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Banking Regulator Issues Warning to Auto Finance Industry

October 22, 2015

By Gregory Arroyo

WASHINGTON — In a speech delivered yesterday at the Exchequer Club, a group that includes bankers, attorneys and consultants, Comptroller of the Currency Thomas Curry likened the current state of the auto finance industry to mortgage-backed securities in the run up to the 2009 credit crisis.

“At that time, lenders fed investor demand for more loans by relaxing underwriting standards and extending maturities,” he said. “Today, 30% of all new-vehicle financing features maturities of more than six years, and it’s entirely possibly to obtain a car loan even with very low credit scores.”

The administrator of the federal banking system praised the auto finance arena for being a major driver of economic activity and record car sales, noting that the segment represented more than 10% of retail credit among institutions regulated by his office.

Curry also noted that banks are increasingly packaging up loans into asset-back securities, which are being greeted by strong demand from investors. Driving investor appetite, he said, is the fact that securities backed by auto loans outperformed most other asset classes during the financial crisis. Raising concerns, however, are signs that finance sources are relaxing underwriting standards and extending maturities in order to feed investor demand.

“With these longer terms, borrowers remain in a negativity position much longer, exposing lenders and investors to higher potential losses,” Curry said. “Although delinquencies and losses are currently low, it does require great foresight to see that this many not last. How these auto loans, and especially the nonprime segment, will perform over their life is a matter of real concern to regulators.”

His comments echoed his office’s Semiannual Risk Perspective, which was released this past spring. Citing data from the Federal Reserve Board, the report showed that auto loan balances had grown 17 straight quarters to $956 billion at the end of 2014. And while it noted that delinquencies and loss rates remained within manageable levels, the report also cited Experian Automotive data showing that 60% of auto loans originated in the fourth quarter 2014 had a term of 71 months or more.

Collateral advances were another concern highlighted in the OCC’s report. According to Experian Automotive data, the average loan-to-value ratio for used-vehicle loans during the fourth quarter 2014 was 137%. For consumers with credit scores below 620, the average was 150%.

“While performance remains reasonable at present, the OCC continues to closely monitor underwriting practices and loan structures,” read the report, in part, noting that extended rapid growth is difficult to maintain and can sometimes mask early signs of weakening credit quality.

“Too much emphasis on monthly payment management and volatile collateral values can increase risk, and this often occurs gradually until the loan structures become imprudent,” the report added. “Signs of movement in this direction are evident, as lenders offer loans with larger balances, higher advance rates, and longer repayment terms.”

Making his fourth appearance before the Exchequer Club, including three times as Comptroller of the Currency, Curry didn’t just single out auto finance. He also listed eight other areas his office is keeping an eye on. His main message to the group was that credit markets are reaching that point in the economic cycle where credit risk is moving to the forefront, noting that banks are now reaching for loan growth by banking less credit-worthy borrowers now that they’ve extended credit to their best customers.

“It’s a point in the cycle where we customarily see an easing of loan underwriting standards, as banks drop or weaken protective covenants, extend maturities, and take other steps to build market share,” Curry said. “It’s a natural byproduct of competition during the later stages of the economic cycle, and so it’s a time when supervisors and bank risk officers need to be most vigilant.

“Looking back, it’s clear that all of us made mistakes in the run up to the financial crisis — regulators and financial institutions alike,” Curry added. “And I believe all of us recognize we have to do better.”


  1. 1. Marv [ October 23, 2015 @ 11:38AM ]

    Great introspective piece.

    NOBODY wants to relive what happened in 2008. I remember many of the big banks breaking news concerning their propped up profits due to securitization of poorly structured loans while we were attending the F&I conference. The whispers amongst many of the attendees of what we feared then soon became reality. Many stores closed their doors permanently. We don't need lenders to relax their buying standards to prop up another demise of our economy. I see callbacks that have me often shaking my head. Advances are such these days that covering up $5-10K of negative equity isn't unheard of. We can only hope that bank and fund managers keep a level head during the boom times we're experiencing.

  2. 2. Rady Henrick [ November 14, 2015 @ 02:12PM ]

    Let's understand some differences between mortgage lending and auto finance. In one, you are lending on a theoretically appreciating asset (real estate), in the other, a depreciating asset (a vehicle). You also can't repo a house which is why their auto finance payment is the first payment consumers typically make and the mortgage one of the last. People need vehicles to get to work and get around. They know it will take a long time--maybe years--for their home to be foreclosed upon and they can do many things to slow down the process, e.g., file bankruptcy. There are no negative amortizing or even variable rate terms for auto loans. What you see is what you get. I am not aware of any auto securitization ever defaulting unlike the mortgages that did not rely on legitimate underwriting of the consumer which the OCC not only permitted but effectively encouraged by letting banks preempt all state laws that would have put limits on it., It's apples and oranges,.


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