Auto lenders are worried that federal regulators are trying to crack down on them in an effort to prevent a subprime bubble they say doesn’t exist.
Auto loans to consumers with credit scores below 660 has roughly doubled since the end of 2009 to $33 billion according to the Federal Reserve Bank of New York — a rapid increase that has drawn red flags from regulators with fresh memories of the run-up to the subprime mortgage crisis.
The Office of the Comptroller of the Currency warned in June that “signs of increasing risk are evident” in auto lending, citing increased loan-to-value ratios and and rising losses suffered by lenders.
Then in August, the Department of Justice subpoenaed General Motors for documents related to its auto-lending business. The Department of Justice did not respond to a request for comment.
The next month, the Consumer Financial Protection Bureau announced a proposal to extend its oversight to non-bank auto lenders, the sector of the industry where the growth in subprime loans has been the strongest.
“Financing can come to seem like almost an afterthought or a mere detail, rather than a key product in its own right,” CFPB Director Richard Cordray warned in a speech announcing the move.
But lenders suggest that rising subprime auto lending is a natural part of the credit cycle and no cause for concern.
“It’s apples and oranges,” said American Financial Services Association executive vice president Bill Himpler, of the comparison between rising auto loans to borrowers with poor credit. “No one goes into buying a car thinking they’re going to slap on a fresh paint of coat on it and flip it.”
The rise in subprime auto lending comes as other forms of consumer credit remain tight in the wake of the crisis. Terms for credit cards remain tight, and mortgages can be hard to find for anyone who doesn’t have perfect credit.
Lenders, who would see their business curtailed if the federal government intruded, argue that the recovery in the auto sector has been one of the bright spots of the mostly weak economic recovery, thanks partly to growth in lending to borrowers with poor credit.
Noting that auto credit growth has been strong among higher credit brackets as well, Himpler went so far as to decry the focus on subprime lending as discriminatory. “Nobody’s asserting this when it comes to the high-end consumer, the folks that can pay with cash and buy a Cadillac or a Lexus,” he said. “But we don’t have any problem putting restrictions on consumers who have greater need for affordable credit such that they can got to their two or three jobs to stay ahead of the tax man.”
A representative for the National Automobile Dealers Association said bluntly that “there is no subprime auto lending bubble,” citing research released Monday by the consumer credit reporting agency Equifax.
There were 3.9 million new subprime auto loans in the year through June, Equifax said, accounting for about 31 percent of all new loans, a decrease from the year before. The balance on those loans was $70.7 billion, a slight increase.
Equifax’s chief economist, Amy Crews Cutts, said in a note accompanying the release that “auto loan originations to borrowers with subprime credit scores remain stable, providing additional evidence that a bubble is not occurring in that space.”
“The regulatory concern on this is very, very small,” said Todd Zywicki, a professor at the George Mason University School of Law who studies consumer finance issues. Zywicki noted that subprime auto lending, at $33 billion by the New York Fed’s estimation, is still well below its pre-crisis high of $43 billion and that defaults and delinquencies remain low.
There is “no real concern about systemic risk to the lenders, no real concern to consumers from this in that it appears that mainly they may get their cars repossessed. It’s not as problematic as home foreclosures,” Zywicki said. “What we’ve got to avoid is believing there is a financial crisis under every bed,” he added, noting that added regulation of subprime auto lending would raise costs for borrowers.
Lenders can comment on the CFPB’s proposal until Dec. 8. The proposal would extend the CFPB’s oversight to 38 auto finance companies that originate about 90 percent of nonbank auto loans and leases, or approximately 6.8 million customers in 2013, according to the agency. The CFPB would monitor those companies to ensure that they did not deceptively market loans to consumers, improperly report their loans to credit bureaus, or use illegal debt-collection tactics.
