U.S. auto loans jumped to the highest level in eight years this spring, fueled by a big increase in lending to risky borrowers, according to a report Thursday by the Federal Reserve Bank of New York.
Yet the New York Fed also said that loans to borrowers with shoddy credit, also known as subprime lending, still make up a smaller proportion of total auto loans than before the Great Recession.
Federal banking regulators have raised concerns in recent months over the rapid increase in subprime auto loans. Such loans could lead to more defaults, harming banks and consumers. Auto loans are also packaged into securities and sold to investors, like mortgage loans. That could amplify the impact of any rise in auto loan defaults.
This spring, banking regulators at the Office of the Comptroller of the Currency said that “signs of increasing risk are evident” in auto lending. They found that lenders are making larger car loans. As a result, the size of car loans in default has increased in the past two years.
The Justice Department said last week that it is investigating General Motors’ financing arm over its subprime lending practices.
Still, the New York Fed report stops short of recommending specific steps. In a separate post on its website, New York Fed economists said they would “continue to monitor” the issue.
Banks and other lenders issued $101 billion in new auto loans in the April-June quarter, according to the quarterly report on household debt. Total outstanding auto loans rose to $905 billion in the second quarter.
Auto loans are the third-largest source of Americans’ debt, after mortgages and student loans. Mortgage debt actually declined in the second quarter to $8.1 trillion while student debt rose to $1.12 trillion. Americans have $669 billion on their credit cards.
Mortgage lending weakened in the second quarter to the slowest pace in 14 years. That includes both mortgages for purchase and refinancing. Banks have significantly tightened their credit standards for mortgage loans since the recession. Home sales have also leveled off this year.
The Fed’s data shows that the dollar amount of subprime auto loans — defined as loans to borrowers with credit scores below 620 — has nearly doubled since 2010. For borrowers in the two most credit-worthy categories — defined as those with scores above 720 — auto lending has risen by only about one-third.
The automakers’ financing arms account for most of the increase in subprime loans. In the second quarter, the dollar value of their subprime loans was triple that of the banks. Economists at the New York Fed said that loans by auto financing companies are much more likely to become delinquent than those by banks.
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