24 May 2018

Bank Regulator Warns of Lax Standards on Auto Loans

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There’s been a spike in the average size of car loans that banks and other lenders are writing off as a loss following months of unpaid bills by borrowers, an official of the Office of the Comptroller of the Currency, a unit of the Treasury Department. At banks, the average charge-off for a car loan was $7,618 in the fourth quarter of 2013, up 12% from a year ago.

For the entire car-loan industry, the average charge-off was $8,520, up 17% from a year prior, according to Experian. The average loan that major lenders gave out at the end of 2013 on new and used cars exceeded the value of the car at the time of purchase. In some cases, that is because of add-on products such as extended warranties and car accessories that are increasingly financed as part of the car loan.

Other more-recent data suggest that problems with auto loans could worsen. Banks, credit unions and certain nonbank lenders in the second quarter of this year reported increases compared with the year prior in car loans on which borrowers hadn’t made payments in 60 days.

The total balance of these delinquent loans was just over $4 billion during the second quarter, up 27% from a year prior. Some delinquent loans are eventually charged off by lenders.

Car-loan originations have taken off over the past couple of years as more buyers have flooded the market for new cars. Total outstanding car loans at national banks and thrifts increased 13% in 2013 and grew 5% during the first half of this year.

The latest round of losses follows a pickup in subprime lending in the car sector. Some $83 billion of subprime car loans were given out during the first seven months of this year, up 7.5% from the same period a year prior, according to another credit-reporting firm, Equifax. It was the highest dollar amount for the first seven months of the year since at least 2007. The firm defines subprime borrowers as having a credit score below 640 on a scale that tops out at 850.

Click here to access the full article on The Wall Street Journal.

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