Risky Lending Drives Auto Loans to Highest Level in 8 Years

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N.Y. Fed: Auto Loans Soar to Highest in 8 Years
Rich Pedroncelli/AP
By CHRISTOPHER S. RUGABER

WASHINGTON -- 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' (GM) 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 million 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.

Still, auto lending to credit-worthy borrowers has also jumped, the report said. As a result, just 22.2 percent of auto loans were subprime in the second quarter. That is still below the 25 to 30 percent that existed before the recession.

And the percentage of auto loans that were 90 days or more overdue was 3.3 percent in the second quarter, the same as in the first quarter. That compares to 3.4 percent of mortgages that were overdue, 10.9 percent of student loans, and 7.8 percent of credit cards.


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mrgem

This is the tip of a very large iceberg.
Just wait until these over-leveraged young people with expensive degrees that they borrowed money to finance start walking away from their debt en masse.
We've failed to control college costs by simply offering to lend more and more money to students -- many of whom will hold degrees that are essentially useless in our economy.
Soembody will pay for this bad debt and it won't be the banks.
Those chickens will come home to roost sooner than we think and it will make auto loan defaults look like very small potatoes.

August 15 2014 at 10:34 AM Report abuse rate up rate down Reply
Robert Smith

I wonder when Barry Soetoro will come out with "Cash for Clunkers2" ? Now he can just use his phone and his pen. Go out and get your risky loan, we the taxpayers will make up the difference.

August 15 2014 at 9:08 AM Report abuse -1 rate up rate down Reply
Robert Smith

Please save your money, Bombs Away Barry Soetoro needs the money for his illegal war in Iraq. Please feel free to donate as much as possible.

August 15 2014 at 6:26 AM Report abuse -1 rate up rate down Reply
1 reply to Robert Smith's comment
Ron

Did you give out that same advice over Bush and his illegal war in Iraq?...........Probably not so your opinion means nothing.

August 15 2014 at 8:40 AM Report abuse +1 rate up rate down Reply
2 replies to Ron's comment
Robert Smith

I was mocking mac, because he's always whining about Bush with that statement.

Hey Ronnie, there is no such thing as an illegal war. Go read the US Constitution, the same one Barry Soetoro uses for toilet paper.

August 15 2014 at 8:55 AM Report abuse -1 rate up rate down
Robert Smith

You have to rate your own comments too, are you conceited?

August 15 2014 at 8:57 AM Report abuse -1 rate up rate down
gee.effwye

hyphen

Translate Button

[hahy-fuh n]

noun

1.

a short line (-) used to connect the parts of a compound word or the parts of a word divided for any purpose.
zzzzzzzzzzzzzzzzzzzzzzzzzzzz

So what your purpose for.dividing this word DOPEY-EST? (And spelling it wrong)
It sure as hell isn't a compound word.

August 14 2014 at 8:52 PM Report abuse -2 rate up rate down Reply
gee.effwye

teabuster2

Which of you two is the dopey-est, is still being debated.
zzzzzzzzzzzzzzzzzzzzzzzzzzzzz

Open up another tab with an online.dictionary, then try again ya friggin dope.

August 14 2014 at 8:16 PM Report abuse -2 rate up rate down Reply
1 reply to gee.effwye's comment
teabuster2

My old buddy dopey

August 14 2014 at 8:18 PM Report abuse -1 rate up rate down Reply
2 replies to teabuster2's comment
gee.effwye

YOU'RE DOPEY-EST!

August 14 2014 at 8:46 PM Report abuse -2 rate up rate down
gee.effwye

dopey

Translate Button

[doh-pee]

adjective, dopier, dopiest. Informal.

1.

stupid; inane:

It was rather dopey of him to lock himself out.

2.

sluggish or befuddled from or as from the use of narcotics or alcohol.

3. teabuster2

August 14 2014 at 9:09 PM Report abuse -2 rate up rate down
Robert Smith

Underwood's town idiot is batting a thousand food stamps.

August 14 2014 at 7:50 PM Report abuse -2 rate up rate down Reply
Robert Smith

Hey, Mac2dunceSomey, do you still walk around backwards with your velcro shoes on the wrong feet ?

August 14 2014 at 7:41 PM Report abuse -2 rate up rate down Reply
Robert Smith

MacTeaSomeyDunce

August 14 2014 at 7:37 PM Report abuse -1 rate up rate down Reply
1 reply to Robert Smith's comment
teabuster2

Real bright comment.

August 14 2014 at 7:55 PM Report abuse -1 rate up rate down Reply
teabuster2

Where's your side kick, Dopey????

August 14 2014 at 7:27 PM Report abuse -1 rate up rate down Reply
1 reply to teabuster2's comment
Robert Smith

I don't need sidekicks

August 14 2014 at 7:28 PM Report abuse -2 rate up rate down Reply
2 replies to Robert Smith's comment
teabuster2

Which of you two is the dopey-est, is still being debated.

August 14 2014 at 7:30 PM Report abuse -1 rate up rate down
Robert Smith

Get all your Com/Lib buddies together and vote on it. Ask your leader of your party. Barry Soetoro.

August 14 2014 at 7:33 PM Report abuse -2 rate up rate down
Robert Smith

Hey Evan, how's the weather in Underwood, Indiana tonight ?

August 14 2014 at 7:26 PM Report abuse -1 rate up rate down Reply