By Alan Zibel,Christina Rogers and AnnaMaria Andriotis
Borrowers who took out auto loans over the past year are missing
payments at the highest level since the recession, fueling concerns
among regulators, analysts and some in the car industry that
practices that helped boost 2014 light-vehicle sales to a
near-decade high could backfire.
"It's clear that credit quality is eroding now, and pretty
quickly," said Mark Zandi, chief economist at Moody's
Analytics.
More than 2.6% of car-loan borrowers who took out loans in the
first quarter of last year had missed at least one monthly payment
by November, the highest level of early loan trouble since 2008,
when such delinquencies rose above 3%, according to an analysis of
data performed for The Wall Street Journal by Moody's
Analytics.
The uptick comes amid an increase in subprime auto loans,
raising concerns that car buyers may have taken on more debt than
they can handle. For that set of borrowers, defined as consumers
with a credit score lower than 620, loan performance also is
deteriorating.
More than 8.4% of borrowers with weak credit scores who took out
loans in the first quarter of 2014 had missed payments by November,
according to the Moody's analysis of Equifax credit-reporting data.
That was the highest level since 2008, when early delinquencies for
subprime borrowers rose above 9%.
Car lenders say the concerns are overstated. "Auto loans
continue to perform well, as they did during the recession," said
Bill Himpler, executive vice president of the American Financial
Services Association, which represents auto lenders. "Concerns
about a spike in delinquencies have not been substantiated by
evidence."
Overall auto-loan delinquencies have been running above year-ago
levels but remain lower than during the recession. As of the third
quarter, 3.4% of borrowers had missed at least one car-loan
payment. That was up from 3.2% in the same quarter a year earlier
but still below 4.2% in 2009, according to Experian Automotive.
Consumer advocates, meanwhile, say car dealers and finance
companies are being overly aggressive with low-income borrowers,
pushing them to the limits of what they can afford.
They point to borrowers like Patrina Thomas, 48 years old, from
the Syracuse, N.Y., area. She said she was persuaded by a local car
dealer to trade in her 2002 Jeep in the summer 2013 in favor of a
used 2008 Chrysler Sebring, sold for more than $17,000 and financed
with a 20.4% interest rate. Unable to make the $385-a-month
payment, the car was repossessed last year.
"Now my credit is ruined," said Ms. Thomas, who still owes more
than $7,600 on the car. "I can't buy a house for a while."
Ms. Thomas's auto loan was financed by Chrysler Capital, a joint
venture between the auto maker and Santander Consumer USA Holdings,
a unit of Banco Santander SA.
A spokeswoman for Santander declined to comment on the case or
on the company's delinquency rates.
According to third-quarter 2014 data from Experian, the industry
leaders, excluding financing arms of car manufacturers, are Ally
Financial Inc., with 7.31% of new-car loans, J.P. Morgan Chase
& Co. with 5.96%, Capital One Financial Corp. with 4.38%, Wells
Fargo & Co. with 3.46% and TD Bank with 2.33%. In the used-car
market, the leaders are Wells Fargo at 6.56%, Ally at 4.41% and
Capital One at 4.35%.
Ally Financial reported $355 million of its outstanding consumer
car loans as nonperforming as of Sept. 30, according to its
Securities and Exchange Commission filing. That is up 7.9% from the
end of 2013. Its net charge-offs for car loans--the amount it is
writing off as a loss because it doesn't expect to be paid
back--were $341 million for the nine months ended Sept. 30, up 18%
from a year earlier.
The increase in losses "is related to growth in the consumer
portfolio as well as our strategy to diversify the business and
book a more balanced mix of assets," said Gina Proia, a spokeswoman
for Ally. "The increase in losses was expected and in line with our
expectations. We continue to have a robust underwriting policy and
price for risk appropriately."
Of the 15 biggest U.S. auto-lending banks, Santander had the
largest percentage of delinquent auto loans in the third quarter,
according to SNL Financial. Santander's delinquency rate of 16.7%
was followed by Capital One at 6.6%, according to SNL.
In general, the auto-finance sector is one of the
fastest-growing lending markets since the financial crisis, with
outstanding loan balances hitting $943.8 billion at the end of
September, from $809 billion two years earlier, according to the
Federal Reserve.
Since such loans have performed well in the past, lenders have
been more willing to take risks on auto lending, while staying
cautious on home mortgages, analysts say.
Of particular concern are loans in which car dealers push
financing at extended terms of six and seven years at relatively
high interest rates, even if the borrowers have weak credit and
escalated debt-to-income ratios. The longer loan terms keep monthly
payments under control and get buyers to purchase more expensive
cars.
Low-interest rates and wider credit availability have helped
propel the U.S. auto industry's comeback from the recession,
driving new-car sales to 16.5 million last year, the highest level
since 2006, according to market researcher Autodata Corp.
To keep the momentum going in 2015, industry analysts said car
companies and lenders will likely have to push more aggressive
finance deals and tap borrowers with weaker credit. Riskier lending
tactics already are drawing regulatory scrutiny.
Federal bank regulators observed that lenders were weakening
standards and taking on more risks about two years ago, said Darrin
Benhart, deputy comptroller of supervision risk management for the
Office of Comptroller of Currency, which regulates the largest U.S.
banks. "We're putting banks on notice that we have concerns," Mr.
Benhart said. "It's definitely an area that warrants some
attention."
Several state and federal agencies also are investigating
industry practices, particularly for subprime borrowers. The
Justice Department last year sent subpoenas to Ally, General Motors
Financial Inc. and Santander Consumer USA. The subpoenas ask them
to turn over documents related to subprime-lending businesses.
Kevin Duignan, global head of securitization for Fitch Ratings,
said some bigger lenders are starting to pull back and be more
conservative on subprime auto lending. The credit-rating firm is
concerned that small and midsize lenders won't follow suit and dive
too deeply into subprime lending.
"Subprime delinquencies and losses are beginning to grow at a
more rapid pace than we've seen in a long time," he said.
Losses on securities backed by prime and subprime auto loans
were up in November, with subprime reaching levels not seen since
early 2010, according to Fitch.
Car loans didn't experience the surge in defaults that occurred
in mortgage lending during the recession. If a loan does goes bad,
it is easier to repossess and resell a car than a house or office
building.
The rise in delinquency rates shouldn't be surprising given the
rebound in subprime lending, said Melinda Zabritski, director of
automotive credit for Experian. Lending to below-prime borrowers
accounted for about 23% of the vehicle-finance market in the third
quarter, up from 21% in 2009 but still below pre-recession levels
of 28% in 2007, according to Experian.
Compared with the low point of six years ago, growth in such
lending, "may look extreme, which is why we recommend looking at a
longer view," Ms. Zabritski said.
Some auto-industry executives are nervous, saying the riskier
practices can leave consumers upside down on their loans longer,
owing more than their vehicle is worth when they are ready to trade
in.
"The industry is starting to do some stupid things," said John
Mendel, Honda's America's vice president of sales. The longer-term
loans coupled with greater use of subprime financing can leave
buyers paying interest rates as high as 22%, much higher than what
is typical for prime buyers, he said.
"If you're going to trade in in the next six years, you're going
to have a problem," Mr. Mendel said.
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