Magazine article American Banker

Why Banks May Be Happy for Their Small Slice of Subprime Auto Market

Magazine article American Banker

Why Banks May Be Happy for Their Small Slice of Subprime Auto Market

Article excerpt

Byline: Kristin Broughton

Banks and credit unions are small players in the burgeoning market for risky auto loans, and that may prove to be good news.

A key economic report published Wednesday showed that traditional lenders have a vastly lower exposure to subprime auto debt than auto finance companies.

About 6% of outstanding auto loans at banks and credit unions have credit scores below 620, compared with 33% for auto finance companies, including the lending arms of major car dealers. Overall, about three-quarters of all subprime auto loans were originated by nonbank financing companies, according to the report.

The data -- published by the Federal Reserve Bank of New York -- illustrates the comparatively small exposure that banks have to the subprime auto market, amid growing concerns about an asset bubble. That's important because delinquency rates are on the rise -- and regulators have warned about the looming potential for losses.

"The vast majority of subprime auto loans are originated by auto finance companies," economists said in a blog post accompanying its quarterly report on household debt.

Banks and credit unions, however, originate about half of all auto loans in the market.

The report comes as a number of lenders have begun pulling back from the subprime market. Santander Consumer Holdings USA -- the subprime auto lender owned by Spanish banking giant Banco Santander -- has scaled back on lending to borrowers with FICO scores below 600.

A number of regional banks -- including Fifth Third Bancorp -- have pulled back on auto loans across the credit spectrum.

Regulators including the Office of the Comptroller of the Currency have warned about loosening underwriting standards in the market, drawing comparisons to the run-up to the subprime mortgage bust.

"Someone is going to get hurt," Jamie Dimon, chief executive at JPMorgan Chase, said in discussing loosening auto loan standards, during an investor conference this summer. …

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