Car loans are riskier, but problems aren't rising, regulator reports

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The Office of the Comptroller of Currency fretted in a recent report that hotter competition is driving auto lenders to accept more risk in terms of lower approval standards, higher loan-to-value ratios, longer terms and more loans to riskier customers.

“Loan marketing has become increasingly monthly-payment driven, with loan terms and LTV advance rates easing to make financing more broadly available,” the bank regulator said in the report, “Semiannual Risk Perspective,” released on June 25. “We will continue to monitor this market closely.”

The report is based on data through Dec. 31, 2013.

Loan-to-value

The OCC report cited Experian Automotive data to show that average loan-to-value, or LTV, rates for new and used vehicles combined at the end of 2013 were higher than a year earlier for all major lender categories -- banks, captives, credit unions and independent finance companies.

According to Experian, the average LTV in the fourth quarter of 2013 was 134 percent, up from 110 percent a year earlier.

Loan-to-value measures the amount a lender is willing to lend vs. the value of the vehicle, usually expressed as a percentage. An LTV greater than 100 percent means the lender is willing to lend more than the value of the vehicle.

That’s a major selling point because the customer can borrow enough to cover negative equity on a trade-in or can finance additional F&I products in the same loan as the vehicle.

Bigger loans

The OCC noted that consumers are using higher LTVs and higher loan amounts to pay for “rising car prices and a greater bundling of add-on products, such as extended warranties, credit life insurance and aftermarket accessories, into the financing.”

Separately, Morgan Stanley analyst Adam Jonas said in a recent report that lenders are resorting to longer loan terms to offset higher transaction prices. He called it “the silent U.S. price war.”

Jonas said the practice is a hidden form of risk to the auto industry’s outlook if longer loan terms take customers "out of their normal trade cycle" and customers replace their vehicles less often.

Ultimately, the OCC report said, auto loan performance has not deteriorated, despite the increase in risk. Experian Automotive reported, for instance, that the 30-day delinquency rate was down in the fourth quarter of 2013 from a year earlier.

The report said: “U.S. economic fundamentals are improving. Households have deleveraged, household wealth has increased, and credit has become more available. Increased wealth has improved consumers’ confidence and drawn them back to auto showrooms and shopping malls.”

You can reach Jim Henry at autonews@crain.com.

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