Subprime auto loan growth is 'less pronounced' in context, Fed analysts say

While auto lending is rising in all credit categories, subprime auto loans are growing the fastest because that segment dropped the most during the downturn, say four analysts from the Federal Reserve Bank of New York.

The group provided some historical context last week to the current debate over whether subprime auto loan growth is overheating in an analysis titled “Looking under the Hood of the Subprime Auto Lending Market.”

“Since the trough” in the fourth quarter of 2009, “balances have risen across the board,” the group wrote, “but the growth has been most pronounced among the riskier groups, which also experienced the most severe contraction during the credit crunch of 2007-09.”

The analysis, which expressed solely the authors’ views, was released the same day as the New York Fed’s second-quarter 2014 Household Debt and Credit Report.

Total auto loan and lease originations were at the highest level in eight years at $93.1 billion in the second quarter, the household debt report said. That was an increase of nearly 8 percent from the year-earlier period.

Total auto loan and lease balances outstanding also increased in the second quarter, to $905 billion as of June 30, a 10 percent increase from the year-earlier period, the report said. Outstanding auto loan and lease balances have now increased 13 consecutive quarters.

Subprime originations, defined as loan and lease originations to borrowers with credit scores below 620, were $20.6 billion in the second quarter, up 7.9 percent versus the year-earlier period, the report said. That increase was only slightly above the average growth for all auto originations, which rose 7.6 percent to $93.1 billion. In the second quarter of 2013, subprime originations were up 15.1 percent from the year-earlier period.

Meanwhile, the New York Fed analysts cited “news reports ... pointing to a boom in subprime lending, and the concerns raised by such a boom and its associated risks have prompted a Justice Department investigation.”

The U.S. Department of Justice recently issued subpoenas to auto lenders GM Financial and Santander Consumer USA in connection with subprime auto asset-backed securities. In the asset-backed market, lenders sell bundles of loans to investors to raise money to make new loans. The investors get paid over time as the loans are repaid.

The lenders disclosed the subpoenas this month. News of the subpoenas followed a harshly critical article in The New York Times on July 20, which drew parallels between asset-backed securities backed up by subprime auto loans and the “bubble” in asset-backed securities backed up by subprime mortgages, which helped bring about the recession.

The Times followed up the article with an even more harshly critical editorial. In turn, the editorial prompted complaints from groups representing auto lenders and dealers that subprime auto loans and subprime mortgages are not comparable loan types.

The New York Fed analysts concluded that the rise in auto lending overall makes the relative increase in subprime auto lending “less pronounced” in context. “We will continue to monitor this ongoing change in the consumer lending market,” the analysts said.

You can reach Jim Henry at

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