Auto dealer and lender groups are howling in protest at an editorial in Saturday’s New York Times that equated subprime auto loans with subprime mortgages. The groups insist there is no comparison between the two types of loans.
At the same time, a recently disclosed U.S. Department of Justice investigation into subprime auto loans is very much part of the debate.
On Tuesday, the National Automobile Dealers Association called the editorial, titled “When a Car Loan Means Bankruptcy,” unfair and unfounded. In a written rebuttal signed by NADA President Peter Welch, the association said that “Enforcement of existing laws against a small minority of bad players is in everyone’s interest, but smearing an entire industry for the misdeeds of a few is just plain wrong.”
Bill Himpler, executive vice president of the American Financial Services Association, a lenders’ trade association in Washington, D.C., also told Automotive News the editorial was off base.
Adding real weight to the war of words, the Justice Department issued subpoenas this month to two big subprime auto lenders, GM Financial and Santander Consumer USA. GM Financial is General Motors’ captive finance arm; Santander is the lender behind Chrysler Capital, a private-label program that provides financing for Chrysler Group dealers and their customers.
The Justice Department demanded records from the two lenders’ sales of asset-backed securities, a financial practice in which lenders sell off bundles of loans to investors.
The lenders said in disclosures filed with the Securities and Exchange Commission that the Justice Department was looking into the “underwriting” of the loans that were sold to investors. GM Financial’s disclosure to the SEC implied that the “underwriting” referred to both the decision-making that went into approving loans to individual consumers and the representations made when marketing the bundled loans for sale to investors on the capital markets.
Those disclosures, along with the specific law cited by the Justice Department, fueled speculations that the Justice Department wants to clamp down on subprime auto loans in the same way regulators clamped down on subprime mortgages, even though from the auto industry’s perspective mortgages and auto loans are completely different.
‘Roping people in’
NADA’s Welch said the editorial portrays the auto lending industry “as a hotbed of deceptive practices and a harbinger of insolvency that could trigger another recession. Nothing could be further from the truth.”
Welch hardly exaggerated the Aug. 9 editorial’s portrayal of auto lending.
The editorial read in part: “The mortgage industry set the stage for the recession by luring people into ruinously priced loans they could never hope to repay, then selling those loans to Wall Street in mortgage-backed securities that went bad. The federal government has since tamed that industry, outlawing most of the risky and deceptive practices that led to that crisis. It must now do the same with the auto lending industry, where the practice of roping people into loans that damage them financially is all too common.”
It added: “The main regulators of this industry, the Consumer Financial Protection Bureau and the Federal Trade Commission, need to move swiftly and aggressively on these matters.”
‘Slow to act’
Chris Kukla, senior vice president at the Center for Responsible Lending, a consumer advocacy group in Durham, N.C., told Automotive News his group “doesn’t know any more than anyone else” about what specifically the Justice Department is after in connection with asset-backed securities.
However, he said that from his group’s point of view, legislators and regulators could be cracking down on auto loans to compensate for the fact that they didn’t crack down on subprime mortgages until it was too late. “They are understanding they were slow to act in the mortgage market when there were issues,” Kukla said.
He said it would be “a fair characterization” to say the Center for Responsible Lending agrees with the Times editorial.
Losses are low
NADA said in its rebuttal that auto loan defaults, at a rate of less than 1 percent in June, are at historic lows. The implication: There’s no indication that a swelling number of consumers with subprime credit are finding themselves unable to make their car payments.
Indeed, one reason for the rise in subprime loans has been the confidence that lending institutions have in the determination of automotive borrowers to repay. One lesson of the recession was that while consumers might walk away from their home and allow the bank to foreclose, they were far more likely to keep making their car payments, so as to be able to get to their job.
According to Experian Automotive, the average repossession rate for all automotive lenders was 0.68 percent in the first quarter of 2014. That was an increase from 0.5 percent in the 2013 quarter.
The repo rate for independent finance companies, which predominantly make subprime loans, was higher in the first quarter but still only 3 percent, up from about 1.8 percent in the 2013 period. The repo rate was down for banks, captive finance companies and credit unions in the first quarter this year. Even in the depths of the recession, the industrywide repo rate didn’t rise above 1 percent.
AFSA’s Himpler pointed out other distinctions between subprime auto loans and subprime mortgages. For starters, he said, investors bought mortgages expecting the underlying assets to appreciate in value. That’s never the case with auto loans, he said.
“In mortgages, people thought they were going to be flipping properties,” he said. “There’s no market for flipping used cars. Buying something that needs a new paint job and selling it for twice what you paid for it -- that doesn’t happen in cars.”
A subprime auto lender CEO, who asked not to be named, said another big distinction is that mortgage brokers sold mortgages with no stake in how well those mortgages would perform in terms of repayment over the long term.
In contrast, he said, the subprime auto lenders that sell asset-backed securities typically agree to buy back the loans if they perform below stated thresholds.
“It’s called skin in the game,” the executive said. “That’s a big difference.”