Banks loosened auto lending standards in Q3

Editor’s note: This article has been corrected to reflect Experian revisions to its data.

The banking industry relaxed its standards for auto loans slightly during a third quarter that showed reduced consumer demand, according to a Federal Reserve survey of senior loan officers.

Forty-six auto lenders polled held auto lending standards constant during the quarter. But five lenders — four of which the Fed considered large banks — said they eased up "somewhat," and one large bank had loosened "considerably." Only one large bank had tightened standards somewhat. The Fed classified the results as a "modest" net expansion of credit to consumers.

Asked about specific policy changes in another series of questions, most of the banks that responded reported no change during the third quarter. However:

• Three large banks described easing somewhat on the loan lengths they'd accept.
• Nine banks, including six large institutions, narrowed the spread somewhat between the interest they paid and the interest they charged customers, indicating a growing competitiveness on rates. Only one large bank said it had widened this spread.
• One bank said it reduced its down payment requirements.
• Four banks, including three large ones, said they had somewhat lowered the minimum credit score they'd accept. One large bank had tightened this somewhat.
• One large bank and one other bank said they were somewhat more open to auto loans to customers who didn't meet their bank's "credit scoring thresholds."

Banks opened up their lending during a quarter that saw desire for auto loans slacken.

Though 34 loan officers reported no change in demand, 13 banks, including four large ones, felt demand had "moderately" weakened. Two large banks and two other institutions felt demand had grown moderately, and one large bank had received "substantially" stronger demand.

The most recent Fed quarterly poll of banking credit trends received responses from 70 banks, though not every institution answered every question or was involved in auto lending.

A Cox analysis presented last week indicated banks also loosened credit in November, as did captives and finance companies. Cox said all three segments and credit unions are all more likely to extend auto loans today than they were in February 2020, before the pandemic disrupted the U.S. economy.

Chief Economist Jonathan Smoke also described some recovery in subprime auto market share this year.

He noted subprime consumers make up a relatively smaller part of the auto market and overall credit pool, "so it's sort of a reflection of changes, improvements that have been happening in credit as well."

Cox said the average subprime interest rate on new vehicles had dropped from 15.01 in November 2020 to 14.27 last month.

Smoke said credit conditions are likely to be favorable to borrowers through at least the first half of next year.

Like the bankers, Cox described customers as more likely to receive approval, favorable interest rates and longer loan terms.

Experian third-quarter data hints at some of these trends but contradicts others.

Experian found new-vehicle credit scores rose 1 point year over year to 733 during the third quarter, and scores in the used-vehicle market rose 9 points to 675. The proportion of loans and leases granted to subprime or deep-subprime borrowers fell 3 percentage points to reach 15 percent, while the share of prime or higher borrowers rose 1 point to 18 percent. Near-prime borrowers grew by 1 point to make up 18 percent of originations.

Melinda Zabritski, Experian's senior director of automotive financial solutions, said any loosening of credit might not yet have appeared in the credit score data. But she also pointed out the nation itself has better credit.

"The entire market has become more prime," she said.

The overall consumer credit database also indicates a lack of participation by deep-subprime borrowers, according to Zabritski.

"It doesn't appear that they have readily returned to market," she said.

New-vehicle loans also bucked the notion of longer maturities during the third quarter, falling 0.1 month from the prior year to 69.54 months. However, used-vehicle loan terms rose by nearly two months, from 65.19 months to 66.97 months.

The average new-vehicle loan charged a 4.06 percent interest rate during the third quarter, down from 4.23 percent a year earlier. The average used-vehicle rate fell from 8.39 percent to 8.12 percent.