Auto lenders don't plan to loosen up before end of 2023, survey shows

Auto dealerships might have a harder time getting certain customers approved as the year progresses, according to the latest Federal Reserve quarterly survey of bank senior loan officers.

Thirty-nine percent of banks polled in April expected to toughen lending at some point between the survey date and the end of the year. And 29 percent of banks had tightened their auto loan standards in the three months before the April survey.

Loan officers representing 17 of 46 large and "other" (less than $50 billion in assets) banks in April expected their institutions to tighten auto loans "somewhat" by the end of the year, according to the Fed. One bank planned to be "considerably" stricter. No banks expected to ease their standards, and 28 planned no further change.

These plans for the rest of 2023 followed tightening among some of the industry in the three months leading up to the April survey. Twelve of 51 banks had toughened their standards for auto loan applications somewhat, and three became considerably stricter. One bank eased auto criteria somewhat during that time, and 35 made no changes.

The Fed survey "shows that banks are tightening lending," Elen Callahan, head of research for the Structured Finance Association, told an Auto Finance Summit East audience on May 11. But the tightening could represent an opportunity for other lenders, according to Callahan.

If a lender "has maintained their platform and continues to underwrite smartly ... I do think that there is going to be a need to pick up that part of the market," she said. "We could even see, in my opinion, a move over to that space."

Jennifer Parsons, a Minnesota-based senior director of finance at Walser Automotive Group, said May 26 that lenders weren't tightening significantly in her market. But Minnesotans also tend to have better credit on average, which insulates the state from major changes, she noted.

Lenders have cut back on loan-to-value ratios, she said. "We've definitely seen some of that," she said.

Walser, of Edina, Minn., ranks No. 28 on Automotive News' list of the top 150 dealership groups based in the U.S., with retail sales of 23,346 new vehicles in 2022.

Jesse Powers, finance director for North Kansas City, Mo.-based Oakes Kia, said May 30 lenders have appeared nervous about debt-to-income and payment-to-income ratios over the past six months. They're not cutting their thresholds, but they're not increasing them in line with the market, he said.

But viewed over the course of the past couple of years, "I would say that things have gotten a lot more open with lenders," he said.

Lenders have during this time accepted sources of valuation calculations that are different from previous periods, including auction reports for one period of time, Powers said.

He said he felt large banks his dealership frequently interacts with "have figured out solutions on how to be able to keep assisting customers in this crazy market."

The Fed also asked banks if they had changed five specific variables during the three months before the April Fed survey, with each of the five questions drawing between 50 and 51 responses.

The most popular change involved the margin between the interest rate they paid to borrow money and the interest rate they charged consumers. Nineteen of 51 respondents increased this spread, while two narrowed it.

Eleven of 51 banks reported demanding larger down payments during those three months while another bank cut its minimum, nine of 51 cut back on the length of loans they would accept, while one bank increased its maximum term, nine of 50 made fewer exceptions to their credit thresholds for customers, and six of 50 raised their minimum credit scores.

All other banks responding to each of these five questions had made no changes to that particular variable.

The industry tightening seen in the Fed study has come as and interest rates make affordability an issue for some car buyers, and more than a third of lenders reported reduced demand for auto loans in the three months before the April survey. Nineteen of 49 responding banks told the Fed they saw demand decline during that time, six banks experienced more customers seeking auto loans and 24 banks called consumer demand unchanged.

Meanwhile, more customers are missing car payments compared with a year earlier, suggesting a higher risk for lenders who want to pursue the demand.

Lender representatives recently discussed their underwriting in light of market conditions.

Tim Mullins, vice president and head of national sales and digital tools at Capital One, told Automotive News May 19 that dealerships say they appreciate Capital One's consistency in lending. "The faucet's not being turned on and off all the time," he said they have told him.

This steadiness doesn't mean no change at all. Though Mullins viewed radical swings as undesirable, he said Capital One constantly adjusts its practices to stay competitive. But "I'm not seeing making more adjustments now than ever before," he said.

Fifth Third Bank auto head Craig Harter told the May 11 auto finance summit that his bank hadn't changed its credit policies in light of the current market, noting that Fifth Third's underwriting practices hadn't even returned to "what I would call our 'pre-COVID' policy levels."

But Harter said Fifth Third was examining whether it wanted to join the ranks of banks regularly writing 84-month loans.

"We do a little bit," he said.

Such seven-year loans lowered payments, but they also took customers out of the new-vehicle market for a longer period of time and reduced consumer equity in the vehicle, he said. However, the market also featured increased prices and interest rates and offered few ways to aid vehicle affordability, he said.

"It's a little worrisome," he said.

Peter Muriungi, CEO of Chase Auto, said at the summit Chase had adjusted to rising delinquencies primarily by getting tougher on borrower collateral. He said the bank was not as worried about the number of borrowers missing payments, but "collateral's a bit concerning." Chase cut back the amount it would loan on used vehicles relative to their value, and "we might pull back a little bit more there," he said.

However, for the most part, Chase adjusts its auto loan underwriting on the "margin," and it takes a disciplined approach to lending throughout the economic cycle, he said.

Asked if the current combination of vehicle inventory growth amid higher sale prices would affect Chase's auto loan policies, Muriungi said it generally does not.

He described Chase's mindset as "affordability's affordability," he said. A borrower can afford a certain percentage of their income, he said. The size of the market affects how much demand can be met, but "the same disciplines" for evaluating customers remain regardless of vehicle prices, he said.

A subprime lender at the conference recalled taking more dramatic action.

Michael Opdahl, COO of Automotive Credit Corp., said May 12 ACC noticed a delinquency trend and in the second quarter of 2022, "we really locked things down."

ACC doubled the minimum income required of borrowers by demanding borrowers make half of the market's median family income, Opdahl said. It also quit financing loans with payments beyond 12 percent of a customer's income.

"We went hedgehog," he said. "Sometimes it's easier just to wait it out."