US consumer debt deters big banks from $1.2tn car-loan market

Rising delinquencies spook subprime mortgage-scarred lenders

Big banks are pulling back from the $1.2 trillion US car-loan market, fearing consumers have taken on more debt than they can handle.

Lenders piled into the sector in the years after the financial crisis, as low defaults and an improving economy encouraged them to double down on a sector that performed relatively well as mortgages soured. Total loans across the industry rose to $1.17 trillion at the end of the first quarter, according to the New York Federal Reserve, up almost 70 per cent from a trough in 2010.

But data last week from the Federal Deposit Insurance Corporation showed the first sequential drop in car loans outstanding at commercial banks in at least six years. The total slipped $1.6 billion to $440 billion from the fourth quarter to the first, suggesting that banks – wary of repeating the mistakes of the subprime mortgage crisis – have been spooked by rising delinquencies.

Wells Fargo and JPMorgan Chase, the two biggest banks in the sector, saw double-digit drops on first-quarter originations from a year earlier. Even relatively aggressive car loan specialists such as Capital One – which added a net $2 billion to its $50 billion car-loan book in the first quarter – are toning down their outlook. "We're certainly one more notch cautious," said Richard Scott Blackley, chief financial officer, this month, noting bigger-than-expected falls in used car prices in the first quarter.


Analysts expect the car loan market to keep growing, fanned by specialist non-bank lenders which focus on borrowers with lower credit scores. But the caution of the big banks – which claim more than 30 per cent of the market – shows many now worry about the consequences of looser underwriting, which has seen them stretch terms for borrowers while pushing up loan-to-value ratios and debt-to-income ratios in an echo of the subprime crisis.

The Office of the Comptroller of the Currency has warned of rising credit risk in car loans, while airing fears over violations of fair-lending standards. Several subprime-focused lenders have disclosed that regulators are investigating them for possible abuses.

Analysts expect losses to keep rising if used-car prices, already down about 8 per cent this year, fall further. Lower prices mean higher gross charge-offs, as customers default on loans greater than the value of the car, and smaller recoveries for forced vehicle sales.

The consequences of a car sector meltdown might not be as severe as in mortgages but "there will be fallout", said Joseph Cioffi, chair of the insolvency and creditors' rights practice at Davis & Gilbert, a law firm.

- (Copyright The Financial Times Limited 2017)