US warns of increasing auto credit risk

The explosion in auto loans may be starting to hit the skates.

A leading banking regulator has warned that the $ 1 trillion auto loan industry has become more dangerous. The Office of the Comptroller of the Currency cited “unprecedented” growth in auto loans, an increase in defaults and a decline in the value of used cars.

The banking watchdog also pointed to the fierce competition among banks, which led them to relax underwriting standards.

“The risks associated with auto loans continue to grow,” the OCC warned in a semi-annual report detailing the main risks facing US banks.

The OCC did not call on the specific banks threatened by the auto loan problems, nor did it say the problem posed a serious danger to the financial system as a whole.

Still, the report echoes concerns voiced by others about auto loans, especially lower quality ones known as subprime. JPMorgan Chase (JPM) Boss Jamie Dimon told a recent industry conference that auto loans looked “strained” even though his bank was careful to issue them.

“Someone is going to be hurt,” he warned.

Earlier this year, Fitch Ratings pointed out that the seriously delinquent subprime auto loan rate had reached its highest level since 1996.

Related: Unpaid Subprime Auto Loans Hit Their Highest Level In 20 Years

Auto loan volumes recently exceeded $ 1 trillion, up more than 40% from the end of 2009. That’s because Americans have bought many more cars, with sales hitting record highs. in 2015. It is also the result of the fact that cars are becoming more expensive. Allied financial (ALLY) and Wells fargo (WFC) are among the largest auto loan providers in the United States

The OCC has warned that banks face higher losses from bad auto loans and may need to put more money aside to protect against those losses. The risk management practices of some lenders “have not kept pace with the growth and increasing risk of these portfolios,” the regulator said.

Indirect auto lending, where banks give dealers money to lend to car buyers, is also an area to watch for “significant fair lending risk,” the OCC said.

It is important to remember that auto loans do not appear to present the systemic risk that mortgages presented before the onset of the Wall Street collapse in 2008. Auto loans are, overall, a much smaller lending universe. than mortgage loans. And banks are also much stronger to deal with possible losses.

CNNMoney (New York) First published on July 11, 2016: 4:15 p.m. ET

About James Almanza

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