Subprime Auto Loans Driving Debt Rise, Face Regulatory Scorn
According to the New York Fed, household debt reached $13 trillion in the 3rd quarter of 2017. Home mortgages remain the bulk of that balance at $8.7 trillion, but a surprise industry caught the attention of the Fed- car loans. At the end of September, auto loans rose another $23 billion (almost double the amount of student loan debt increases) to $1.2 trillion with 90+ day delinquencies up a troubling 4%.
Nearly half of new auto loans were provided to Americans with subprime credit. While the majority of Americans are believed to have a subprime credit score, the Fed found that 23 million Americans held a subprime auto loan, defined as loans to consumers with a credit score of 620 or below. Now, subprime auto loans are being bundled together and sold off by lenders in a manner reminiscent to the mortgage crisis of 2008, and it is drawing the attention of federal regulators.
Earlier this month, the Consumer Financial Protection Bureau (CFPB) issued a report expressing concern over increasing default rates associated with longer term (more than 5 years) auto loans marketed to consumers with poor credit. The agency found that longer term auto loans had a default rate double the rate for loans 5 years or less. Further, the vehicles associated with longer term loans tended to have much higher price tags, leading to the concern that consumers could still be paying off the loan long after they stop driving the vehicle.
To help car shoppers make smart choices, the CFPB developed a “Know Before You Owe” resource with information and tools to ensure informed decisions are made during the purchase process. On top of helping consumer make more informed decisions, the Bureau is also engaged in enforcement actions against auto lenders that target military service members. While the agency has not put forth any regulations specific to subprime auto loans yet, regulation should be expected if delinquency trends keep rising and immoral collection practices continue in the industry.
