More than 8.4 % of consumers with weak credit scores who took out car loans in the first quarter of 2014 missed payments by November. ASSOCIATED PRESS
Borrowers who took auto loans over the past year are missing payments at the highest level since the recession, fueling concerns among regulators, analysts and some in the car industry that practices that helped boost 2014 light-vehicle sales to a near-decade high could backfire.
“It’s clear that credit quality is eroding now, and pretty quickly,” said Mark Zandi, chief economist at Moody’s Analytics.
More than 2.6% of car-loan borrowers who took out loans in the first quarter of last year had missed at least one monthly payment by November, the highest level of early loan trouble since 2008, when such delinquencies rose above 3%, according to an analysis of data performed for The Wall Street Journal by Moody’s Analytics.
The uptick comes amid an increase in subprime auto loans, raising concerns that car buyers may have taken on more debt than they can handle. For that set of borrowers, defined as consumers with a credit score lower than 620, loan performance also is deteriorating.
More than 8.4% of borrowers with weak credit scores who took out loans in the first quarter of 2014 had missed payments by November, according to the Moody’s analysis of Equifax credit-reporting data. That was the highest level since 2008, when early delinquencies for subprime borrowers rose above 9%.
WSJ's AnnaMaria Andriotis joins Tanya Rivero on Lunch Break to discuss car-buying strategies that can save you money and limit your risk. Photo: Getty
Car lenders say the concerns are overstated. “Auto loans continue to perform well, as they did during the recession,” said Bill Himpler, executive vice president of the American Financial Services Association, which represents auto lenders. “Concerns about a spike in delinquencies have not been substantiated by evidence.”
Overall auto-loan delinquencies have been running above year-ago levels but remain lower than during the recession. As of the third quarter, 3.4% of borrowers had missed at least one car-loan payment. That was up from 3.2% in the same quarter a year earlier but still below 4.2% in 2009, according to Experian Automotive.
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Consumer advocates, meanwhile, say car dealers and finance companies are being overly aggressive with low-income borrowers, pushing them to the limits of what they can afford.
They point to borrowers like Patrina Thomas, 48 years old, from the Syracuse, N.Y., area. She said she was persuaded by a local car dealer to trade in her 2002 Jeep in the summer 2013 in favor of a used 2008 Chrysler Sebring, sold for more than $17,000 and financed with a 20.4% interest rate. Unable to make the $385-a-month payment, the car was repossessed last year.
“Now my credit is ruined,” said Ms. Thomas, who still owes more than $7,600 on the car. “I can’t buy a house for a while.”
Ms. Thomas’s auto loan was financed by Chrysler Capital, a joint venture between the auto maker and Santander Consumer USA Holdings , a unit of Banco Santander SA.
A spokeswoman for Santander declined to comment on the case or on the company’s delinquency rates.
According to third-quarter 2014 data from Experian, the industry leaders, excluding financing arms of car manufacturers, are Ally Financial Inc., with 7.31% of new-car loans, J.P. Morgan Chase & Co. with 5.96%, Capital One Financial Corp. with 4.38%, Wells Fargo& Co. with 3.46% and TD Bank with 2.33%. In the used-car market, the leaders are Wells Fargo at 6.56%, Ally at 4.41% and Capital One at 4.35%.
Ally Financial reported $355 million of its outstanding consumer car loans as nonperforming as of Sept. 30, according to its Securities and Exchange Commission filing. That is up 7.9% from the end of 2013. Its net charge-offs for car loans—the amount it is writing off as a loss because it doesn’t expect to be paid back—were $341 million for the nine months ended Sept. 30, up 18% from a year earlier.
The increase in losses “is related to growth in the consumer portfolio as well as our strategy to diversify the business and book a more balanced mix of assets,” said Gina Proia, a spokeswoman for Ally. “The increase in losses was expected and in line with our expectations. We continue to have a robust underwriting policy and price for risk appropriately.”
Of the 15 biggest U.S. auto-lending banks, Santander had the largest percentage of delinquent auto loans in the third quarter, according to SNL Financial. Santander’s delinquency rate of 16.7% was followed by Capital One at 6.6%, according to SNL.
In general, the auto-finance sector is one of the fastest-growing lending markets since the financial crisis, with outstanding loan balances hitting $943.8 billion at the end of September, from $809 billion two years earlier, according to the Federal Reserve.
Since such loans have performed well in the past, lenders have been more willing to take risks on auto lending, while staying cautious on home mortgages, analysts say.
Of particular concern are loans in which car dealers push financing at extended terms of six and seven years at relatively high interest rates, even if the borrowers have weak credit and escalated debt-to-income ratios. The longer loan terms keep monthly payments under control and get buyers to purchase more expensive cars.
Low-interest rates and wider credit availability have helped propel the U.S. auto industry’s comeback from the recession, driving new-car sales to 16.5 million last year, the highest level since 2006, according to market researcher Autodata Corp.
To keep the momentum going in 2015, industry analysts said car companies and lenders will likely have to push more aggressive finance deals and tap borrowers with weaker credit. Riskier lending tactics already are drawing regulatory scrutiny.
Federal bank regulators observed that lenders were weakening standards and taking on more risks about two years ago, said Darrin Benhart, deputy comptroller of supervision risk management for the Office of Comptroller of Currency, which regulates the largest U.S. banks. “We’re putting banks on notice that we have concerns,” Mr. Benhart said. “It’s definitely an area that warrants some attention.”
Several state and federal agencies also are investigating industry practices, particularly for subprime borrowers. The Justice Department last year sent subpoenas to Ally, General Motors Financial Inc. and Santander Consumer USA. The subpoenas ask them to turn over documents related to subprime-lending businesses.
Kevin Duignan, global head of securitization for Fitch Ratings, said some bigger lenders are starting to pull back and be more conservative on subprime auto lending. The credit-rating firm is concerned that small and midsize lenders won’t follow suit and dive too deeply into subprime lending.
“Subprime delinquencies and losses are beginning to grow at a more rapid pace than we’ve seen in a long time,” he said.
Losses on securities backed by prime and subprime auto loans were up in November, with subprime reaching levels not seen since early 2010, according to Fitch.
Car loans didn’t experience the surge in defaults that occurred in mortgage lending during the recession. If a loan does goes bad, it is easier to repossess and resell a car than a house or office building.
The rise in delinquency rates shouldn’t be surprising given the rebound in subprime lending, said Melinda Zabritski, director of automotive credit for Experian. Lending to below-prime borrowers accounted for about 23% of the vehicle-finance market in the third quarter, up from 21% in 2009 but still below pre-recession levels of 28% in 2007, according to Experian.
Compared with the low point of six years ago, growth in such lending, “may look extreme, which is why we recommend looking at a longer view,” Ms. Zabritski said.
Some auto-industry executives are nervous, saying the riskier practices can leave consumers upside down on their loans longer, owing more than their vehicle is worth when they are ready to trade in.
“The industry is starting to do some stupid things,” said John Mendel, Honda’s America’s vice president of sales. The longer-term loans coupled with greater use of subprime financing can leave buyers paying interest rates as high as 22%, much higher than what is typical for prime buyers, he said.
“If you’re going to trade in in the next six years, you’re going to have a problem,” Mr. Mendel said.
Write to Christina Rogers at christina.rogers@wsj.com and AnnaMaria Andriotis atannamaria.andriotis@wsj.com
