Auto Loans: A Silent Bubble?
Last week, a national bank holding company, TCF, announced it will discontinue all indirect auto loan originations, effective December 1, 2017. In July, Wells Fargo announced it was scaling back and remodeling its auto lending business in response to growing stress in the market. They’ve cut 30 percent so far. All this is due to the desperation that faced automakers and lenders after the financial crisis. In their desperation, they found a trick that could result in higher sales and more loans. Lenders started to extend the length of the loans, which reduced the monthly payment on the cars. As they were doing this, they also started to give loans to borrowers with not-so-great credit–the subprime borrowers, giving a boost to auto sales and auto loans (up 60 percent). Now the delinquency rates are increasing, and FIs are nervous. Rightly so. Look at the housing market in 2006–2007. As default rates soared, banks’ mortgage lending almost halted. Doubtful that credit unions will stop all auto lending, but it does give one time to pause and review the financial outlook of the indirect auto loan origination business as compared to alternative uses of capital.
~John-Ashley Paul, President/CEO