- By ALAN ZIBEL
andANDREW R. JOHNSON WSJ
WASHINGTON — A U.S. financial regulator is growing worried about increasingly risky practices in the auto-lending market, an area of growth for banks.
The Office of the Comptroller of the Currency, in a report released Wednesday, singled out concerns in the “indirect” auto lending market, in which banks buy up loans originated by car dealers. The regulator said it’s concerned about signs of loosening lending standards, including more loans to borrowers with weaker credit.
“These early signs of easing terms and increasing risk are noteworthy,” the banking regulator said.
Banks saw auto lending grow nearly 13% compared with a year earlier in the fourth quarter of last year and the OCC said it’s worried about growing losses in the industry. Average losses per vehicle have “risen substantially in the past two years.”
Auto lending has been a big area of growth for banks as demand for credit cards and other consumer loans has remained tepid.
U.S. Bancorp USB +0.14%, the largest U.S. regional bank by assets, has been “moving more aggressively in auto loans,” Chief Executive Richard Davis said during an investor conference earlier this month.
Wells Fargo WFC +0.21% & Co., the fourth-largest U.S. bank by assets, has expanded its auto-lending business significantly. The San Francisco-based bank’s auto-loan portfolio increased 11.3% in the first quarter to $52.6 billion.
Wells Fargo has improved its credit quality in the auto-lending business in recent years, Thomas Wolfe, executive vice president of consumer credit solutions for the bank, said during an investor presentation in May. “We have moved upstream slightly,” he said, adding that the bank does “a lot more prime financing than we do non-prime or subprime financing.”
Total outstanding U.S. auto loans have risen to $875 billion in the first quarter of 2014, the highest level in more than a decade, according to Federal Reserve Bank of New York data.
Earlier this month, General Motors Financial Co. sold off its largest bond backed by subprime auto loans since 2007, garnering the lowest yields in more than a year compared with an interest rate benchmark.
Bond investors have gravitated to auto loans because delinquencies are low and the bond deals weathered the financial crisis with few rating downgrades, a stark difference from bonds backed by home mortgages.
The auto-lending market faces regulatory inquiries as well, The Justice Department and Consumer Financial Protection Bureau have been investigating whether lenders’ practices have led to discrimination against women and minorities.