August 24, 2014

Moody's: Subprime auto loans slowing

Aug. 21, 2014 – Financial institutions, including credit unions, are backing away from subprime auto loans after concerns about another financial bubble, according to a report from Moody's Investors Service.

The Washington Post quoted the report as saying: "Lenders are beginning to show some caution in lending to riskier borrowers. That caution, if it continues, could help rein in subprime auto loan losses. Subprime loan volumes are still high, although they have flattened somewhat over the past year."

Earlier this month, it was reported that the Justice Department was looking into subprime auto lending amid concerns that checks and standards were not being observed – in a potential repeat of the subprime mortgage crisis. In a securities filing, a General Motors subsidiary disclosed that it had been subpoenaed by the Justice Department for seven years of documents on subprime loan contract origination and securitization. The New York Times cited credit rating firm Experian as saying the volume of total subprime auto loans at the beginning of 2014 was 15 percent higher than the previous year at $145.6 billion.

However, Moody's reported that, due to credit unions and others slowing lending to borrowers with lower credit scores, the average credit scores of subprime borrowers has increased slightly in the last two quarters. The report also said that late payments on subprime car loans are on the rise, but still below the levels seen during the financial crisis.

In related news, CFPB announced Wednesday it would take enforcement action against a Texas-based auto finance company for distorting consumer credit records. The bureau said the company lends primarily to subprime borrowers, and neglected to correct a computer system giving credit reporting agencies false information. The bureau is ordering the company to fix its errors and pay a $2.75 million fine.