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Inside A Car Dealership Ahead Of Motor Vehicle Sales Figures
Much of U.S. household debt is being driven by a boom in auto lending.  Photograph by Daniel Acker— Bloomberg via Getty Images

Subprime Auto Loans Have Got Regulators Worried

Nov 20, 2015

Household debt is on the rise again, as a recovering economy and labor market boost consumer confidence.

According to the latest data from the Federal Reserve, U.S. households borrowed $212 billion in new loans in the third quarter of 2015, much of that driven by a boom in auto lending. On Thursday, the Wall Street Journal published a report which raised the question of whether regulators should be worried about the quality of lending in the auto market.

"Over the six months through September, more than $110 billion of auto loans have been originated to borrowers with credit scores below 660, the bottom cutoff for having a credit score generally considered good," the report reads. "Of that sum, about $70 billion went to borrowers with credit scores below 620, scored that are considered bad."

Regulators are taking notice too. In a speech last month, Comptroller of the Currency Thomas Curry said that what was happening in auto lending, "reminds me of what happened in mortgage-backed securities in the run up to the crisis," while Richard Cordray, director of the Consumer Financial Protection Bureau last year warned that subprime borrowers might be subject to predatory practices.

But while consumers should be wary of lenders who seek to bilk them with high fees and other tricks, there are a couple major differences between mortgage loans and auto loans that should keep the rest of us from worrying that the auto loan market will crash the broader economy. As my colleague Stephen Gandel argued in a report on subprime auto debt, cars are much cheaper and easier to recover and resell in case of a default, as opposed to real estate. Second, the duration of car loans are much shorter than mortgages, making them more stable and easy for investors to value.

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