A recent report released by the Center for Microeconomic Data at the Federal Reserve Bank of New York found that American household debt continues to increase, including debt resulting from automobile loan balances. The third quarter of 2017 saw a $116 billion increase, continuing a march upward since mid-2013.
The report specifically addressed the growth of subprime auto debt, which the New York Fed classified as debt held by borrowers with origination credit scores falling below 620. In total, there are currently 23 million consumers who hold subprime auto loans. While banks tend to finance auto debt originated by borrowers with higher credit scores, auto finance companies have long dominated subprime auto lending, and their shares of this market have only increased in recent years. The New York Fed’s report highlighted three specific areas related to the growth of subprime lending among auto finance companies:
Originations: Auto finance companies historically have held more than 70 percent of subprime auto loans. In 2017, lending to borrowers with lower credit scores has not increased as rapidly as in previous years, but lending to borrowers with higher credit scores has kept pace.
Outstanding Balances: In the third quarter of 2017, auto loan balances increased by $23 billion, with outstanding balances on subprime auto debt currently totaling approximately $300 billion. Auto finance companies, who own a disproportionate share of subprime auto debt, currently hold more than $200 billion, a share that has nearly doubled since 2011.
Delinquency: The delinquency rate for auto finance companies has increased since 2014 by more than two percentage points. The delinquency rate is considerably higher and rising for debt owed to auto finance companies, rather than banks, even when comparing consumers who have roughly the same credit scores.
Troutman Sanders’ Financial Services Litigation practice group has specific expertise in the automotive lending industry and the legal issues these companies face. We maintain a dedicated Auto Finance practice that offers broad industry experience and in-depth subject matter understanding in compliance, litigation, and regulatory matters affecting clients engaged in consumer retail automobile sales, as well as both direct and indirect automobile sales financing. We will continue to monitor trends in the auto finance industry.