WASHINGTON – U.S. auto loans jumped to the highest level in eight years this spring, fueled by a big increase in lending to risky borrowers, according to a report Thursday by the Federal Reserve Bank of New York.
Yet the New York Fed also said that loans to borrowers with shoddy credit, also known as subprime lending, still make up a smaller proportion of total auto loans than before the recession.
Federal banking regulators have raised concerns in recent months over the rapid increase in subprime auto loans. Such loans could lead to more defaults, harming banks and consumers. Auto loans are also packaged into securities and sold to investors, like mortgage loans. That could amplify the effect of any rise in auto loan defaults.
This spring, banking regulators at the Office of the Comptroller of the Currency said that “signs of increasing risk are evident” in auto lending. They found that lenders are making larger car loans. As a result, the size of car loans in default has increased in the past two years.
The Justice Department said last week that it is investigating General Motors’ financing arm over its subprime lending practices.
Still, the New York Fed report stops short of recommending specific steps. In a separate post on its website, New York Fed economists said they would “continue to monitor” the issue.
Banks and other lenders issued $101 billion in new auto loans in the April-June quarter, according to the quarterly report on household debt. Total outstanding auto loans rose to $905 billion in the second quarter.
Auto loans are the third-largest source of Americans’ debt, after mortgages and student loans. Mortgage debt declined in the second quarter to $8.1 trillion, while student debt rose to $1.12 trillion. Americans have $669 billion on their credit cards.
The automakers’ financing arms account for most of the increase in subprime loans. In the second quarter, the dollar value of their subprime loans was triple that of the banks. The New York Fed said loans by auto financing companies are much more likely to become delinquent than those by banks.
Still, auto lending to credit-worthy borrowers also jumped, the report said. As a result, just 22.2 percent of auto loans were subprime in the second quarter. That is still below the 25 percent to 30 percent that existed before the recession.