While the Federal Reserve states that automobile loans are now at an 8-year high, it is important to note that the number includes a great number of “subprime” loans made to consumers with poor credit (with scores below 620), putting both buyers and banks in jeopardy of default, much like they did in the housing market. In addition, borrowers should beware that like mortgages, auto loans are often packaged into securities and can be sold off to investors.
According to a report released by the Fed yesterday, not only have subprime auto loans doubled in the past 4 years, lenders are granting loans for larger amounts despite the fact that the number of defaulted loans have increased since 2012, causing alarm bells to go off at the Office of the Comptroller of Currency. It also stated that banks and other loan companies issued $101 billion in new automobile loans between April and July of this year, raising the total amount of outstanding vehicle debt to $905 billion in that quarter.
It was also noted that in addition to investigating General Motors in regard to the ignition switch, resulting in the recall of millions of vehicles since the beginning of this year, the Justice Department announced last week that it has begun a civil investigation into the company’s financial arm in regard to its subprime lending practices and has subpoenaed documents involving contracts for said loans from 2007 to the present. According to Preet Bharara, the US attorney for the Southern District of New York, he is seeking information regarding their “underwriting criteria and how the loans were represented to those who were pooling them and assembling securities to be sold to investors, and whether the lender fully disclosed to investors the credit worthiness of the borrowers whose loans made up the complex securities.”