WaPo: Regulatory Vigilance Warranted on Frothy Auto Loans

Thursday, 14 Aug 2014 07:12 AM

By Dan Weil

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As U.S. auto sales surge, so do subprime auto loans, raising worries of a bubble.

A whopping $146 billion of subprime auto loans were issued in the first quarter, up 15 percent from a year earlier, according to credit rating agency Experian.

Regulators have begun to take notice of the trend, and that's a good thing, according to a Washington Post editorial.

Editor’s Note:
5 Shocking Reasons the Dow Will Hit 60,000


The Office of the Comptroller of the Currency (OCC) said in a recent report that "signs of risk in auto lending [are] beginning to emerge," with looser underwriting rules and a "substantial" increase in lenders' average loss per vehicle.

But investors desperate for yield in a low-interest-rate environment are jumping at bonds backed by the loans, The Post notes. "It's a dynamic reminiscent of the subprime mortgage bubble that helped cause the Great Recession," the editorial states.

While subprime auto loans don't represent the same systemic threat as subprime mortgages, "the OCC report strikes us as just the kind of regulatory vigilance the situation requires," the editorial states.

The Justice Department is on the case too, which might be helpful, according to The Post.

"No, a subprime auto-lending bubble probably can't and won't cripple the U.S. economy. But the longer it goes on, the more people will get hurt when it abruptly stops. It would be better for all concerned to tap the brakes now than to risk a crash later on," The Post notes.

Post editors aren't the only ones concerned about the situation. "It appears that investors have not learned the lessons of Lehman Brothers and continue to chase risky subprime-backed bonds," Mark Williams, a former bank examiner with the Federal Reserve, tells The New York Times.

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

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