Banks Tighten Auto Lending as More Borrowers Fall Into Default

(Bloomberg) -

Lenders are tightening the spigot on new auto loans, making it harder for U.S. consumers with weak credit to buy a car, data from the Federal Reserve Bank of New York show.

New car loans for subprime borrowers fell in the first quarter to $25.9 billion, the lowest in two years, according to the New York Fed’s quarterly report on household debt and credit. Drivers with credit scores below 620 now comprise less than 20 percent of new loans, down from almost 30 percent a decade ago. Borrowers with the highest credit scores — 760 or more — made up nearly a third of new auto loan originations in the first quarter as lenders target the safer deals.

Banks including Fifth Third Bank Corp. have been trimming their loan books and cutting back on riskier credit as delinquent auto loan balances surge. The share of auto debt more than 90 days overdue rose to 3.82 percent in the first quarter, the highest in four years.

While caution may be good for banks’ balance sheets, it doesn’t offer much relief for automakers, who relied on cheap credit to fuel a seven-year stretch of booming sales. Now they’re boosting discounts and cutting production to address swelling inventory on dealer lots. Ford said Wednesday it’s cutting 1,400 jobs in North America and Asia to improve profits as the U.S. auto industry recorded a fourth straight drop in monthly sales in April, after eking out a record year in 2016.

Tighter credit “is a big impediment to future strength in auto sales,” said Yelena Shulyatyeva, senior U.S. economist for Bloomberg Intelligence. “A lot of this demand was driven by loose lending standards.”

Ally Financial Inc., which Bloomberg Intelligence estimates has 55 percent of its loan book in auto credit, is one lender trying to distance itself from the weaker borrowers. The percentage of Ally’s auto originations to U.S. consumers without a credit score or with a grade of 619 or less fell to 15.7 percent in the first quarter, from 17.8 percent a year earlier.

“We’re cutting some of the tails or the under-performing pockets of our book,” Jeff Brown, chief executive officer of the Detroit-based lender, said last month in an interview. “We recognize sales have been pretty strong, credit has been pretty stable and all that’s transitioning right now.”