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Booming Auto Lending Helps Banks, but Attracts Scrutiny

Several banks today are able to survive in the last quarter of the previous year despite a declining mortgage demand, thanks to their good-looking auto loan portfolio.

Auto-lending giant JP Morgan Chase, for example, reported that its auto loan origination went up by 16 percent to $6.4 billion in the final leg of 2013. However, the mortgage slowdown and the steep legal penalties both dented its earnings, which declined by 7.3 percent.

Meanwhile, Wells Fargo, the most profitable bank in the U.S. and a major auto lender, had $6.8 billion worth of auto loan origination last year, an expansion of 26 percent. It reported that mortgage banking in the last quarter went down to $1.6 billion, about half of what it reported in the same period in 2012.

Auto loan origination has been growing steadily since 2007, reaching its peak of almost $100 billion in 2013, according to the Federal Reserve Bank of New York.

But since last year, the booming auto lending industry has drawn scrutiny from the federal government and consumer advocates. The Justice Department and the Consumer Financial Protection Bureau are concerned about car dealerships and their tendency to charge minority borrowers hefty auto loan interest rates.

Dealerships work with banks in providing auto loans to car buyers. They mark up the base interest rate as compensation for arranging financing for consumers. The CFPB has oversight on banks like Chase and Wells Fargo, but it does not regulate car dealerships.

The consumer bureau has called on banks to take necessary measures in curbing discriminatory lending practices. It has also reminded indirect lenders that it is their responsibility to ensure that their indirect lending programs comply with fair lending laws.

Ally Bank, one of the country’s major auto loan originators, was investigated by the bureau for its lack of effort in repressing unfair lending practices. Last December, it agreed to pay a total of $98 million of settlement charges.

CFPB chief Richard Cordray has said that the bureau will “take action to address discrimination in any form.”




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