Lenders are giving more auto loans to people with low credit scores. They make subprime auto loan packages with bonds and sell them on Wall Street. This looks like the housing bubble in 2005. And this is why regulators are getting nervous.
The New York Federal Reserve noted in August that subprime auto loans are going back to its pre-recession levels. About 27 percent of auto loans were made to borrowers with credit scores below 500, the highest since 2007. These loans back $17.2 billion worth of bonds issued this year, just a little less than the $20 billion recorded eight years ago.
The increase in subprime auto loans boosted the U.S. auto sales, but regulators are not very happy about the situation. Consumer activists are not confident it would last.
In addition, auto loan delinquencies are falling, but have not yet reached pre-recession marks.
One that worries consumer advocates is the independent lenders that are usually backed by financial institutions or automakers. They began providing auto loans to dealers in 2010 after Dodd-Frank became a law. This law created the Consumer Financial Protection Bureau or CFPB that basically serves as a watchdog in consumer lending, but with auto dealers absolutely excluded from its oversight.
While this worries consumer groups, investors see it as an opportunity to increase interest rates in times of low yields.
The CFPB tirelessly watch over the auto lending market and fight against unfair and damaging practices in it.
Currently, the bureau has placed auto lenders in the hot seat, aiming at the regulation of dealer markups which push borrowers to get auto loans they cannot really afford. The CFBP has suggested the adoption of a flat fee as compensation for dealers instead of markups to prevent possible abuses.
In the meantime, the CFPB has asked the lenders that are within its purview to keep an eye on their dealers to ensure that there is no discriminatory lending happening against women and minorities.
Ally Financial has announced early this month that they are being probed by the regulator with regards to their supervision of lending discrimination.