What is the face of the new boom in subprime auto lending?
Millions of Americans with shoddy credit are easily obtaining auto loans from used-car dealers, including some who fabricate or ignore borrowers' abilities to repay. The loans often come with terms that take advantage of the most desperate, least financially sophisticated customers. The surge in lending and the lack of caution resemble the frenzied subprime mortgage market before its implosion set off the 2008 financial crisis.
Auto loans to people with tarnished credit have risen more than 130 percent in the five years since the immediate aftermath of the financial crisis. Roughly one in four new auto loans last year went to borrowers considered subprime — people with credit scores at or below 640.
A wave of money is pouring into subprime auto loans, as high rates and profits attract investors. Just as Wall Street stoked the boom in mortgages, some big banks and private equity firms are feeding subprime growth by investing in lenders and making money available for loans.
And, like subprime mortgages before the financial crisis, many subprime auto loans are bundled into complex bonds and sold as securities by banks to insurance companies, mutual funds and public pension funds — a process that creates ever-greater demand for loans.
The New York Times examined more than 100 bankruptcy court cases, dozens of civil lawsuits against lenders and hundreds of loan documents. It found that subprime auto loans can come with interest rates that can exceed 23 percent. Loans were typically at least twice the size of the value of the used cars purchased, including dozens of battered vehicles with mechanical defects hidden from borrowers. Such loans can thrust vulnerable borrowers further into debt, even propelling some into bankruptcy, according to the court records and interviews with borrowers and lawyers in 19 states.
Many subprime auto lenders are loosening credit standards and focusing on the riskiest borrowers. Pointing to higher auto loan balances and longer repayment periods, the ratings agency Standard & Poor's recently issued a report cautioning investors to expect "higher losses."
"It appears that investors have not learned the lessons of Lehman Brothers and continue to chase risky subprime-backed bonds," said Mark T. Williams, a former bank examiner with the Federal Reserve.