WASHINGTON — The Office of the Comptroller of the Currency (OCC) once again used its spring Semiannual Risk Perspective report to lay out its concerns regarding credit markets. Chief among its concerns in the auto finance arena is a highly competitive market that's led to a decline in underwriting standards.
The agency said credit risk is increasing due to strong loan growth combined with easing in underwriting standards. As a result of banks striving for yield in an increasingly competitive environment, concentration and risk layering are increasing, particularity in indirect auto, commercial and industrial, and commercial real estate (CRE).
According to the report, auto lending risk is increasing due to unprecedented growth across all types of finance sources, as well as an increase in delinquencies and a decrease in used-vehicle values.
And as banks compete amongst each other to earn a larger foothold in an increasingly competitive market, their underwriting standards for direct and indirect auto loans have begun to decline, the report found. This decline, combined with a layering of risks like higher loan-to-value ratios and longer finance terms, has led to concentrations in auto loans increasing.
“These factors create the potential for increasing levels of embedded credit risk in auto loan portfolios. The elevated risk results in higher probable credit losses and may warrant additional provisions to the [allowance for loan and lease loss] or higher capital allocations,” the report stated.
Supervisory work, the report added, has found that some banks’ risk management practices have not kept pace with the growth and increasing risk in auto portfolios. However, even with the added risk in indirect auto lending, the agency noted that it expects regulators to place a brighter spotlight on the commercial real estate market.
“It’s at this stage of the cycle that we also see strong loan growth combined with easing underwriting to result in increased credit risk. While leveraged lending and auto lending remain concerns, CRE lending and concentration risk management has become an area of emphasis for regulators,” said Thomas J. Curry, comptroller of the currency.
Originally posted on F&I and Showroom