Loose auto underwriting points to ‘weak’ credit outlook, Moody’s says

Lenders did little to tighten auto loan underwriting last quarter despite worsening delinquency trends. Last quarter, 3.5% of bank respondents in the Federal Reserve’s Senior Loan Officer Opinion Survey reported to have somewhat tightened credit standards. The remaining 96.5% said standards remained basically unchanged.

Given the “rapid rise in auto loan debt,” however, banks would need to tighten standards “a reasonable amount” before Moody’s Investors Service analysts would view them to be in the average range, Warren Kornfeld, senior vice president of Moody’s financial institutions group, told Auto Finance News. 

Despite the modest tightening, because auto loan underwriting standards are “currently so weak,” Moody’s projects a weak credit outlook for the auto finance industry.

The drop in interest rates has increased demand, Kornfeld added, which should be a positive for underwriting standards as originators are less pressured for volume. The Fed’s survey showed consumer demand for auto loans increased among 17.5% of bank respondents. “There are positive developments in auto credit,” he said. “We will see how they continue to play out late in the cycle.”