The Office of the Comptroller of the Currency wants to better understand warehouse lending in auto finance, the regulator told Auto Finance News.
The director of the OCC’s retail credit risk unit, Bob Piepergerdes, said that as part of an effort to assess growth in auto lending among OCC-regulated institutions, his office is looking to more fully understand the patterns around warehouse lending by banks to auto finance companies.
Piepergerdes shared those thoughts when asked about the case of Condor Capital, a subprime lender now under indictment by the New York State Financial Services Department, which stands accused of bilking its customers out of refund money. Also named as an “intervenor” in the Condor case is Wells Fargo Bank, which means that Wells is legally “united” with Condor as a defendant in the case. Wells Fargo provided Condor with a $256 million line of credit that Condor used to make its loans.
Piepergerdes was unaware of the specifics surrounding the Condor case. Nonetheless, warehouse lending is common in auto. Banks provide capital to small finance companies, especially subprime lenders. Just how widespread, and how much money gets lent out, remains murky — hence the increased regulatory interest.
That information was one nugget of a greater conversation about the OCC’s latest semiannual risk report released this past June that details the regulatory agency’s growing concern over indirect auto lending patterns among OCC regulated institutions. The OCC’s National Risk Committee monitors emerging threats to the federal banking system’s safety.
The report said OCC had been watching signs that credit risk is now building after a period of improving credit quality and problem loan clean-up “Examiners have observed erosion in the underwriting standards for syndicated leveraged loans, as well as loosening of standards and increased layering of risk in the indirect auto market,” the report states.
Piepergerdes said his area hasn’t been tracking warehouse lending specifically. He said they had been focusing on the loans financial institutions make to consumers either directly or indirectly through the dealers. But he said OCC has a credit analytics database do on the commercial credit side, through which it got some rough data on how much OCC-regulated institutions are providing in terms of capital to finance companies and captives.
LENDING PATTERNS
The OCC is also casting a closer eye on consumer lending patterns among its institutions, banks and other large institutions, which originate just over 30% of the nation’s auto loans.
“We’ve been keeping our eyes on the longer terms over the past few quarters. LTVs have also been going up,” he said.
Piepegerdes said when he’s spoken to banker groups and had discussions with them about things that are starting to get the OCC’s attention in auto lending, the lengthening of terms is one of the things they talk about.
“We have to make certain that we understand clearly the risk selection process for auto lending in the institutions we regulate. The longer terms, are they going to the most creditworthy borrowers? In some ways, that seems counterintuitive since they’re the ones who could probably afford a higher payment,” he said.
Nonetheless, how can regulators keep a watchful eye, while still encouraging a fruitful lending environment?
“What we struggle with as bank regulators is what regulatory guidance is needed to deal with risk when we see it building in our institutions,” said Piepergerdes. He said the OCC is paying attention to how competition is affecting auto lending. The OCC wants to be aware of what’s going on and make sure their lenders are lending in a prudent way.
“We have a fine line of making sure that we’re assessing that risk effectively,” he said.
He said LTVs are a little trickier to compare, because that depends on how institutions calculate them, what they include or don’t include, in particular related to add on products such as extended warranties.
But, he also acknowledged that the an increasingly heated market, where competition was king, had placed enormous pressure on banks.
When he talks to banker groups, one of the reasons he said they go out to 84 months when they’d never done that before is simply because their competitors are readily doing it. “We want to make sure the banks are evaluating risk properly for loss reserves. When you start seeing a higher loss per loan, particularly when you think you have collateral, it’s another indication of increasing risk,” he said.
Nonetheless, he said the agency doesn’t want to put a damper on prudent lending.
“The reason we highlighted auto lending in the semi-annual risk perspective is we want to alert the industry that we’re watching,” he said.