Senate Bill Gives Banks ‘Wiggle Room’ for Nonprime Lending, Economist Says

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A bipartisan financial reform bill making its way through the Senate this week could allow midsize banks in the auto space to be more competitive with non-bank institutions, especially in the nonprime sector, said Michael Vogan, lead auto economist at Moody’s Analytics.

Senate bill 2155, sponsored by Senate Banking Committee Chairman Mike Crapo (R-ID), would raise the threshold for banks to be considered “systemically important” to $250 billion in assets from $50 billion.

The new threshold means banks like Ally Financial Inc. and SunTrust Banks would no longer have to comply with the more strenuous stress testing that comes with the larger-bank designation.

“With respect to auto, I think it’s going to make banks even more competitive when compared with captives, independent auto finance companies, and dealer finance companies,” Vogan told Auto Finance News. “I don’t think the reaction would be a complete jumping-ship from those regulatory practices, and the stress tests won’t be going away entirely. What it will do is free up some resources, with which they can compete.”

Non-bank auto delinquencies have caused some lenders to pull back from nonprime credit tiers, but banks have performed better, in part, because regulation encourages them to take less risk.

“If some of that pressure is alleviated, given that [bank] delinquency rates are still relatively low compared to history, they would have some wiggle room to expand lending more and compete,” Vogan said. “But, I don’t think it would be a mad dash to the bottom of the auto credit ladder.” Even if the bill passes the Senate, it still faces a battle in the House.

Vogan will share his insights on the economy at the Auto Finance Performance & Compliance Summit at the Omni Dallas from May 9-10. Register here.

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