US: banking regulator cautions subprime auto loan bonds image

According to New York’s top banking regulator, the emergence of sales of bonds that rely on subprime auto loans is bringing “a disalignment of incentives” for lenders, adding debt to borrowers already seen at risk.

Benjamin Lawsky, superintendent of the Department of Financial Services, commented in front of state senators in Albany during a hearing on lending practices that loans turned into bonds for consumers with shady credit “scares me a bit.” He added that lenders are giving more and more loans, many of them lifting the issuance of the loans and the securities they back. Borrowers are starting to fall back on payments once more, fueling fear the market could create another bubble just like prior to the 2008-2009 financial crisis, which in turn has prompted increased scrutiny of the market. The Justice Department and state authorities are searching for a way to secure auto loans for possible fraud as they investigate new potential areas of abuse, commented Acting Deputy Attorney General Sally Quillian Yates back in February.

Lawsky added that if done correctly, subprime loans have their rightful place in the financial system and they “don’t want to totally disrupt the market either” and “create a problem where people can’t get credit.” He also disclosed to the lawmakers that his personnel is currently in the middle of a massive investigation that searches traces of discrimination in the auto industry. Reports point out the Department of Financial Services has been probing more than seven big auto lenders for alleged breaches of fair lending and other consumer wrongdoings – the units in question being Santander Consumer USA, Toronto-Dominion Bank and the financial divisions of Ford, Honda, Hyundai Nissan and VW AG.

Via Bloomberg