Auto Analyst Sees Stricter Lending Standards

DETROIT – An analyst says auto-loan standards are getting stricter. But it's not a stern return to recessionary days and ways. 

Six years ago, auto financing froze up, limiting borrowing to only the highest credit scorers. The subprime set was out of luck.

Since then, credit has become more accessible. Loan rates have been relatively low. Securitized lenders bought deeper while competing for business.

Seeing changes is John Murphy, Bank of America Merrill Lynch’s lead U.S. auto analyst.

“Over time, there has been a loosening of credit quality since 2009,” he says at the Automotive News World Congress here. “But we are getting back to levels that are more normal.”

Some worriers say the auto-finance industry’s relaxed lending practices could spark widespread loan delinquencies and defaults.

It’s not that bad, according to many in the industry, including Murphy, who says: “We’re not looking at something disastrous, not something negative.”

Besides, he says, lenders hold a powerful weapon should a car loan go bad: the right to get the vehicle back. “You have a strong piece of collateral you can repossess.”

Reselling a repo mitigates lender losses, but doesn’t cover them. Some lenders describe seizing a person’s car as lose-lose.

Murphy optimistically forecasts U.S. vehicle sales will hit 20 million units in 2018. That would present production challenges to automakers that currently aren’t at such capacity levels. Last year, they sold 16.4 million light vehicles in the U.S.

“Other people are bearish, we’re bullish,” Murphy says, citing consumer confidence and many people’s need to replace aging vehicles as a reason for auto sales at 20-something soon. 

He expects vehicle sales will drop after peaking in 2018. “This is the time to bolster balance sheets and not try something willy-nilly. Definitely prepare for a downturn after 2018.”

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