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Lenient Underwriting Leads to 3Q Delinquency Increases

January 7, 2008

Growing stress in the housing sector and more lenient underwriting standards have contributed to indirect auto loan delinquencies jumping to a 16-year high, according to the American Bankers Association (ABA).

“During the past few years, dealers had an incentive to sell cars, so they were qualifying people who may have had shaky credit histories,” said Keith Leggett, a senior economist for the ABA. “We’re also seeing the maturity structure for car loans becoming progressively longer and borrowers are becoming more and more upside down. Loan-to-value ratio has also been rising.”

The association reported that delinquencies on indirect auto loans in the third quarter of 2007 (those that were at least 30 days overdue) were the highest they have been since 1991, when indirect auto loan delinquencies hit 2.87 percent. Delinquencies on direct auto loans, on the contrary, were down from the same time a year ago. All numbers were seasonally adjusted.

The percentage of delinquencies on indirect auto loans followed a four-year increase. In the third quarter of 2007, delinquencies hit 2.86 percent. This was up from 1.59 percent in the third quarter of 2004. Delinquencies were at 2.24 percent in 2005 and 2.35 percent in 2006. The delinquencies in the third quarter of 2007 were also up from 2.77 percent in the second quarter.

Although direct auto loan delinquencies were down year over year, from 1.87 in the third quarter of 2006 to 1.81 in the third quarter of 2007, the delinquencies in the third quarter of 2007 were up from the 1.69 percent reported in the second quarter.

“We’re expecting continued increases in delinquencies across the broad spectrum of consumer loan products,” warned Leggett. “Weak job numbers in the fourth quarter of 2007 have an impact on individuals’ ability to make timely payments. This will translate into 2008 and there will be continued stress in the consumer sector.”

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