Lender Risk Draws Greater Scrutiny As Auto Sales And Borrowing Surge

Auto sales are on the rise — and with those gains, it stands to reason that lending to help finance those purchases would also be up.

Bank earnings have been a hallmark of quarterly reports this past week, and depending on where you looked, auto loan originations grew. Consumers, clearly, are more comfortable taking on big-ticket items, and having by and large paid down credit card loans may be pivoting to deploy their borrowing power into other challenges.

Much has been made of the chip shortage that has impacted any number of verticals that rely on computing power to function — and the increasingly high-tech, connected auto industry is no exception.

But, still, the trend has been up and to the right. At a high level, automakers saw double-digit sales gains in the second quarter over a year ago (albeit off mid-pandemic levels). As recounted in CNN, GM sales were up 40 percent year on year, and up 7 percent sequentially. Toyota sales grew by 73 percent year on year and were up 14 percent sequentially. Hyundai? Up 69 percent year on year.

Drill down a bit into the banks, and we see a strong positive trajectory as well. JPMorgan Chase reported in the quarter that auto loan and lease originations were $12.4 billion, which compares to $11.5 billion in the first quarter of this year — and $7.7 billion last year.

The quarter also saw a $75 million release of reserves in this business line, which indicates that credit quality remains better than had been expected in the quarter.

Wells Fargo said in its own release that auto lending was up 7 percent year over year and 3 percent from the first quarter. For Wells, auto loan originations were $8.3 billion in the quarter, up from $7 billion in the first quarter, and favorable compared to the $5.6 billion that had been seen in the second quarter of last year.

Full Snapback Mode 

The above are just a few snapshots of an industry in rebound — OK, call it sharp snapback — mode.

As JPMorgan CEO Dimon said during the conference call, “The pandemic is kind of in the rearview mirror. Hopefully, nothing gets worse with it. And they’re raring to go,” he said of consumers,” adding that “you see it in auto purchases.”

Along the way, for the banks, we’ve seen growth in mobile and digital banking customers, which means too, that some of that lending activity is happening online. The great digital shift carries with it convenience, to be sure, but also some measure of risk for the lenders that, well, never meet the borrowers face to face. Identities can be cobbled together from any number of online sources, to be sure.

In the PYMNTS June 2021 report, The Next Wave: Business Adoption Of Digital Identity Protection, a survey that included responses from more than 300 auto dealers, security is top of mind. About half of the auto dealers we queried said they had plans to invest in authentication and verification solutions, among the highest scores of all industry segments examined. Drilling down a bit, more than half of those dealers said that digital processes take too long. And a whopping (nearly) 85 percent of those dealers said they prefer to increase the security of transactions even if it means acquiring fewer new customers. Better safe than sorry, goes the mantra.