Auto loan underwriting standards have loosened dramatically since the financial crisis, as lenders open up the financing spigots to those with less-than-perfect credit, according to data from Experian Information Solutions Inc.


Experian found that lenders increased their origination of auto loans to subprime borrowers jumped 10.6 percent during the past year with an increase of 19.2 percent to deep subprime consumers. Nonprime loans now make up 36.0 percent of all car loans, up 2.0 percent from the previous year.


And those with poor credit are borrowing more now. The average loan-to-value ratio (TV) for subprime car buyers rose to 114.5 percent this year, up from 112 percent in 2010, according to a report from Standard and Poor’s. That means buyers are borrowing more than their cars are worth. Levels are not yet back to their market high of 2008 when LTVs for bad credit borrowers hit 121 percent.


“We’re expecting continued weakening in credit standards as more players vie for a piece of the subprime auto loan market and others try to hold on to market share,” wrote the analysts.


And Fitch Ratings believes credit standards may erode further.


“We expect new auto loan originations to persist through the subsequent quarter given greater vehicle financing options and heightened consumer demand for automobiles,” Fitch said in a press release. “However, with rapid growth in the number of new auto loans, the prospect of pronounced aggressive underwriting standards remains plausible.”


Because of that weakening in credit, auto-backed securities (ABS) are likely to take a hit in the future when some of these loans sour. S&P says it does not expect to cut its ratings on these type of securities though. It believes that enough investor protections have been built in to prevent the risk from growing too great.


Still, with borrower credit scores dipping lower and lower, it is hard to see how ABS ratings will remain unchanged in the coming months.

About Amber Nelson
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.

Read More @ Loan.com Blog