Car loans may be a boon to banks experiencing lackluster mortgage demand, but automobile lending has come with its own headaches recently.
JPMorgan Chase, a leader in auto lending, reported that car loan origination rose 16 percent, to $6.4 billion, in the fourth quarter. It was a bright spot for the bank, whose earnings slumped 7.3 percent as it continued to grapple with legal costs associated with various investigations and a sharp decline in mortgage refinancing.
Wells Fargo, another major auto lender, reported on Tuesday that car loan origination was $6.8 billion in the fourth quarter, up 26 percent year over year. Last quarter, the bank made $1.6 billion from mortgage banking, about half of what it reported in the period a year earlier.
Auto loan originations have steadily risen since 2007, topping nearly $100 billion in the third quarter of 2013, according to the Federal Reserve Bank of New York. Car lending generates billions of dollars in fees, and the spike in business has been matched by a strengthening market for securities backed by such loans.
But while auto lending has been a booming business, it has also attracted increased scrutiny from federal regulators. The Consumer Financial Protection Bureau and the Justice Department are worried that car dealerships, which work with banks like Wells Fargo and JPMorgan, could be discriminating against minority borrowers.
Last year, Ally Bank, one of the country’s largest auto loan originators, disclosed that it was under investigation by the consumer bureau for not doing enough to curb questionable lending practices. In December, the bank agreed to pay $98 million to settle related charges.
The bureau had already warned lenders that they could be liable for discrimination at the car dealerships with which they worked.
Many Americans need a loan in order to buy a car, and most get loans through the car dealerships themselves. Those dealerships can then sell loans to third-party lenders and charge a single-digit undisclosed interest rate for themselves.
The practice has drawn criticism from consumer groups, who say that dealerships’ discretionary markup practices can lead to discrimination against black, Hispanic and Asian borrowers. Last year, the consumer bureau warned indirect lenders that they were accountable for complying with fair lending laws in their indirect lending programs.
“We made it clear that we will take action to address discrimination in any form,” Richard Cordray, the bureau’s director, stated at the time of the Ally settlement.