LAS VEGAS -

It’s not necessarily the volume of auto loans that commercial banks are generating that has the Office of the Comptroller of the Currency (OCC) troubled. It’s the volume of paper that has defaulted and been charged off that has bank regulators concerned.

During a speech on Tuesday, Darrin Benhart, the OCC’s deputy comptroller for credit and market risk, highlighted how much charge-offs among banks grew in a 12-month span. Benhart indicated the average charge-off for a defaulted auto loan increased from $6,832 in the fourth quarter of 2012 to $7,618 in the fourth quarter of 2013.

“That’s a 12-percent increase in 12 months,” Benhart told attendees at the 22nd annual Financial Services Collections & Operational Risk Conference in Las Vegas.

Benhart explained the data came from the OCC’s Semiannual Risk Perspective, a report generated twice a year in an effort to inform the industry about emerging risks. The most recent installment came in June, and Benhart said a new offering is to be published before the end of the year.

Benhart acknowledged the June report covers a number of risks, but he focused part of his appearance on auto financing.

“Auto lending, as pointed out in the report, is a bit of a two-edged sword,” Benhart said. “Product structures, loan-to-values and pricing practices raise both credit quality and consumer compliance concerns. Increased wealth and improving economic conditions have improved consumers’ confidence and drawn them back to auto showrooms and car lots.

“The result is a double-digit growth in this product at many of our banks. That healthy growth reflects the consumer appetite for new, or ‘new-to-you’ cars that families may have decided not to purchase in previous years when unemployment was higher and the overall economy more sluggish,” he continued.

Benhart noted that total outstanding auto loans in national banks and federal thrifts grew 13 percent in 2013 and expanded by another 4.8 percent through June 30 of this year. He also pointed out some individual banks that concentrate in vehicle financing enjoyed growth rates significantly above that level.

“While that is strong growth, the market remains fragmented with banks, credit unions, finance companies and captives all playing major roles,” said Benhart, adding that banks hold about 29 percent of the total auto finance market. That share equates to about $262 billion in outstanding loans, according to OCC’s analysis.

Benhart stressed the rise in auto financing and its risk stems from one of the same reasons finance company executives often cite when they share quarterly performances.

“Competition is one of the factors behind the increased risk we are seeing,” Benhart said. “Competitive pressure is driving some auto lenders to pursue growth by lengthening terms, increasing advance rates and originating loans to borrowers with lower credit scores. The marketing of these loans is focusing more on monthly payment, with little attention to the overall debt of the borrower.

“Average loan-to-value, or LTV rates for both new and used vehicles are getting more liberal and exceeded 100 percent for all major lender categories at the end of 2013,” he continued. “These high LTVs reflect both rising car prices and a greater bundling of add-on products such as extended warranties, credit life insurance, and aftermarket accessories into the financing.

“The results have yet to show large-scale deterioration at the portfolio level, but we are definitely seeing the signs of increasing risk,” Benhart went on to say.

Benhart insisted the most obvious indicator of increasing risk is that the average loss per vehicle has risen “significantly” during the past 24 months. At this point in his presentation, Benhart mentioned the trend that triggered his concern —that 12-percent rise in charge-offs in 12 months.

“Increased average loss is one indication of how longer terms and higher LTVs can increase exposure. Notably we are seeing average charge-offs in auto lending rise across all lender types over the last year — banks, credit unions, and non-depository finance companies,” he said.

“Some in the media and industry have downplayed the significance of the risk we are identifying in the auto lending industry, but at the OCC, we will continue to monitor product terms and risk layering practices to ensure that banks manage growth and exposure prudently,” Benhart went on to say.