Equifax and Moody’s Analytics recently suggested commercial banks should consider borrowers who might fall in the non-prime or even subprime tiers to enhance their auto-finance opportunities. Evidently, officials from the Office of the Comptroller of the Currency (OCC) disagree stemming from what they shared in their Semiannual Risk Perspective released this week.

The report indicated auto finance risk is increasing because of “notable and unprecedented growth” across all types of institutions. The OCC’s concern stems from auto delinquencies beginning to increase as used-vehicle values have started to decline.

“As banks have competed for market share, some banks have responded with less stringent underwriting standards, or both, for direct and indirect auto loans,” OCC officials said in the report. “In addition to the easing of underwriting standards and potential layering of risks (higher loan-to-value ratios combined with longer terms), concentrations in auto loans have been increasing.

“These factors create the potential for increasing levels of embedded credit risk in auto loan portfolios,” they continued. “The elevated risk results in higher probable credit losses and may warrant additional provisions to the allowance for loan and lease loss or higher capital allocations.

“Supervisory work to date has noted that some banks’ risk management practices have not kept pace with the growth and increasing risk in these portfolios,” OCC officials went on to say in the report, which can be downloaded here.

During a recent webinar hosted by the Consumer Bankers Association, Equifax auto finance leader Lou Loquasto emphasized how a healthy mix is important for any part of the credit market, especially automotive.

“If our industry makes all of the loans at 800 credit, losses are going to be super low. But if they make them all at 500 credit, losses are going to be super high,” Loquasto said.

“If you look at the mix over the past five years, we have been really steady since 2011,” he continued. “What that tells us — because auto loans are short term and losses, when they come, may come sooner rather than later in the loan term — we at Equifax expect the future performance of the recent pools of business to look very similar to what happened in 2014 and 2015. That’s one of the reasons we’re very optimistic about where we’re going.”

After releasing the Semiannual Risk Perspective, Comptroller of the Currency Thomas Curry acknowledged the challenge banks have, but he still took a cautious approach.

“The banking environment continues to evolve, with growing competition among banks, nonbanks, and financial technology firms,” Curry said. “Some banks are struggling to find viable business models, while others are increasingly adopting innovative products, services and processes in response to evolving customer demands and the entrance of new competitors.

“Doing so often involves assuming unfamiliar risks, including expanded reliance on third-party relationships,” he continued. “Banks may face heightened strategic planning and governance risk if they do not use sound risk management practices that align with their overall business strategies. It’s at this stage of the cycle that we also see strong loan growth combined with easing underwriting to result in increased credit risk.

“While the OCC strongly encourages responsible innovation that provides fair access to financial services and fair treatment of consumers, we have also stressed that banks should have effective risk management to ensure such innovation aligns to their long-term business strategies,” Curry went on to say.