Ally Financial recently became the latest auto-lending company to face a government investigation into its subprime auto lending practices, raising questions among some as to whether the next subprime crisis will come in the form of auto loans.

The Securities and Exchange Commission has requested documents from Ally “in connection with its investigation related to subprime automotive finance and related securitization activities,” the company disclosed in a filing last month.

Ally is just one of a handful of lenders to have received such a request from regulators in recent months. In July, the Department of Justice served GM Financial with a subpoena directing it to produce certain documents relating to GM Financial’s, its subsidiaries’, and affiliates’ origination and securitization of subprime automobile loans since 2007, the company disclosed in a securities filing.  

The subpoena relates to potential violations of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which empowers federal prosecutors to seek civil penalties for a wide range of offenses—including mail and wire fraud, bank fraud, and false statements made to the government—that specifically affect federally insured financial institutions. Recently, however, the Justice Department has started to use FIRREA against non-banks as well.

“Among other matters, the subpoena requests information relating to the underwriting criteria used to originate these automobile loans and the representations and warranties relating to those underwriting criteria that were made in connection with the securitization of the automobile loans,” GM Financial stated. “In September, GM Financial was served with additional investigative subpoenas to produce documents from state attorneys general and other governmental offices relating to its subprime auto finance business and securitization of subprime auto loans.”

In a third example, Santander Consumer USA Holdings disclosed in August that it similarly had received a subpoena from the Justice Department under FIRREA, “requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime auto loans since 2007,” the company stated. “We are cooperating with this request.”

CFPB Oversight

The Justice Department is not the only agency with a wary eye toward subprime auto lending practices. The Consumer Financial Protection Bureau (CFPB) has proposed a new rule to oversee larger nonbank auto finance companies for the first time at the federal level.

Currently, the CFPB supervises large banks making auto loans, but not nonbank auto finance companies. Under the Dodd-Frank Act, the CFPB has authority to supervise certain nonbanks that the agency defines through rulemaking as “larger participants” in a market.

The proposed rule would generally allow the CFPB to supervise nonbank auto finance companies that make, acquire, or refinance 10,000 or more loans or leases in a year in order to ensure they are complying with federal consumer financial law. The CFPB estimates that about 38 auto finance companies, which originate around 90 percent of nonbank auto loans and leases, would be subject to this new oversight.

The CFPB also released a report that details auto-lending discrimination it has uncovered at banks. The report highlights that the agency’s supervisory actions against banks will result in about $56 million in redress for up to 190,000 consumers harmed by discriminatory practices.

While some have questioned whether the next subprime crisis will come in the form of subprime auto loans, others argue that such loans are not as risk-laden as subprime mortgage lending because automobile loan payments are smaller and more manageable for borrowers. “Subprime auto loans are more likely to be a bump in the road than a disaster,” states a client alert from law firm Clyde & Co.

Nonetheless, the SEC, Justice Department, and CFPB have made it clear that they do not intend to allow the auto finance industry to take the same route as the mortgage loan industry without facing the consequences.