Critical Issues Facing Auto Lenders – Mid-Year Update

By Daniel S. Wittenberg and Tanya N. Lewis

The auto lending market stands at a critical inflection point halfway through 2026. With outstanding auto loan debt reaching $1.67 trillion across 108 million open accounts at the end of 2025, the sheer scale of the market demands that lenders stay ahead of the forces reshaping it. From record-setting delinquency rates and a fragmented regulatory landscape to the unique challenges of electric vehicle financing, lenders face a complex web of pressures that require careful navigation. We examine some of the pressing issues confronting auto lenders today and the strategic responses emerging across the industry.

Perhaps no single issue looms larger for auto lenders in 2026 than the sustained rise in loan delinquencies. According to data from the Federal Reserve Bank of New York, 90-day-or-more auto loan delinquencies reached 5.60% in the first quarter of 2026, up from 5.21% the prior quarter and well above the long-term average of 3.59%. The 90-day delinquency rate has now climbed for several consecutive quarters, rising from 4.41% in Q1 2024 to its current level — the highest since the pandemic-era peak.

For lenders, the operational takeaway is clear. Performance diverges sharply by credit tier, vehicle type, and loan vintage. Used-vehicle loans carry higher payment burdens and performance risk than new-vehicle loans, and recent 2024 and 2025 vintages show elevated early delinquency compared with pre-pandemic benchmarks. Nearly 29% of auto finance customers are now categorized as financially vulnerable according to J.D. Power’s 2025 U.S. Automotive Financing Satisfaction Study. Lenders are responding during the underwriting process by reducing maximum advance rates, tightening payment-to-income thresholds, shortening allowable terms for higher-risk segments, and pricing more aggressively for higher loan-to-value deals.

The regulatory environment for auto lending in 2026 is best described as fragmented and uncertain. At the federal level, the Consumer Financial Protection Bureau has significantly reduced its enforcement posture. State attorneys general, however, are stepping into the void. Consumer advocates have urged state regulators to fill the gap left by federal retrenchment, and active enforcement cases involving Maryland, Illinois, Massachusetts, Colorado, and New York are targeting auto lending practices, underwriting, and aftermarket products. New York’s Fostering Affordability and Integrity through Reasonable (FAIR) Business Practices Act allows the attorney general and consumers to take action against corporations for unfair, deceptive, and abusive practices, including “junk fees” and the steering of borrowers into higher-cost loan products. Alaska has pursued settlements against dealerships that unlawfully charged fees not included in advertised vehicle prices. California introduced its own CARS Act legislation taking effect in October 2026, aimed at implementing many of the same consumer protection provisions as the vacated FTC’s CARS Rule.

Lenders must therefore manage a patchwork of state-level obligations alongside evolving federal expectations. The practical consequence is that compliance teams cannot assume that reduced federal activity translates to reduced risk — the locus of enforcement has simply shifted to the states.

As electric vehicle adoption continues to grow, auto lenders face unique challenges in underwriting and managing EV loans and leases. The most pressing concern is residual value uncertainty. EV technology evolves rapidly, battery degradation remains difficult to predict across vehicle lifespans, and the secondary market for used EVs is still maturing. Lenders are beginning to develop residual value models powered by real-world usage data and telematics, but the lack of historical performance data comparable to internal combustion vehicles creates inherent uncertainty. Forward-thinking lenders are adapting by expanding risk models to account for charging infrastructure availability, battery life, and secondary market liquidity. More leasing options are emerging, especially for fleet and subscription models, and there is growing demand for integrated incentive tools within loan origination systems that enable lenders to validate rebates and credits in real time. Notably, in January 2026 the FDIC approved industrial bank charters for two automakers, permitting them to accept deposits and further vertically integrate their financing operations — a development that reflects increased concerns about vehicle affordability and signals potential competitive pressure from manufacturer-owned banks.

The Buy Here, Pay Here (BHPH) segment of the auto lending market has come under intense scrutiny in 2026, drawing attention from federal regulators, Congress, and the financial institutions that fund BHPH operations. The Federal Reserve published new research in May 2026 examining trends in the sector, which directly extends credit to consumers with subprime or no credit histories. The Fed found that nearly 78% of BHPH lending volume goes to subprime borrowers, compared to just 27% for traditional auto lenders. The research highlights that while BHPH loans have delinquency and default rates approximately 2.65 and 1.88 times higher than those of traditional auto lenders, they are 16.63 times more likely to be in active repossession status. In Q3 2025, approximately 5% of BHPH balances were in active repossession, compared to less than half a percent for traditional lender balances. The integrated BHPH model allows dealers to initiate repossessions earlier, more frequently, and often more aggressively than traditional auto lenders, with many operators equipping sold vehicles with GPS devices and operating in states with more relaxed repossession regulations.

The BHPH sector has expanded rapidly in recent years, with loan balances increasing more than 200% since 2018. To fund originations, BHPH dealers rely heavily on credit lines from banks to provide dealer floor plan financing, working capital, and bridge financing before asset securitization to a broader set of investors. Banks historically viewed these credit lines as relatively low risk because of structural protections such as over-collateralization, loan guarantees, and special purpose entities. However, the collapse of Tricolor Holdings — a major BHPH operator that abruptly declared bankruptcy in September of 2025 amid fraud allegations — exposed the risks embedded in this segment and caused losses of approximately $200 million each to two major banks through their credit line exposure. Following Tricolor’s collapse, bank risk assessments for BHPH lending have worsened significantly, signaling growing caution toward the sector.

The Tricolor episode has also prompted congressional action. In February 2026, Senator Elizabeth Warren launched a probe into the auto lending and repossession industries, sending letters to major auto lenders, the National Independent Automobile Dealers Association, and major BHPH servicers including CarHop, Byrider, and America’s Car Mart.

To offset elevated credit risk, BHPH dealers typically charge higher interest rates and often require more frequent payment schedules than the standard monthly plan used by traditional lenders. Approximately 14% of subprime loan balances are on weekly or biweekly payment plans, which provide more consistent cash flow and allow for earlier identification of borrower payment difficulty. For lenders with exposure to the BHPH sector — whether through credit lines, securitization investments, or participation agreements — the combination of heightened regulatory scrutiny, congressional probes, and the demonstrated contagion risk from operator failures demands careful reassessment of counterparty due diligence and portfolio monitoring practices.

With delinquencies at record levels, the spotlight on collections practices and credit reporting has intensified. Both the CFPB and state regulators have highlighted the importance of clear and predictable loss mitigation communications, and recent supervisory attention has focused on right-party contact processes, documentation of hardship accommodations, and repossession procedures. Supervisory highlights from late 2025 also underscored Fair Credit Reporting Act concerns including furnishing accuracy, dispute handling, and the timing of updates during payment plan modifications. Recent private litigation has highlighted compliance pitfalls for furnishers, including failures to flag disputes to credit bureaus, inaccurate delinquency dates, and unauthorized credit pulls by dealers post-sale. Servicemember lending also remains a priority, with the CFPB’s January 2025 report finding that servicemembers typically borrow more, put less money down, and receive loans with higher annual percentage rates and longer terms than civilians.

The auto lending market in 2026 is not in crisis, but it is undeniably under pressure. Execution quality — in underwriting precision, portfolio segmentation, compliance infrastructure, and collections strategy — will separate strong performers from those that face disproportionate losses. Lenders that build tier-based risk models, prepare for state-level regulatory fragmentation, manage BHPH counterparty exposure, and develop competence in EV financing will be best positioned to navigate the year ahead. The market rewards discipline: in a $1.67 trillion asset class with 108 million open accounts, the margin between prudent lending and excessive exposure has never been thinner.

*** Any opinion expressed are the authors’ and not necessarily those of the firm or their colleagues.