Leveling the Playing Field in Car Lending
More than five years after the U.S. government bailed out car manufacturers, the auto industry is booming once again. Last year, consumers purchased more than 15 million cars, the most since 2007, and sales this year are expected to top 17 million, based on data from the National Automobile Dealers Association. Latinos are fueling much of this growth. According to Polk research, Latinos spent $39 billion on new vehicles last year, representing 20 percent of new vehicle sales.
It is easy to see why car sales are booming. With more than 85 percent of the U.S. workforce using an automobile to commute to work, cars have become a necessity. Car ownership is no longer a luxury but is a prerequisite to economic opportunity. The need for a car is particularly true for many low- and moderate-income families and communities of color who live or work beyond the reach of public transit systems. For these families, cars are their most significant asset, and many of them rely on loans to finance the purchase of these assets.
Through the first three quarters of 2014, U.S. households owed approximately $935 billion in outstanding auto loans, an amount that has been increasing steadily for more than three years. Today, there are more auto loans than mortgages in the United States, and new auto loan originations are at volumes not seen since 2005.
Despite the importance of cars and car lending for U.S. consumers, auto finance is marked by a noted lack of regulation and transparency. As a result, predatory practices have been allowed to thrive, leading to unnecessarily expensive and unsustainable loans, particularly for those least able to afford it. Those with subprime credit are particularly at risk of being burdened with these predatory practices due to fewer direct auto financing options available to them. For example, recently, the U.S. government entered into a consent order with a major auto lender, ordering it to pay $98 million in damages to Latino and Black borrowers who were being charged higher interest rates for their auto loans than similarly situated White borrowers. Further complicating matters, the auto lending market is a fractured one, with a wide array of lenders, each of which is targeting particular borrowers.
This week, the Consumer Financial Protection Bureau (CFPB) is collecting comments on a rule aimed at bringing more order and increased accountability to the auto lending market, by better defining the automobile financing market and the larger participants within that market. This rule will potentially benefit a significant number of consumers by extending regulatory oversight to most nonbank financial institutions and ensuring these institutions comply with consumer financial protection laws and regulations.
We support and commend the CFPB’s efforts to improve transparency and accountability in auto lending by extending its supervision to nonbank auto lenders, such as “Buy Here Pay Here“ lenders, leasing companies, and companies servicing installment auto loans. This supervision will bring much-needed attention to otherwise lightly regulated companies, and will ensure that auto financing by banks, already subject to CFPB supervision, is not at a competitive disadvantage.
We also urge the CFPB to continue its efforts to get rid of discriminatory practices in auto lending by requesting comments on a rule to prohibit mark ups by auto dealers on the interest rates charged by auto lenders. This practice has a long history of leading to racial discrimination and the CFPB should use its rulemaking authority to squeeze it out of the market once and for all.
