The Consumer Financial Protection Bureau will keep an eye on underwater auto loans and study subprime auto lending competition, the agency said last week.
The agency said it was “concerned” about loan-to-value ratios, which compare the amount owed on a vehicle with its actual worth.
“While LTV ratios have dropped in the past year for consumers who already had cars due to high used-vehicle prices, LTVs were climbing prior to the global vehicle shortage,” the bureau wrote in a Feb. 24 blog post. “We expect that trend to resume once price pressures abate.”
New vehicle loan-to-value ratios stood at 118 percent in the fourth quarter of 2021, up from 110 percent of sticker price a year earlier, Experian said the same day. But used-vehicle loan-to-vehicle ratios had fallen from 123 percent to 113 percent.
The bureau followed its blog post with a Feb. 28 compliance bulletin warning lenders against improper repossession practices. The agency said in an accompanying news release that it observed “the illegal seizure of cars, sloppy record keeping, unreliable balance statements and ransom for personal property” and feared that rising auto prices would incentivize “risky” repo behavior.
The price of new cars and trucks in January rose 12 percent over the past year, according to the Bureau of Labor Statistics’ Consumer Price Index. Used cars and trucks were up 41 percent during that same time frame.
“Given the increase in loan amounts, the rising length of loan terms and the uncertainty around the ongoing economic recovery, we will be closely monitoring lender practices and consumer outcomes,” the Consumer Financial Protection Bureau wrote Feb. 24. “In particular, we continue to evaluate lending structures where lenders seem to rely on high interest rates and fees to profit even when consumers fail.”
While the bureau doesn’t regulate dealerships, the agency’s attention to auto loans might still have ramifications for retailers. This could include scrutiny by other regulators who do, such as the Federal Trade Commission, or new practices by dealerships’ partner lenders.
The bureau’s blog post referenced working with the FTC while discussing a discrepancy among interest rates the agency observed between subprime borrowers with similar default risk.
“We are looking to better understand potential barriers to competition in the subprime auto-lending market that may drive these and related outcomes,” the Consumer Financial Protection Bureau wrote. “We will continue to research auto-lending policies and practices that may hinder a fair, transparent and competitive market. And, we will work with our counterparts at the Federal Trade Commission and the Federal Reserve Bank Board of Governors to use our collective authorities to address issues in the market.”