A new CFPB report, “Growth in Longer-Term Auto Loans”, discusses a CFPB finding that there has been a significant increase in the use of longer-term “auto loans” since 2009. The report could presage greater CFPB scrutiny of longer-term auto loans in supervisory examinations of banks and auto finance companies. This greater scrutiny might include an attempt by the CFPB to use its UDAAP authority to restrict the availability of longer-term auto loans, such as by imposing an “ability to repay” standard with respect to such loans.
In December 2016, the CFPB unveiled Consumer Credit Trends, which it described as “a web-based tool to help the public monitor developments in consumer lending and forecast potential future risks.” The tool uses de-identified credit information taken from a nationally-representative sample of credit records maintained by one of the nationwide consumer reporting agencies and tracks originations for mortgages, credit cards, auto loans, and student loans by borrower credit score, income level, and age.
When the tool was unveiled, the CFPB indicated that it planned to “offer analyses on notable findings as warranted.” In the new report, which the CFPB describes as “the first Quarterly Consumer Credit Trends report” and an “update to the CFPB’s Consumer Credit Trends dashboard,” the CFPB “explore[s] what the data reveals about the increased use of these longer-term loans.” For purposes of the report, “longer-term loans” are defined as loans with terms of six years or more. In the accompanying press release, the CFPB stated that “the average length of ownership of a vehicle is approximately 6.5 years” and asserted that “[t]his means that many consumers might still owe on loans after they are no longer driving the vehicle.”
The report says that it uses the same definition of “auto loans” as is used in the Consumer Credit Trends dashboard. The dashboard defines the term to mean “closed-end loans used by consumers to finance the purchase of a new or used auto, where the auto is used as collateral for the loan.” Although the dashboard uses the term “loan,” we assume that the data analyzed also includes the predominant form of purchase money auto finance transactions – retail installment sale transactions with automobile dealerships.
In purporting to paraphrase the dashboard definition of “auto loans,” the report also refers to leases used to finance automobile purchases. We assume that this reference to leases was included unintentionally because the dashboard definition of “auto loans” does not refer to leases, and consumer lease transactions are not purchase money consumer credit transactions.
The CFPB report includes the following findings based upon its review of the sample “auto loan” dataset:
- The share of longer-term loans increased from 26 percent of auto loans originated in 2009 to 42 percent of 2017 auto loan originations (with six-year term loans being the most common “longer-term loan”).
- The credit scores of borrowers who obtain longer-term loans are lower than the scores of borrowers who obtain five-year loans. (The average credit score of borrowers taking out longer-term loans is 39 points below the average score of borrowers obtaining five-year loans, although the report notes that the lowest average credit scores are for borrowers who obtain loans with terms of less than three years.)
- Longer-term loans tend to be used to finance larger amounts.
- Default rates associated with longer-term loans are higher than those for shorter-term loans.
The CFPB makes the following observations based on its findings:
- Consumers may be increasingly using longer-term loans because they are buying more expensive cars, making smaller down payments, or otherwise financing larger amounts.
- While longer-term loans may make monthly payments more affordable, financing costs are higher over the life of the loan. As a result, it is not clear consumers are better off obtaining longer-term loans or are likely to be more successful in repaying those loans.
- Riskier borrowers are more likely to opt-for a longer-term loan to ease their monthly debt burden.
- The movement toward longer-term loans may increase the likelihood of borrower default (although the CFPB notes that default rates for both five- and six-year loans have been increasing).
The first three observations appear to be statements of the obvious and/or inferences that are speculative in nature. The last observation is based upon data comparing cumulative default rates by origination-year cohort for five- and six-year loans, with “default” being defined as 90 or more days past due or having a major derogatory event such as a repossession. Notably, the report states that “[t]he higher default rates observed for six-year loans should not be interpreted as a causal relationship” since “riskier borrowers” may prefer longer-term loans. Nevertheless, the report concludes that the absence of a decline in the default rates for six-year loans as they have become more widely used “suggests that the movement toward these longer-term loans may increase the likelihood of borrower default, potentially posing greater risks to both borrowers and lenders.”
This concluding observation of the CFPB regarding default rates, and its findings regarding credit scores and loan amounts, may foreshadow supervisory scrutiny with respect to the underwriting of “auto loans” with terms of six years or more. The end result of such scrutiny may be to restrict the availability of longer-term loans to the ultimate detriment of consumers.