Equifax, the consumer credit reporting agency, recently released a report that it said refutes evidence pointing to a growing "bubble" in the subprime auto lending market based on the fact that credit scores were higher for people with subprime auto loans than for people who do not have an auto loan, ignoring the significant concerns raised by recent Center for Responsible Lending research.
Equifax attempts to do so in two ways:
- Equifax argues that any problems in the market are overstated by looking at one data point: lender charge-off rates, and
- Equifax uses carefully chosen data points to make the argument that subprime auto lending is a net positive, and as such the market should be left alone.
Center for Responsible Lending Senior Vice President Chris Kukla gave the following comments:
The Equifax report uses a simplistic and flawed approach to determine whether subprime auto lending is a positive for borrowers. The report states that borrowers with auto loans saw their credit scores improve more than those who don't. Correlation does not equal causation. Equifax did not look at any other variables that could impact a credit score, such as differences in employment status or outstanding debts. Credit scores alone are also not sufficient to dispel significant concerns about rising delinquencies and defaults in the subprime auto loan market and abusive practices that merit regulator investigation.
The report uses defaults for borrowers with very low credit scores within the first six months of the loan as the measure of whether the market is performing well. Early payment default is a sign that loans are so poorly underwritten that borrowers default immediately. That data does not give any insight into whether loans are affordable for the long term. Recent data show that auto loan delinquencies and defaults are steadily rising while for most other forms of credit those rates are falling. According to the Federal Reserve Bank of New York, auto loan 90-day delinquency rates surpassed the rate for mortgage loans for the first time since 2007.
No one disputes that, when done responsibly, subprime auto lending can provide access to economic opportunity. That said, irresponsible and predatory lending tactics such as interest rate markups, loose underwriting and layering risky practices on top of each other create loans that are more expensive and at a greater risk of default.? Given what we learned from issues with subprime mortgages, apparent risks in subprime auto lending should raise red flags. We applaud regulators for taking a look into this market to ensure that loans are being made fairly and affordably.
For more information, or to arrange an interview with a CRL spokesperson on this issue, please contact Andrew High at Andrew.High@responsiblelending.org or 919-313-8533.