Today, at a Consumer Financial Protection Bureau (CFPB) Indianapolis field hearing on auto lending practices, Center for Responsible Lending Senior Vice President Chris Kukla testified about abuses in the market. Kukla, who leads CRL's auto lending team, highlighted the auto dealer interest rate markup and a number of issues in the subprime auto loan market that have been the subject of recent media scrutiny.
The text of Kukla's opening statement is below:
Thank you, Patrice. Director Cordray, thanks also to you and your staff for holding this hearing, and for providing me the opportunity to participate.
For most families the purchase of a car is the largest they will make outside of buying a home. Owning a car gives families greater access to employment, and increases their quality of life. According to a study from the Brookings Institution, the typical metropolitan resident can reach only about 30 percent of jobs in their metropolitan area using public transit, assuming a trip of 90 minutes or less each way.
It is no wonder, then, that TransUnion reported consumers made paying their auto loan their top priority, even ahead of paying rent or mortgage payment. Cars are vital to American families because, for most, keeping a car and keeping a job are inextricably linked. In light of this fact, we can conclude that auto finance done well expands access to economic opportunity and sustains it.
The recent rise in auto lending, particularly in the subprime space, has attracted significant and ongoing attention in the media. Many of these articles have focused on abuses that occur. Unfortunately, most of these abuses are not new – they have existed for some time. For instance, over the past two decades the practice of lenders allowing dealers to mark up the interest rate for compensation has been the subject of regulatory scrutiny and lawsuits over potential racial and ethnic discrimination. Despite significant evidence that this discretion often leads to discriminatory impact, including evidence from a CFPB and DOJ settlement last year, the practice continues.
Lenders rely heavily on dealers to provide the pipeline for loans – of the cars financed in the United States, 80% are financed through the dealer. As such, lenders and dealers share responsibility for abusive lending practices. Lenders set the terms for the loans they will accept, and provide the pricing discretion to dealers that has led to significant harm. We have learned, though, that in the recent increase in auto lending lenders have also relaxed their underwriting standards. Loan terms are increasing, as are loan-to-value ratios. This data can be an indicator of larger issues in the market – in particular, whether loans are truly affordable.
As we learned from the mortgage market, when financial institutions rely heavily on third parties to generate loans, competition can shift from providing the best loan to providing the loan with the least amount of underwriting restrictions. The mortgage market would have benefited from common-sense rules to ensure loans were affordable and sustainable. Unfortunately, we did not act until it was too late for many homeowners and lenders – but we can avoid the same mistake in this market.
The regulatory patchwork covering auto finance contributes to the endurance of these abuses, and consumer protection has for too long been an afterthought. Congress chose to split regulatory responsibility over consumer protection in auto finance, separating dealers and lenders between different regulators. Nonetheless, we believe that each regulator can and should exercise appropriate oversight of those entities under their jurisdiction.
The larger participant rule is potentially a welcome step in the right direction. Auto lending is a fractured market, with a wide spectrum of players. A strong final rule would bring many of those lenders under the same consumer protection umbrella.
It is also important to note that while dealers and lenders have to follow the basic rules that all lenders must follow, there are very few consumer protections specific to auto lending on the federal or state level. And, those that do exist frequently fail to protect consumers against the abuses they are purported to stop. Abusive and unfair practices, like the significant pricing disparities that dealer interest rate markups create, need to end.
We believe that a robust car lending market is important to American families. In particular, making loans to those with blemished credit or thin credit files can be very helpful to families. However, the current market requires safeguards to ensure that the market is robust and sustainable. Consumers should trust that the auto lending market is transparent and fair. Abusive lending practices eliminate that confidence and have no place in our credit markets. We welcome the opportunity to be here today, and look forward to the discussion.
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.
Contact: Andrew High, 919-313-8533, Andrew.High@responsiblelending.org