The Consumer Financial Protection Bureau (CFPB) released its quarterly report on credit trends for the third quarter of 2017 last week, focusing on trends in the auto lending industry. Auto loans are a key sector in the lending market—approximately100 million auto loans are outstanding, valued at more than $1 trillion.
The CFPB’s report made several key findings. First, the CFPB flagged the fact that, after years of steady increase in the number of auto loans extended, the number of auto loans has been decreasing since 2016 and the trend continued through 2017. But second, and more importantly, the CFPB noted that, along with the general increase in auto loans, there also had been an increase in longer-term auto loans (“longer-term” meaning financing that extended more than five years). CFPB Direct Richard Cordray has opined that these loans are riskier, as they are more expensive for the consumer over time, and the quarterly report reflects that the increase in these loans has not shown any signs of abating. The report’s focus on these longer-term auto loans could indicate that the CFPB may be refocusing its enforcement efforts on auto loans, as discussed further below.
Rise of Longer-Term Auto Loans
In general, the proportion of longer-term auto loans increased from 26% in 2009 to 42% in 2017. Borrowers seeking longer-term loans generally have lower credit scores (by an average of 39 points) than those taking out five-year loans. In addition, borrowers using longer-term auto loans tend to finance larger amounts (the report states the average size of these loans is $25,300 for six-year loans and $32,200 for seven-year loans) than those that take out five-year loans (the size of which averages about $20,100).
Perhaps of most importance for financial institutions, the CFPB report states that these longer-term loans also generally carry a higher risk than do typical five-year auto loans. Defining a “default” as a loan either 90 days or more past due or having a major derogatory event, the CFPB report shows that auto loans with terms of six years or longer have a significantly higher default rate—around 8 percent—while the default rate on shorter-term loans has been around 4 percent. Further, the CFPB report notes that, as longer-term loans have grown in popularity, so has the default rate. This suggests that “the movement toward these longer loan terms may increase the likelihood of borrower default, potentially posing greater risks to both borrowers and lenders.”
CFPB’s Scrutiny of Auto Loans
The CFPB report’s focus on auto lending is just the most recent sign that the auto loan industry may be back on the CFPB’s radar for the coming year. At an auto loan event last month, Calvin Hagins, deputy assistant director for originations in the office of supervision policy at the CFPB, warned that, while the CFPB’s regulatory focus had shifted in 2017 to other industries and away from auto loans, that may change in 2018. Mr. Hagins stated, “[In 2018,] we will be looking at institutions based on risk, and trying to do exams where we conducted a servicing review already—whether it was this year or will be in 2018, or what we’ve done in origination exams—so that we have the whole picture together.”
Given the increased delinquency trends and the hints given by Mr. Hagins, auto lenders would do well to make sure they are up to date on their servicing obligations, particularly with regard to their compliance management systems, which Mr. Hagins indicated would be a focus. As 2018 draws closer, Lenderlaw will monitor whether auto loans do make it onto the CFPB’s priority list and will report any such developments.