Senator’s warning on auto lending

Massachusetts Senator Elizabeth Warren has used a major public speech on financial regulation to take aim at the auto finance market, warning that sub-prime loans in this sector risk recreating the kinds of problems evident in the US housing market before the 2008 crash.

Warren, a former Wall Street lawyer, was the guiding force behind the establishment of the Consumer Financial Protection Bureau (CFPB), a federal agency which seeks to tackle unfair lending practices.

“Right now, the auto loan market looks increasingly like the pre-crisis housing market, with good actors and bad actors mixed together,” Warren said in her speech, which assessed the state of the financial sector five years after the passage of the Dodd-Frank reform law and looked at the unfinished business of financial reform.

“The market is now thick with loose underwriting standards, predatory and discriminatory lending practices, and increasing repossessions,” Warren said.

Warren pointed out that car dealers got a specific exemption from the CFPB and suggested that stronger regulation was needed.

“It is no coincidence that auto loans are now the most troubled consumer financial product. Congress should give the CFPB the authority it needs to supervise car loans — and keep that $26 billion a year in the pockets of consumers where it belongs,” she said, referring to a study which estimates this is the annual cost of auto dealer markups.

When it was first set up three years ago, the CFPB was given powers to supervise the automotive lending divisions of banks, but not of other players in the market.

In September 2014, the CFPB proposed rules that would extend its supervision authority to the larger participants of the nonbank auto finance market, if those companies make, acquire, or refinance 10,000 or more loans or leases in a year. The CFPB estimates 38 auto finance companies, which originate about 90% of nonbank auto loans and leases, would be subject to this new jurisdiction.

This extension to its powers would bring many captives into its regulatory scope, and the move has been strongly opposed by bodies such as the National Automobile Dealers Association and others.

Warren warned: “Right now the Republicans are pushing an anti-market agenda. They are trying to hamstring the CFPB by slashing its funding, reducing its jurisdiction, and restricting its enforcement authority – steps that would undermine the market by taking financial cops off the beat.”

Two years ago, the CFPB brought allegations of discrimination in auto lending against Ally, saying the company had offered less attractive deals to some consumers based on race and ethnicity, and required the company to pay $80 million in damages to the consumers and a further $18 million in penalties.

However, Warren called for tougher action, saying in her speech: “The CFPB is a tough cop on the beat, but what about the other cops? What are they doing to hold those who break the law accountable? Today, the Department of Justice doesn’t take big financial institutions to trial – ever – even when financial institutions engage in blatantly criminal activity. Instead, DOJ uses what it calls deferred prosecution agreements and non-prosecution agreements, in which it asks the offending firm to pay a fine and to work with the government to come up with a plan for doing better in the future.”