It is no surprise that U.S. automobile dealers have been in a tizzy the past few months as the Consumer Financial Protection Bureau (CFPB) has been rattling its swords threatening to ban them from marking up interest rates on car loans, a sacred profit center for dealerships. Using methodology that assumes a person’s race can be determined by their last name and their gender by their first name, the CFPB claims that certain protected classes are being discriminated against in terms of being charged higher interest rates and thus the practice must stop.
What is a surprise is that Congress is equally annoyed with the agency’s strategy and lack of transparency, and recently announced new regulations limiting their power. No matter the outcome, there is a real possibility that the unintended consequences of the CFPB’s actions will be higher car loan rates for you. (Read More…)
Subprime borrowers have accounted for more than 27% of new car and light truck loans this year, the highest level since 2007. A year ago, a buyer with a credit ranking in the bottom percentile would not likely have been able to buy a car. This year people with credit stores as low as 500 or lower have qualified for loans.
After the Federal Reserve has kept interest rates near zero for five years now, the subprime car loan market is now being described as “frothy”. With interest rates so low, investors are willing to purchase the riskier bonds that back subprime car loans in pursuit of higher returns. A number of financial companies have entered that market. Citigroup reports that 13 loan backers have accessed the asset-backed market to fund subprime auto loans this year. (Read More…)
According to regulatory filings by Toyota Motor Credit Corp., the giant automaker’s car financing arm, and American Honda Finance Corp., which fills a similar role for Honda, the United States Consumer Financial Protection Bureau and the Department of Justice are investigating major auto manufacturers for possible lending bias based on race, which would be a violation of the 1974 Equal Credit Opportunity Act. The agencies are looking into how loans that the automakers’ credit companies provide to auto dealers are priced. Bloomberg reports that as many as seven car companies have been asked for data that may be related to the borrowers’ races and interest rates charged. Both government agencies declined to comment on the matter. (Read More…)