Auto finance companies have witnessed a surge in lending activity, a sign that the economy is gradually improving. However, government agencies are identifying and taking action to address increased lending at high interest rates to borrowers with poor credit, similar to lending practices that were the basis for subprime mortgage lending less than a decade earlier.
The Federal Reserve Bank of New York reported that from March through September 2015, more than $110 billion of auto loans were originated to borrowers with credit scores considered less than "good." Of those, $70 billion of loans were issued to borrowers with "bad" FICO credit scores (i.e., less than 620). The vast majority of subprime auto lending has been concentrated within auto finance companies. Banks and credit unions, on the other hand, have increased lending to subprime borrowers very slowly. The Federal Reserve has promised to continue to monitor the growth in auto loan balances and originations.
In June 2015, the Consumer Financial Protection Bureau (CFPB) issued a rule that will allow the agency to supervise 34 of the largest nonbank auto finance companies and their affiliated companies that engage in auto financing so that these supervised companies "treat consumers fairly." The CFPB also released new examination procedures that examiners will use to ensure that auto finance companies are following the law.
Meanwhile, the Department of Justice is refocusing their investigations into auto finance companies' loan origination and securitization practices and the provision of auto insurance for cars purchased with low down payments. In February 2015, Deputy Attorney General Sally Quillian Yates vowed to fully investigate subprime auto lending. As recently as November 2, 2015, Assistant Attorney General Vanita Gupta of the Department of Justice's Civil Rights Division announced that her division has prioritized the enforcement of fair lending laws and the investigation into discriminatory practices, including reverse redlining, against the most economically vulnerable communities.
State Attorneys General are also participating in this effort to reduce discriminatory practices by auto finance lenders. Earlier this month, the subprime auto loan business of Santander Holdings USA Inc., agreed to provide $5.4 million in financial relief to several hundred Massachusetts consumers because it improperly charged lower income individuals higher-than-allowed interest rates. During a self-audit, Santander auditors discovered that the institution was charging certain consumers more than the state imposed cap of 21 percent interest and notified the Massachusetts Attorney General's office of this violation. Santander entered into a settlement agreement with the Massachusetts Attorney General to eliminate interest charges on the remaining balances of the loans to 450 customers and also reimburse them for interest payments made. Santander admitted to no wrongdoing under the terms of the settlement agreement.
Auto finance lenders should undertake their own internal investigations to assess whether their practices violate federal and state lending and consumer protection laws. Additionally, as Ms. Gupta advised, lenders should critically review their policies and procedures, establish internal controls to catch potentially discriminatory effects of existing practices, and take steps to remedy any discrimination that is uncovered.
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