Bureau Misses the Mark Again
The Consumer Financial Protection Bureau (CFPB) yesterday posted a blog that doubles down on earlier flawed Bureau analysis of the vehicle finance industry. The thesis: consumers, particularly those with less than stellar credit (i.e., subprime credit scores), receive varied interest rates on vehicle loans. How, the CFPB pondered, could two individual consumers with the same credit score and purchasing similarly priced vehicles end up with two wildly divergent loan rates? Further, how could a consumer with a better credit score end up with a loan with a higher interest rate than a consumer with a lesser score?
The CFPB’s premise, it seems, is that lenders – and business sectors in general – must be price gougers by nature. This premise is blinkered and irresponsible, having us believe that a consumer’s credit score is the single indispensable metric of credit worthiness. It also reveals a fundamental misunderstanding of how vehicle financing – or consumer lending in general, for that matter – usually works.
A credit score is derived from information in a consumer’s credit report: their financial obligations, such as loans, credit cards, mortgages, and other debts, and when they have paid them and when they have not; how much credit the consumer has available on all the consumer’s accounts, and if the consumer has been applying for new accounts; when loans were closed with full payment, or whether they were charged-off by the creditor because the consumer stopped making payments. Credit reports also indicate if a consumer has declared bankruptcy.
Lenders consider credit scores, but they also look at how much money a consumer has in the bank; whether credit will be secured by collateral, and if so, the value of the collateral; the consumer’s employment and how stable it has been; the length of the loan, and how much of a down payment the consumer will make.
Finally, lenders have different costs i. Some lenders specialize in serving customers with lower creditworthiness, and have more risk than lenders who only serve the most creditworthy consumer. Some may operate in regions where economic conditions are worse than other places.
One area that consumers and commentators overlook is the cost of funds. In order to lend money or extend credit, the lender has to get the money from somewhere. A large bank has deposits it can use and may have access to capital markets all over the world . Small finance companies do not have such resources and pay more to borrow the money they lend to consumers.
Access to loan funds places a spotlight on another CFPB misunderstanding: inflation. While it’s true that in times of inflation, prices for products can be higher, those prices are a result, not the cause. Inflation is the result of too much money in the economy, and over the past two years, due to the pandemic and low Federal Reserve interest rates, the U.S. injected almost $3 trillion in cash into the American economy. Supply chain issues for things like computer chips for cars – a dearth of supply – may also have an affect on pricing and availability. Added costs to vehicles to make them more energy efficient also is driving up vehicle prices. But none of these are a cause of inflation.
In short, inflation is the result of government policies, and many of the policies of the federal government over the past few years are what is driving inflation. The vehicle finance industry and traditional installment lenders have helped millions of U.S. consumers maintain their financial stability during a time of great economic disruption. AFSA members have worked to defer or renegotiate loans, or to expand lending options; they have worked to provide consumers with more loan options, not fewer credit products. And they’ve done so responsibly and to meet customers where they are.
All of this highlights the need for AFSA to work to ensure policymakers have the information they need to make clear and sound regulatory decisions, and for policymakers to be open to better understanding the markets they oversee.
February 25th, 2022 by Dan Bucherer