More Flawed Analysis from the CFPB
On January 29 the CFPB issued a report saying that U.S. military Servicemembers “pay higher costs and face greater financial risks” than their civilian neighbors when financing vehicles. This report insinuates that servicemembers are being disadvantaged somehow, but a closer look reveals methodological shortcomings in the CFPB’s analysis. Even absent these issues, there are clear and obvious explanations for the discrepancies claimed in the report.
As the report itself states, its findings are based on a sample of only six auto lenders. The dataset also contains limited information on the borrower’s individual characteristics. These limitations make it impossible to draw valid comparisons between servicemembers and the general public.
For example, the report notes:
- Servicemembers pay the same amount for vehicles but pay more interest and fees than civilians, adding that servicemembers may generally choose to make lower downpayments than other groups, which would naturally mean servicemembers would pay more interest over the life of a finance contract.
- The report also indicates that servicemembers choose longer-term finance contracts than other groups, which has a direct effect on the amount of interest paid.
- The report also speculates that servicemembers are younger than other groups, which means that they have less established credit histories and less time to amass savings than other groups.
The report claims that servicemembers have higher interest rates on their vehicle finance contracts than other groups. But interest rates are set based on individual characteristics, and if service members have shorter credit histories by virtue of their youth and choose longer term finance contracts, some increase in relative interest rate is completely legitimate. The CFPB report says this discrepancy is nearly $20 a month, which a small difference.
The report also claims that servicemembers choose to buy voluntary protection products more than other groups and pay more for those products. Again, if this group of consumers is buying more expensive cars and financing them for longer terms than other groups, it is completely legitimate that the voluntary protection products would cost a bit more.
The vehicle finance industry makes a wide variety of convenient loan products available for consumers to finance a vehicle. A report based on limited and possibly unrepresentative data that mischaracterizes differences in characteristics based on consumer choice and legitimate factors as somehow predatory is misleading and unhelpful.
January 30th, 2025
