March 17, 2020

Warren and Brown Raise Concerns to CFPB about Abusive Lending Practices in the Auto Loan Market

Auto loans are the third largest category of consumer debt; lack of CFPB oversight has hurt consumers and allowed risky and harmful practices to become commonplace; To CFPB Director Kathy Kraninger: CFPB has not taken a single enforcement action against auto lenders during your tenure

Text of Letter (PDF)

Washington, DC -- United States Senator Elizabeth Warren (D-Mass.), Ranking Member of the Senate Committee on Banking, Housing and Urban Affairs Subcommittee on Consumer Protection and Financial Institutions, Senator Sherrod Brown (D-Ohio), Ranking Member of the Senate Committee on Banking, Housing and Urban Affairs, sent a letter to the Consumer Financial Protection Bureau (CFPB) raising concerns about the agency's lack of oversight of the auto loan market and citing troubling trends in high levels of debt, record delinquencies, and abusive practices by lenders in the market. The threats to consumers and the economy from this volatile debt market could explode in the near future as coronavirus-related downturns in financial markets and the economy put strains on consumers.

Auto loans are the third largest category of consumer debt, behind only mortgages and student debt. The level of debt has been growing in recent years: At the end of 2019, there were over 115 million auto loan accounts open, and the total outstanding auto loan debt associated with these accounts totaled $1.33 trillion. More troubling, the percentage of that debt that is severely delinquent has returned to levels not seen since the financial crisis. 

"Regrettably, the Bureau has not taken meaningful action to combat these trends during your tenure as Director," the lawmakers wrote in their letter to CFPB Director Kathy Kraninger. "[T]he CFPB has not issued a comprehensive report on this issue since 2017, and has not taken a single enforcement action against any auto lenders since 2018. Of the 15 public enforcement actions related to auto lending since the creation of the Bureau, none have occurred during your tenure as Director."

The lawmakers are further concerned that the structure of the auto loan market, particularly the relationship between dealers and lenders, allows for consumers to be exploited. The vast majority of borrowers finance a car purchase through indirect auto loans where an auto dealer is compensated based on the size and interest rate of the loan, creating an incentive to raise costs to consumers and opportunities for abuse. The senators cited the "yo-yo scam," "kicking the trade," and other abusive  market practices that squeeze consumers.

"While the agency does not have the authority to examine directly the practices of auto dealers, it does have the authority -- and the responsibility -- to examine the auto lending companies and financial institutions that provide auto loans," the lawmakers continued. "The CFPB's role in overseeing this market is especially important given the substantial and growing role of non-bank and non-credit union members, as no other regulator has jurisdiction over these entities' consumer protection practices."

The lawmakers have requested responses to their letter by March 26, 2020.

Senator Warren has previously spoken about the dangers in the auto loan market, stating in a 2015 speech that the market looks "increasingly like the pre-crisis housing market, with good actors and bad actors mixed together. The market is now thick with loose underwriting standards, predatory and discriminatory lending practices, and increasing repossessions." In that same speech, she also mentioned how auto dealers got a specific exemption from CFPB oversight and that Congress should give the CFPB the authority it needs to supervise car loans, which the senator referred to as "the most troubled financial product."

In 2018, she delivered a speech on the Senate floor, speaking out against a Congressional Review Act (CRA) resolution to rescind the CFPB's auto lending guidance.  In her remarks, Senator Warren discussed how the CFPB's guidance helps stop discrimination in auto lending by ensuring auto lenders comply with the Equal Credit Opportunity Act.