Why Isn’t There a Regulation on Auto Loans?
Auto loan debts have become a large business and yet, it is an important type of financing that many consumers need. However, the government has failed to really notice its impact. Consumers that borrow money to buy cars and trucks in 2015 alone have incurred a total debt of $119 billion as indicated by the Federal Reserve Bank in New York. This outstanding debt in the auto industry is the highest it has been in a decade. The contention, though, is how was this debt created, who benefits from it and why is it not regulated by the government. If you are in the market looking for a vehicle to buy, the important thing is to shop around or you will end up paying too much in financing costs to buy your next vehicle.
Auto financing is traditionally initiated by the car dealership in your local area. The car dealership is the lender or broker in some cases, selling the financing and negotiating its terms, price and loan structure with the consumer. At a later date, the car dealership will resell your loan to an investor. The value of the loan upon resale will depend on the amount that was borrowed, the buyer’s credit score and the interest rate. Of course, most consumers want to have the lowest interest rates and the car dealer wants to secure the best deal for loan resale.
Subprime Auto Loans
As vehicles age, consumers will look for a replacement, thereby creating a market. Since most Americans depend on their vehicles to commute, owning one is far more important than a high interest rate. Those with weak or bad credit will have to accept subprime loans that have become rare for mortgage lenders, but not for car dealers.
Some car dealers, however, have experienced losses as borrowers with bad credit fail to repay their loans. This has been the experience of new auto financing companies entering the market recently. There has also been an increase in subprime borrowers struggling with their monthly car payments. For this reason, as was the meltdown in subprime mortgage loans years ago, many are hoping that this will not happen in the auto finance industry.
Oversight of Auto Loan
Due to the size of the auto loan industry, many would think that it would be carefully regulated by the federal government. However, that is certainly not the case. Car dealers are purposely not included in oversight because the assumption is that auto dealers are not able to handle the federal paperwork like banks can. This is under the ‘carve out’ program created by the passing of the Dodd-Frank Wall Street Reform.
With increased inflation and the intricacy of the market, it is not surprising that auto prices have also increased in recent years. Increase auto prices means larger auto loans. The ‘carve out’ program has not affected car dealers, but auto finance companies with their discriminatory terms and rates according to the CFPB. For that reason, auto financing companies have settled claims for more than $200 million. In June 2015, a rule was published by the CFPB where automobile leases are considered financial services or products, leading to some traction, regulating the auto industry without a direct regulation to local car dealers.