Federal Agencies Eye More Regulation To Prevent An Auto Subprime Bubble

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Jonah Bennett Contributor
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Federal regulators are concerned that a subprime bubble is developing in the auto market, but lenders are denying the claim, arguing that further regulation would be a huge mistake, the Washington Examiner reports.

The data cited by the Federal Reserve Bank of New York show that lending to consumers with a credit score below 660 has doubled, although growth has been strong in the higher credit score brackets, as well.

Over the last few months, tension between the regulators and lenders has been escalating, with the auto industry increasingly coming under scrutiny from different federal agencies. Already, the Consumer Financial Protection Bureau has announced plans to start regulating nonbank financial lenders in the auto industry next month. And the Department of Justice in August continued the trend by subpoenaing General Motors for information on its lending practices.

According to CFPB estimates, the growth of subprime lending has been most prominent in nonbank institutions.

“Nonbank auto finance companies extend hundreds of billions of dollars in credit to American consumers, yet they have never been subject to any supervisory oversight at the federal level. These companies have also played a significant role in the growth of subprime auto lending by making loans to consumers with lower credit scores,” CFPB director Richard Cordray said in a September statement announcing federal oversight.

However, the CFPB proposal is still available for comment from lenders up until December 8. New oversight would affect 38 nonbank companies, and would aggressively crackdown on deceptive marketing practices and illegal debt-collection techniques.

For lenders, auto loans are a natural part of the credit cycle, and despite the fact that subprime lending is increasing, they argue that there is no cause for concern. In other words, according to executive vice president Bill Himpler of the American Financial Services Association, people do not buy cars and immediately flip them. A representative from the National Automobile Dealers Association similarly argued that “there is no subprime auto lending bubble.”

If more regulation comes down the pipe, however, borrowers can expect to see their costs rise in a market where credit is readily available, unlike the mortgage market which requires near perfect credit to secure a loan.

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