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1 1 (April 25, 2019)

handle is hein.crs/govzmm0001 and id is 1 raw text is: Cogesoa Resarc Servk 0 April 25, 2019 The Automobile Lending Market and Policy Issues An automobile (auto) loan allows a consumer to finance the purchase of a new or used car. In most parts of the United States, access to a car is critical for people to be able to get to work and other important activities. According to Kelley Blue Book, a vehicle valuation and research company, the average cost of a new car was more than $36,000 in 2018. Most people cannot pay such a large amount in cash. For this reason, many people choose to finance the cost of a car. The auto loan market is the third-largest consumer credit market in the United States, after mortgages and student loans. According to the New York Fed, at the end of 2018, 113 million consumers-roughly 45% of adult Americans-had an auto loan and auto loan debt outstanding totaled almost $1.3 trillion. This In Focus provides a brief overview of the auto lending market, explains how the market is regulated, and analyzes related policy issues. Overview of the Auto Lending Market Auto loans are usually structured as installment loans, where a consumer pays a fixed amount of money each month for a predetermined time period, frequently three to seven years. Often, lenders require consumers make a down payment to obtain the loan. Auto loans are secured by the automobile, so if a consumer cannot pay the loan, the lender can repossess the car to recoup the cost of the loan. Reportedly, most auto loans are arranged at the auto dealership where the car was purchased, called the indirect auto financing market. The dealer forwards information about the prospective borrower to one or more lenders, and solicits potential financing offers. Often, the dealer is compensated for originating this loan through a discretionary markup, which is the difference between the lender's interest rate and the rate that a consumer is charged. The lender may cap the possible size of the dealer markup (e.g., 2.5%) to limit the loan from becoming too susceptible to default. But within this range, auto dealers and consumers can negotiate the loan's interest rate, and therefore indirectly determine how much to compensate the auto dealer for the convenience of arranging the loan. In the indirect auto financing market, the dealer markup arrangement can incentivize the auto dealer to negotiate- and profit from-a higher interest rate with the consumer. The auto dealer may also choose the lender who compensates it the most-for example, the lender that allows the largest markup, rather than the lender offering the best terms for the consumer. Although other consumer credit markets include markups, it is less common for bank or credit union lenders to allow an outside broker in the transaction discretion as to the amount of the markup. For example, while the Real Estate Settlement Procedures Act restricts such practices in the mortgage market, after reports of mortgage brokers steering customers to more expensive loans due to kickbacks-unearned fees for a referral-in the lead-up to the financial crisis, Congress in 2010 took actions to further crack down on these practices. Alternatively, consumers can also go directly to a bank, credit union, or other lender for an auto loan, before making their purchase, avoiding the dealer markup cost. Different consumers may prefer arranging auto financing through an auto dealer or directly through a lender, depending on their preferences around convenience, cost, and other factors. In either case, the lender usually owns the loan and can service it themselves or through a third-party company. Some auto dealerships extend credit themselves, called Buy Here, Pay Here, commonly marketing to consumers with subprime or no credit history. These dealers do not work on behalf of other lenders, but keep the loan on their books. These dealers tend to offer higher interest rates and more expensive loans to consumers. If a consumer cannot pay cash for a new or used car, the consumer also has the option to lease the car. In a leasing arrangement, the consumer pays for the right to drive the car for a fixed period of time, often three years. Unlike an auto loan, the consumer does not own the car. Leasing arrangements are not considered consumer loans and, therefore, are not regulated like auto loans. Auto Market Regulation In response to the financial crisis, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank; P.L. 111-203) established the Bureau of Consumer Financial Protection (CFPB) to implement and enforce federal consumer financial law while ensuring consumers can access financial products and services. The CFPB's authorities fall into three broad categories: supervisory, including the power to examine and impose reporting requirements on financial institutions; enforcement of various consumer protection laws and regulations; and rulemaking, to prescribe regulations to implement consumer protection laws. The CFPB is the main federal regulator for the auto loan market, overseeing consumer protection compliance. If a bank or credit union owns auto loans on its books, that bank is also subject to safety and soundness regulation from other financial regulators, depending on its charter. For more information, see CRS In Focus IF10031, Introduction to Financial Services: The Bureau of Consumer Financial Protection (CFPB), by Cheryl R. Cooper and David H. Carpenter. The CFPB oversees consumer protection compliance for auto lending, but not auto dealers' typical activities. Dodd- https:I/crsreports.conc -- _-_

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