In a new Data Point report, “Subprime Auto Loan Results by Lender Type”, the CFPB examines how interest rates and default risk vary among different types of subprime lenders, and to what extent the variation in interest rates between subprime loans can be explained by differences in default rates. The CFPB has generally concluded that subprime borrowers pay different interest rates depending on the type of lender they use to finance their vehicle purchase. For the purposes of the report, a subprime auto loan is defined as a loan made to a consumer with a credit score of 620 or less.
The report classifies lenders into five categories: banks, credit unions, finance companies, captives, and Buy-Here-Pay-Her (BHPH) car dealerships. The main conclusions of the Bureau are as follows:
- Subprime borrowers from banks and credit unions tend to have higher credit ratings than subprime borrowers from finance companies and BHPH dealerships and the value of vehicles financed by subprime loans from banks and cooperatives of credit tends to be greater than the value of vehicles financed by finance companies and BHPH dealerships. loans.
- Average interest rates vary widely across lender types, with average interest rates around 10% on subprime loans from banks, compared to 15-20% for subprime loans from banks. finance companies and BHPH dealers.
- Default rates are higher among lender types that charge higher interest rates, with a 15% chance that a subprime bank loan will become at least 60 days past due within 3 years, compared to a 25-40% probability for a finance company or a BHPH dealer risk loan.
- Differences in default risk between lender types cannot fully explain interest rate differences between lender types. Small borrowers from BHPH dealers had default rates comparable to borrowers from banks and credit unions and small finance companies and large borrowers from BHPH dealers had default rates comparable to borrowers from large finance companies. funding. However, the interest rates charged to small borrowers from BHPH dealers were significantly higher than the rates charged to similar borrowers from banks and credit unions and the interest rates charged to small finance companies and large borrowers from dealers BHPH were considerably higher than the rates charged to similar borrowers from major finance companies. (The Bureau’s “small” and “large” designations relate to market share.)
The Bureau offers various possible explanations for why differences in default risk do not fully explain the differences in interest rates charged by different types of lenders. These explanations include (1) a given level of default posing a higher risk to the profits of certain types of lenders because their loans are secured by lower-value vehicles or their costs of repossession and collection are higher, ( 2) the underwriting practices of certain types of lenders that do not identify less risky borrowers and the use by certain lenders of technologies that reduce costs in the event of consumer default while increasing the cost of lending to borrowers less risky, (3) perceptions of borrower sophistication that reduce incentives to offer lower interest rates to less risky borrowers, and (4) access to cheaper financing that makes it possible to offer lower interest rates. lower interest rates to all borrowers.
The Office notes various limitations to the information provided in the report, including the fact that it examines interest rates and default experience, but fails to observe many other potentially relevant factors, such as that the way the fees paid by borrowers to obtain loans vary between types of lenders and other loan characteristics such as the willingness of borrowers to pay an interest rate premium to reduce the risk of getting refuse a loan. The Bureau concludes its report with a call for “more research on the goals of auto loan borrowers, how they purchase auto loans, and how their goals and buying behavior influence borrower outcomes and loans”.