In a new data point report, “Results of subprime auto loans by type of lender», 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 among 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 the purchase of their vehicle. For the purposes of the report, a subprime car loan is defined as a loan made to a consumer with a credit score of 620 or less.
The report categorizes lenders into five categories: banks, credit unions, finance companies, captives, and buy-here-pay-her (BHPH) auto dealers. The main conclusions of the Office are as follows:
- Subprime borrowers from banks and credit unions tend to have higher credit scores than subprime borrowers from finance companies and BHPH dealers and the value of vehicles financed by subprime loans from banks and credit unions has tend to be greater than the value of vehicles financed by finance companies and subprime dealers from BHPH. ready.
- Average interest rates vary widely among different types of lenders, with average interest rates around 10% on subprime loans from banks versus 15-20% on subprime loans from finance companies and BHPH dealers. .
- Default rates are higher for the types of lenders that charge higher interest rates, with a 15% chance that a bank subprime loan will become at least 60 days past due within 3 years compared to a probability of 25 to 40% for a finance company or a subprime loan from a BHPH dealer.
- Differences in delinquency risk between types of lenders cannot fully explain the differences in interest rates between types of lenders. Borrowers from small BHPH dealers had default rates comparable to borrowers from banks and credit unions and small finance companies, and borrowers from large BHPH dealers had default rates comparable to borrowers from large financial corporations. 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 dealerships. BHPH were significantly higher than the rates charged to similar borrowers from large finance companies. (The Bureau’s “small” and “large” designations relate to market share.)
The Bureau offers various possible explanations 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 greater risk to the profits of certain types of lenders because their loans are collateralized by vehicles of lesser value or their repossession and collection costs are higher, ( 2) the underwriting practices of some types of lenders that fail to identify less risky borrowers and the use of technologies by some lenders that reduce costs when consumers default while increasing the cost of loans to less risky borrowers , (3) perceptions about the sophistication of borrowers that reduce the 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 to all borrowers.
The Bureau notes various limitations to the information provided in the report, including the fact that it examines interest rates and delinquency outcomes, but does not observe many other potentially relevant factors, such as how the fees paid by borrowers to obtain loans vary among types of lenders and other characteristics of the loan such as borrowers’ willingness to pay an interest premium to reduce the risk of being refused a loan . The Bureau concludes its report with a call “for more research into the goals of auto loan borrowers, how they shop for auto loans, and how their goals and buying behavior influence borrower outcomes.” and loans ”.