Despite my assessment that auto finance is not in a position precariously similar to mortgage finance prior to the credit crisis, there are still problems in the industry. Several consumer advocates have claimed that many low-income consumers are finding too little access to auto credit. Advocates rightly point out that having a car in this nation is nearly a requirement for employment, particularly in certain locales.
So how can auto finance be improved to expand access to auto finance to low-income borrowers, while at the same time preventing abusive lending, which simply has no place in the industry? Below are a couple of suggestions for how to improve auto finance not just for low-income consumers, but generally to infuse the industry with higher performance standards.
1. FHA FOR AUTO
First, I would suggest that the federal government make an FHA for auto. The Federal Housing Administration, founded in 1934, provides a valuable guarantee against mortgage loan default, especially for loans to high-risk borrowers. A similar guarantee can be made on loans to high-risk auto borrowers, thereby reducing the risk to lenders and enhancing credit — and credit standards — to the higher-risk segment of the auto finance market. The Small Business Administration is also offering a similar financing benefit in the form of a guarantee on its 7a loans for small businesses.
There are downsides to this proposal, mainly in the fact that this would be a government program. However, FHA — at least by design — is intended to operate at zero net cost to the federal government, and certainly an FHA for Auto could similarly pursue a net-neutral operational paradigm. This FHA for Auto would certainly displace the argument from consumer advocates that there is too little financial support for low-income auto borrowers.
2. GSE FOR SUBPRIME AUTO
Another option is creating a government-sponsored enterprise for subprime auto loans. Now, before your knee jerks into my shin, think about this for a moment. Despite the credit crisis, the GSEs still provide funding to the mortgage industry. While auto is not even close to the size of home mortgage finance, a GSE for subprime auto would lower the cost of subprime auto funds — and that, in turn, will make auto loans more affordable to below-prime borrowers, which is exactly what consumer advocates want.
3. THE TAX OPTION
One way to help make auto loans more affordable to consumers is to change the tax code. The federal government can deploy a limited tax deduction for subprime auto loans that is similar to that enjoyed in the mortgage market. By making auto loans deductible, the federal government can ease the financial burden for consumers buying a car. The problem with this idea lays in the difficulty in executing it equitably. Still, the mortgage deduction is the single most significant factor growing home ownership in the US. Perhaps an auto loan deduction will do the same for auto finance?
4. ADD TRANSPARENCY
Consumer advocates will often gripe about the auto loan terms some consumers get, particularly those who are less financially sophisticate. More data would help. I urge the Federal Reserve to return to including loan-to-value ratios and average loan term data in its G19 report, its data on consumer credit outstandings. Publishing the LTV data is a very public way for all of us to make sure that underwriting criteria remains in check. With so many lenders griping about competition, publishing LTV data again will help everyone in the industry get more comfortable with underwriting trends while allowing lenders to offer the best possible terms.
These are not revolutionary ideas, but come from the tried-and-true for the industry. And that, I hope, makes them more feasible.
I look forward to your comments.
This is the fifth in a series of posts on the state of auto finance today.Like This Post