The latest small-dollar lending rule from the Consumer Financial Protection Bureau could limit risk surrounding subprime borrowers seeking a vehicle title loan, John Redding, partner at Buckley Sandler LLP, told Auto Finance News.
When consumers seek loans outside of their traditional bank, they might resort to putting their vehicle up as collateral against the loan, which is known as title lending. However, there are instances where that consumer still owes money to an auto lender for an existing loan on the vehicle. The CFPB’s rule makes it so that vehicle title lenders with terms of 45 days or less must prove the borrower has an ability to repay.
“The enhanced ability to repay analysis is going to have to take into account the payment for any other lien on the vehicle,” Redding said. “Therefore, to the extent that was not being considered prior to the rule, upon the effective date [summer 2019], it will become one of the factors taken into account and that could result in potentially less credit being extended to consumers who are seeking title loans where the vehicle has another lien against it.”
Ultimately the bureau’s proposed rule will only affect “a fairly small segment of the auto finance market” and have nearly no impact on purchase-finance businesses. Yet, there is a long-term desire to predicate all lending on the borrower’s ability to repay, as evidenced by the CFPB’s activity and state enforcement actions, Redding said. “We aren’t there yet, but that desire continues to exist.”
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