The Community Reinvestment Act (CRA) was designed to increase credit access to low- and moderate-income individuals (LMI) and neighborhoods, but will implementing it in auto finance achieve its desired outcome?
Regulators are intent on bringing CRA requirements to auto finance, but quantitative benchmarking may serve to decrease competition in the market by pushing banks out, further limiting access to credit for communities that need it the most.
To be sure, there is little argument against the notion that access to reliable transportation is key to steady employment and financial health. But, in auto, banks operate primarily in the prime space and dipping lower in the credit spectrum is no easy task.
It’s no wonder that the major acquisitions in auto finance over the last two years have involved subprime lenders. The market views an established subprime lending operation to be a key competitive advantage in facilitating vehicle sales and making the proverbial pie larger.
Stellantis acquired First Investors Financial Services, Vroom acquired United Auto Credit Corp., and AutoNation acquired CIG Financial, all with the intention of building out a prime offering on top of a tried-and-true subprime program.
If quantitative benchmarking is implemented in the final CRA rule, and banks are required to lend under the CRA if their portfolio hits a certain percentage of their total portfolio, it seems more than likely that the outcome would fall in line with a prediction by law firm Alston & Bird Counsel Caroline Eisner: Banks will simply cut back auto loan production or leave the market entirely.
But perhaps there is another, less evident course banks could take.
Daniel Chu, chief executive of Tricolor Auto Acceptance — the only issuer in subprime auto asset-backed securities to be certified by the U.S. Treasury as a Community Development Institution — told Auto Finance News that banks that lend to Tricolor receive vicarious CRA credit.
It would seem, then, that CRA implementation could open up opportunities for banks to partner with smaller, subprime financiers with established programs and a direct line to communities that the CRA is endeavoring to help without having to build out their own subprime offering. Those partnerships could come in the form of low-cost capital that would enable subprime lenders to reach a wider swatch of LMI consumers, or in some form of pass-through agreement where banks can connect LMI individuals with lenders that specialize in underwriting loans in their communities.
Until the notice of proposed rulemaking is finalized, the industry can do little but speculate as to what effects, exactly, CRA implementation will have on the auto finance industry. But one thing is for certain: It will be up to the banks to make lemonade from lemons and find a way to serve LMI consumers effectively and safely.
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