Legal experts question value of CFPB’s negative equity report

Legal experts have doubts about the utility of the long-awaited negative equity report published recently by the Consumer Financial Protection Bureau , in part because the data comprises the disruption of the pandemic years. The CFPB report measures negative equity trends in auto lending based on a dataset from nine lenders with 34 million loan originations from 2018 to 2022, according to the CFPB report, released June 17. Consumers who financed negative equity into a new-vehicle loan between 2018 and 2022 were more than twice as likely to have their account assigned to repossession within two years compared to shoppers with a positive trade-in balance on their loan, according to the CFPB report. Legal experts question how the report can be used from an enforcement and supervision standpoint since the five-year window of the data includes the pandemic, and question how the data can be used for compliance going forward. The pandemic’s unique effect on negative equity makes it difficult to see how the CFPB data can help the bureau identify areas that might require more regulation, Michael Benoit , a partner at law firm Hudson Cook , told Auto Finance News . “I don't think you can use the last five years as having any sort of predictive value about how people are going to behave in the future, unless we're going to have a pandemic every five years,” said Benoit, whose practice focuses on automotive and personal property finance and leasing. In response to criticism on the inclusion of pandemic-era data, a CFPB spokesperson had this to say: "This [data] accurately reflects that there was a seismic event in the auto industry that occurred in 2020 and the data that we have at least shows what the beginning of that impact looks like. "But we're also limited by time period of the data that we were able to collect," the CFPB spokesperson continued. "And so there may be some differences in 2023 and certainly we'd be interested in looking at that, but that's not the data that we have." First report in a CFPB series The report is the first in a series expected under the CFPB’s auto finance data plan , which launched in February 2023. The bureau is expected to release additional reports this year, including one on repossession data, according to a Jan. 23 notice in the Federal Register . A ccording to information obtained by Auto Finance News through a Freedom of Information Act request, the reports are based on data from nine lenders between 2018 and 2022 : American Honda Finance Corp .; Capital One Auto Finance ; Chase Auto ; Exeter Finance ; Global Lending Services ; GM Financial ; Hyundai Capital America ; PNC Bank , and; Regional Acceptance Corp . Consumers with negative equity were nearly 1.5 times more likely to have their account assigned to repossession within two years than consumers with no trade-in, according to the report. The report did not break out the data by distribution of credit scores within repossessions, interest rates and monthly payments on loans, or other factors that could have contributed to repossessions outside of negative equity. “None of this shows any causation,” Benoit said. “It shows some correlation, but there's no causation.” Lenders can compare how their numbers "stack up" Despite uncertainty about how the CFPB report might affect lenders, lenders could use the report to learn whether negative equity on their loans differs from findings in the report, Eric Johnson , a partner at Hudson Cook , told AFN . “Look at the requests that were made of these nine [lenders] in this pilot and do your own analysis,” said Johnson, whose practice includes government investigations, examinations and enforcement. Lenders can see where they stack up against the report’s findings, and whether they have a higher or lower negative equity percentage than the lenders in the report, Johnson said. Nearly 12% of loans include negative equity The CFPB’s report offers insight into where negative equity stands after pandemic fluctuation. According to the report: 11.7% of vehicle loans included negative equity; 32.1% had a positive equity trade-in; and 56.2% had no trade-in. The share of vehicles financed with negative equity peaked in 2020 at 17.2% and fell to its lowest point during the analyzed period in 2022, landing at 7.9%, according to the CFPB. Negative equity raises payments Consumers who financed negative equity into a new loan tended to have larger loans and higher monthly payments than consumers with a positive equity trade-in, according to the CFPB report. The average amount financed on loans with negative equity sat at $32,316 compared with $28,244 for accounts with a positive trade-in balance and $26,767 for accounts with no trade-in balance included. Average monthly payments were 27% higher on deals with negative equity compared with no trade-in and 26% higher compared with deals that included positive equity, according to the report. Other negative equity takeaways Consumers who financed negative equity also had lower credit scores and longer loan terms , according to the report. Those financing with negative equity had an average credit score of 704, compared to 752 for those with positive trade-in equity , and 732 for consumers with no trade-in balance. The average loan term on accounts financed with negative equity was 73 months , compared with 67 months for no trade-ins and 68 months for positive equity trade-ins. Consumers who financed negative equity also had larger loan-to-value (LTV) and payment-to-income (PTI) ratios, according to the report: The average LTV ratio for consumers according to the report was: 119.3% for loans financed with negative equity; 88.9% for positive trade-ins; and 101.6 percent for no trade-in. Meanwhile, the average PTI ratio for consumers who financed negative equity was 9.8%, compared with 8.2% for no trade-in and 7.7% for positive trade-ins. Though the report indicates that negative equity puts more pressure on consumers, it’s unclear what the CFPB will do with the data and how lenders might react, Hudson Cook’s Benoit said. “Financing negative equity is a consumer's choice,” he said. “They have the choice not to buy a new car. . From a regulatory perspective, I'm interested to see where the CFPB goes with this.” Auto Finance Summit, the premier industry event for auto lending and leasing, returns Oct. 7-9 at Wynn Las Vegas. . To learn more about the 2024 event and register, visit www. .AutoFinanceSummit.com.

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