Of course, auto loans and mortgages have different attributes, price points and risks. A key difference is in collateral recoveries and the ability to curtail loss severities. When mortgage lenders pursue remedies, the costs related to foreclosure can act as a deterrent. In contrast in auto lending, defaults can often be cured by quick non-judicial repossessions. It's a process that has short-cuts and cost-saving measures (starter interrupt devices, GPS tracking), and it can even be revenue generating for lenders who also operate as debt collectors. Even investors in subprime auto securitizations are well insulated by the deal structures.

But legislators and regulators are concerned about the financial welfare of the most vulnerable of borrowers and often see the subprime landscape as taking advantage of lower-income, underserved consumers and potentially fraught with racial bias.

Unlike housing, where renting often provides a lower-cost alternative to home ownership, there is arguably no such lower cost option in auto. In the long-run, leasing and car rentals are relatively more expensive than ownership and possession of one's own vehicle has only risen in importance during the pandemic as consumers seek to avoid mass transportation and covet the ability to control their individual surroundings for health and safety reasons.

If there is any tinkering with access to credit, it could tip the scales too far, leaving subprime borrowers with little or no path to ownership (or they get so pushed to the affordability margins that their only option becomes unscrupulous companies with suspect or fraudulent practices).

The 2020 allegations made against Credit Acceptance Corporation (CAC) shed light on how "ability-to-pay" can be used against a subprime auto lender. There, the fundamental conclusion drawn by the Massachusetts AG was "[a] loan the lender does not reasonably believe the borrower is able to repay is an unfair loan" and thus a violation of the state's unfair and deceptive acts and practices laws (UDAP).

The AG focused on the fact that over 50% of the loans extended by CAC end up in default. The premise being that such a significant number of defaults occur because CAC's entire business model does not rely on the borrower being able to repay, but rather, CAC is able to profit from collections and defaults. In 2021, CAC entered into an agreement in principle to settle with the state on these issues.

There were warning signs even before the CAC action. Santander settled with 34 state attorneys general in 2020 (https://reut.rs/2VI3VrX) over similar issues of making subprime auto loans knowing they carried a high likelihood of default (and also ignoring dealer misconduct on these loans where income had often been inflated). Back in 2017, Santander settled similar accusations again in Massachusetts and Delaware where the allegations focused on funding loans without a reasonable basis to believe the borrowers could afford the loans.

In July 2021, Santander settled (https://bit.ly/2VDTWnK) a four-year old dispute with the attorney general of the state of Mississippi over its past auto loan practices and must "account for a consumer's ability to pay a loan" going forward there. The CAC action may now lead the way to other state attorneys general interpreting their own UDAP laws in ways that would penalize other lenders for similar conduct.

We've already seen the acting director of the CFPB, Dave Uejio, say that he supports ability-to-pay rules (https://bit.ly/3AtaEF0) in the payday lending and auto title lending contexts under the authority afforded to the CFPB to regulate unfair, deceptive and abusive acts and practices (UDAAP).

But previous efforts were a false start. In 2017, the CFPB issued a rule for payday and auto title loans (https://bit.ly/3lMVMgL) that required lenders determine that the borrower had sufficient income to pay the loan and to meet their financial obligations during its term plus 30 days after payoff. But in 2020, the CFPB revoked the underwriting elements of the 2017 rule, including the rule that it was an unfair practice to make such loans without reasonably determining the consumers had the ability to repay.

Uejio's 2021 comments suggest a return to that previous perspective, although his statement suggests first the bureau "will use the authority provided by Congress to address these harms, including through vigorous market monitoring, supervision, enforcement," and then secondarily, "if appropriate, rulemaking." As recently as last month, he's stressed the importance of this approach for payday lending. Perhaps it is more of a slow-start this time, versus a false-start.

Under both UDAAP and UDAP standards, the CFPB and state attorneys general have long focused their individual enforcement efforts on those accused of bad acts in repossession, collections, and sales practices. As we've seen, state attorneys general have even used UDAP to challenge underwriting practices. If there is greater enforcement going forward, look for an increase in coordinated efforts at the federal and state level. Senator Elizabeth Warren has recently called upon the CFPB (https://bit.ly/3yDESVp) to specifically increase scrutiny on auto lending. "Warren Calls For CFPB Scrutiny Of Overdraft Fees, Crypto," Law360, July 19, 2021.

But it's a precarious time to change the regulatory landscape. The most productive regulations and policies balance underserved consumers' need for access to credit against the need to protect them from unfair and predatory practices. Even in the student loan space, questions keep arising with respect to parent PLUS loans which are granted without a consideration of the borrower's ability to pay. This has raised the issue of how best to balance the social good of making sure consumers have access to this kind of credit while at the same time not putting them into harmful debt cycles from which they cannot emerge.

At such a turbulent time, as we (hopefully) turn from a time of massive government assistance to a rocket economic recovery, a regulatory scheme that makes it harder to get loans could disrupt or amplify trends in the market. Even without regulatory changes, subprime auto originations fell during the pandemic due to tightening underwriting.

It seems for now the likely path to consumer protection will be enforcement, but if performance deteriorates, post-pandemic consumer protection concerns could intensify and a more aggressive path — rulemaking and legislation — could be on the horizon for subprime auto.