Many of us are still scratching our heads trying to figure out why the CFPB lumped traditional vehicle installment lenders into the same pot as vehicle title pledge lenders, in the formation of its Payday, Vehicle Title, and Certain High-Cost Installment Loans Proposed Rulemaking released June 2, 2016 (which we have discussed here). The most prevalent theory seems to be that the CFPB simply could not figure out a bright line of demarcation for the “Longer-term covered loan” portion of the Proposal. Most of us, and most borrowers, can easily distinguish a vehicle title pledge from a traditional installment loan secured by a non-purchase money security interest in a vehicle. Apparently, the CFPB cannot.
There are a host of differences. First, there is the simple matter of interest rate. Title pledge loans more often than not bear triple-digit APRs. Traditional vehicle installment loans do not.
Second, title pledge loans generally are for short term periods of 30 to 60 days, and in some states even 90 days. Traditional vehicle installment loans generally have a minimum term of six months and most are for more than one year.
Third, and most importantly for rulemaking, title pledge loans bear the indicia of a predatory loan—solely collateral dependent, no debt amortization and a balloon payment. Traditional vehicle installment loans are not predatory loans. Traditional vehicle installment loans are longer term, underwritten to be repaid, fully amortizing, no prepayment nor balloon payment, made without a required ACH and reported to credit bureaus.
One would think that the CFPB could draft a Proposal recognizing this distinction. Sadly, it could not, or at least did not.
The problem with lumping traditional vehicle installment lending into the Proposal is that the considerable compliance cost and post-hac testing of the CFPB's proposed “alternative” will result in reducing the credit availability to those who do not have easily provable income and expenses, or who have marginal credit scores.
Installment lenders are in business to make a fair profit. As compliance costs go up, the laws of economics dictate abandoning that segment of the marketplace requiring increased compliance, or raising prices (interest rates) to cover the increased compliance costs. Lending is not immune from the laws of economics.
Millions of Americans have equity in their cars, trucks and in recreational vehicles. The CFPB's Proposal, if adopted as is, will most certainly make it more difficult and costly for consumers to utilize that equity—which is an asset. We as a people are not accustomed to the government telling us what we can and cannot do with our property. If we have equity in our homes and choose to use it to buy consumer products, start a business or send children to college, we should be free to do so. If we have equity in our next most valuable asset—our vehicles—we should be free to use that equity for our wants and needs as well. Sadly, this Proposal is about to quash this opportunity for too many Americans.
Under this Proposal, the CFPB is not engaged in consumer protection. It is engaged in government paternalism.