Navigate Auto Lending Regulatory Scrutiny Amid Rising Delinquencies and Pricing Challenges

Discover how recent CFPB initiatives and evolving market trends impact auto financing and how proactive measures can help auto lenders mitigate risks and build trust with regulators and consumers.

CFPB’s Focus on Auto Financing: Strengthening Consumer Protection and Transparency

Over the past six months, the Consumer Financial Protection Bureau (CFPB) has intensified its focus on auto financing data to bolster consumer protection and shed light within the lending industry. Given the continued climb in delinquency rates caused by a number of factors, there is ample reason to keep an eye on auto lending regulatory scrutiny.

The Auto Lending Landscape: Higher Prices, More Debt, Increasing Delinquencies

The auto finance market has seen substantial shifts in the past five years, with soaring new and used car prices driven by heightened demand and supply chain shortages during the pandemic. While new car prices have dipped by 5.45% since their peak in December 2022, they remain elevated compared to pre-pandemic values. These dynamics translated into larger loan amounts and increased monthly payments, affecting the financial well-being of consumers.

“The CFPB expects that average borrower balances and overall outstanding debt will grow. As these larger loans put more pressure on family budgets, we are increasing our focus on this market.”— Rohit Chopra, CFPB, 2022

US auto loan balances have continued an upward trajectory since the second quarter of 2020, reaching $1.61 trillion in Q4 2023, marking a $12 billion increase from the previous quarter. Historically, auto lending has boasted lower delinquencies and charge-offs compared to other consumer asset classes. However, a shift is emerging with delinquency rates for auto borrowers surpassing pre-pandemic levels. This rise is likely caused by inflation-stress on household budgets, interest rate hikes and the higher prices of new and used cars. Notably, the increase in delinquencies is particularly pronounced among low-income consumers and those with subprime credit scores, which has been noted by the CFPB.

Heightened Auto Lending Regulatory Scrutiny

UDAAP Violations Uncovered in Recent CFPB Examinations

Auto servicing exams led to the CFPB uncovering UDAAP violations that included junk fees. These unauthorized fees comprised of late charges that surpassed the contractually allowed amounts and estimated repossession fees that were substantially higher than the actual average costs incurred. Additionally, examiners found that servicers charged unfair and abusive payment processing fees for the most common payment methods. (Winter 2023 CFPB Supervisory Highlights)

CFPB Response to Auto Loan Delinquencies and Financial Strain on Borrowers

In response to the surge in delinquencies and repossessions caused by the sharp rise in new and used car prices – which led to increased monthly payment amounts – the CFPB has launched a new initiative. This initiative involves collecting auto lending data from nine major auto lenders to gain insights into their auto lending portfolios.

“Auto loan payments are consuming a greater share of income for many consumers and we are actively monitoring credit performance and repossession activity.”— Rohit Chopra, CFPB, 2023

Focus on Subprime Lending and Add-On Products

The CFPB is broadening its focus to also scrutinize subprime lending, driven by a rise in late payments among these borrowers. Additionally, the Bureau is examining add-on products offered by auto lenders. Concerns arise particularly when a loan ends early but the benefits from the add-ons still apply, or when the benefits expired while the borrower is still paying for it as part of the initial financing package. Past experiences with the CFPB suggest that heightened interest often leads to intensified scrutiny within the industry.

Navigating Regulations: Prioritize Compliance, Transparency and Education

Ensuring Auto Lending Regulatory Compliance

By proactively addressing auto lending regulatory concerns, enhancing compliance practices and prioritizing consumer protection, lenders can reduce regulatory risk and build trust with both regulators and consumers. Bridgeforce stands ready to help auto lenders navigate these challenges and implement effective compliance solutions, tailored to specific goals, needs and circumstances.

Take these actions to get regulator ready and build trust with consumers:

Strengthen Compliance Management Systems

Auto lenders who prioritize the enhancement of their compliance management systems to effectively identify, monitor and mitigate regulatory risks will take the lead among the industry. This includes conducting comprehensive assessments of existing systems, addressing any gaps and implementing both robust controls and monitoring mechanisms. Get started by conducting internal compliance audits. Audit existing processes, fee structures and CMS to find areas of improvement and align with regulatory expectations.

Update Policies and Procedures

Review and update policies and procedures to reflect current regulatory requirements and best practices. Then, make sure all staff are trained on compliance protocols and expectations and can evidence that what they do matches your policies and procedures.

RELATED CONTENTA guide to creating P&Ps that reduce risk and maintain compliance

Focus on Consumer Education and Protection

Proactively engage in consumer education initiatives to empower borrowers with knowledge about obligations and rights in auto financing. Provide clear, comprehensive and transparent information about loan terms, repayment options and potential financial impacts to help consumers make informed decisions and mitigate risk of consumer harm.

Review Collections Practices and Strategy Treatments

Evaluate strategies and operational practices against a compliance lens. Then, adjust these activities to mitigate emerging risks. Initiate collections training to build knowledge and ability in communicating with consumers in financial distress. We’ve seen call model and empathy-focused training build customer satisfaction from 72% to 88%. Plus, 80% of customers who were placed on programs continuing to make payments.

Enhance Transparency in Fee Structures

Auto lenders should review and revise their fee structures to ensure transparency and compliance. During this assessment, take steps to eliminate unauthorized fees, accurately disclosing all charges to consumers and providing clear explanations of add-on products. Ensure disclosures are easily accessible and understandable for consumers.


Staying Ahead in Auto Lending Regulatory Compliance – Bridgeforce Can Guide You Through Evolving Regulations

The landscape of auto lending regulations continues to evolve, staying ahead of compliance requirements is paramount for auto lenders. When searching for a partner, Bridgeforce brings years of expertise and guidance. We can help auto lenders navigate challenges effectively and maintain compliant while fostering trust and transparency in their operations.



[Editor’s note: this article was written by Melissa Peirano, former Associate Partner at Bridgeforce]

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