A new CFPB report, Negative Equity in Auto Lending, contains an analysis of data relating to the financing of negative equity in vehicle trade-ins.  The report uses data collected by the CFPB in response to nine market monitoring orders issued by the CFPB in February 2023.   The orders were issued to three banks, three finance companies, and three captive lenders requesting information about their auto lending portfolios.  The report is the first of a series of reports that the CFPB plans to issue using data from this collection.

The CFPB’s overall finding based on the data from the collection is that “negative equity may lead to worse consumer outcomes.”  The report’s specific key findings include:

• Between 2018 and 2022, 11.6% of all vehicle loans in the dataset included negative equity, 32.1% included a positive equity trade-in, and 56.3% had no trade-in.  The percentage of loans in the dataset that included negative equity ranged from just under 8% in 2022 to over 17% in 2020.  Other data indicates that the number of transactions that included negative equity and the average amount of negative equity both increased in 2023
• Consumers who financed negative equity from a prior vehicle loan into a new loan were more than twice as likely to have their account assigned to repossession within 2 years compared to consumers who had a positive trade-in balance and were almost 1.5 times as likely to have their account assigned to repossession within 2 years than consumers with no-trade in associated with the new loan.
• Consumers who financed negative equity had larger loans than consumers with a positive equity trade-in, which resulted in average monthly payments that were 27% higher than average payments of consumers with no trade-in and 26% higher than average payments of consumers with a positive trade-in.
• Consumers who financed negative equity had lower average credit scores, lower average household income, and longer average loan terms, and were more likely to have a co-borrower than consumers with no trade-in or a positive equity trade-in.
• Consumers who financed negative equity had larger average loan-to-value and payment-to-income ratios than consumers with no trade-in or a positive equity trade-in.
• Nearly 25% of consumers financing less expensive vehicles (i.e. in the $20,000 to $29,000 price range) financed negative equity as compared to nearly 16% of consumers who purchased more expensive vehicles (i.e. costing more than $50,000).
• The percentage of negative equity financed compared to the vehicle price was between 23-25% for consumers who purchased vehicles priced at $20,00 or less, compared to 10-14% for consumers who purchased vehicles priced above $40,000.

The CFPB typically does not publish reports like this one, which contains data that it obviously considers to be disturbing, without there being an action item lurking behind the report.  In concluding the report, the CFPB states that “[w]ith the understanding that consumer outcomes for those who financed negative equity seem to be worse than for those who did not, the CFPB will more closely examine the data on and lender use of this practice.”  It is difficult here, however, to ascertain what action item might result from a closer examination.   We doubt that they would have the authority to ban the financing of negative equity altogether, much less the authority to ban the financing of negative equity solely on the basis of this report, but the CFPB has certainly been known to push the envelope when it comes to the scope of their jurisdiction. 

The American Financial Services Association (AFSA) issued a statement expressing its appreciation for “the Bureau’s clear, objective, and straightforward reporting of the data”  AFSA also expressed its disagreement with the CFPB “over its view of the amount of available data on auto financing.”  According to AFSA, despite statements from the CFPB that “detailed information about the market is limited or non-existent,” AFSA “has cited many sources for data on the market.”

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