How auto lending might be affected by proposed rule changes aimed at low-income borrowers

Auto lending may soon be included as part of the Community Reinvestment Act, a federal law enacted to encourage banks and savings associations to lend to low- and moderate-income households, under new regulations being considered.

But experts worry the new regulations could push banks away resulting in limited access to credit for communities and individuals who need help.

"Putting these rules in place can't increase the way that banks do auto lending to minority populations in certain areas," said Celia Winslow, senior vice president of the American Financial Services Association. "I think there's much better ways to go about trying to increase auto lending."

The Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency are seeking to change the regulations, which will include auto lending as a category for low- and moderate-income individuals.

According to the notice, the agencies proposed requiring new automobile lending data collection and reporting by banks with assets of over $10 billion.

The agencies said this was because of a lack of comprehensiveness required to construct the metrics to evaluate automobile lending from credit reporting agency data and other market sources.

"Although limiting data collection and reporting requirements for automobile lending to only banks with assets of over $10 billion would have the benefit of tailoring these requirements such that they do not apply to banks under this asset level, it would also lead to less comprehensive metrics for all banks, particularly in areas where banks with assets of over $10 billion have a low market share of bank automobile lending," the agencies said.

Caroline Eisner, financial services and products lawyer for Alston and Bird, said there is no current timetable for when the changes could be implemented. However, she speculated the agencies are likely looking to implement them this year or early next year.

Eisner said banks might be under further scrutiny to ensure they measure up to the potential new regulations.

"That means we'll still be looking at mortgages, small businesses, small farms, but depending on the size of their auto lending portfolio, in particular, that also means potentially looking at and examining a bank's auto lending portfolio to make sure that it is serving [low- and moderate-income] individuals and [low- and moderate-income] areas," Eisner said.

Winslow said she disagreed with the new regulations because of the banks' lack of authority over the auto market.

"Banks have a much smaller share of the overall auto market. And secondly, most auto loans are done by a customer going into a dealership and applying through the dealer for a loan," Winslow said. "So the bank doesn't have a whole lot of control."

Eisner said she predicts the new regulations will not pull new banks into auto loan lending.

"The impact that I see here for banks that do auto lending is that I think that is going to drive their market share down," Eisner said. "So if you have a bank with a large proportion of auto lending in their portfolio, they will have a greater responsibility and greater costs."

Eisner said banks might focus less on the auto market to avoid inspections related to the Community Reinvestment Act.

"You might see banks with higher than 15 percent of their lending portfolio in auto significantly decreasing it in order to avoid CRA examination of their portfolio," Eisner said.

However, Eisner said this might also change who is giving loans.

"Driving bank market share down does not mean that I think that there will be fewer loans made," Eisner said. "I just think the loans will be made by non-bank lenders more often than by bank lenders."

Winslow said there are significant differences between auto lending and mortgage lending.

"The fact is that auto loans are actually much more like consumer loans than they are like mortgage loans," Winslow said. "Under mortgages, banks are required to get information on a borrower's race or ethnicity. In the auto lending context, banks are prohibited from gathering that."

Eisner said the CRA could not extend its reach to the auto retail market because of fundamental differences.

"The agencies can't write a rule that somehow magically gets [low- and moderate-income] borrowers into more cars. The process just doesn't work in the same way," Eisner said. "The CRA is intended to have banks open up branches in communities that are under-banked or not banked and then build up those banking relationships. But the same thing doesn't work in the auto context because the bank can't open a dealership in an area and the bank can't control who goes into what dealership."

As banks prepare for the potential changes, Eisner suggested they examine their lending patterns.

Banks need to assess "where they're lending and the economic makeup of their communities where they're lending and start to ensure that they are providing not only loans but also investments and services," Eisner said.

Winslow said she believes auto lending can be incorporated into the CRA, under different conditions. "When the agencies are talking about lumping all consumer loans together under retail services and products, that's where the auto loans should be placed, as opposed to in their own category," Winslow said.