It's only fitting that we'll end the year with more uncertainty, this time as a result of the elections. It seems safe to expect a Biden/Harris administration in January, but the road ahead remains a bit foggy pending the Georgia Senate run-off elections in January, the outcome of which will determine which party controls the Senate. Under Democratic control, we could see more progressive programs, while a Republican majority could put the brakes on any aggressive policy agenda. The outcome may even affect state-level regulation as a divided government could result in state legislators filling the void.
No matter what happens in Georgia though, a change of administration following so closely on the heels of unprecedented public and private borrower assistance sets the stage for increased scrutiny and enforcement on auto lending. The question is how much, how soon and by whom?
Clues in the Transition
The make-up of the Biden transition team provides a hint at the administration's intended direction. There's a heavy presence of former Obama administration officials and pro-consumer advocates. With the two run-off elections in Georgia, however, there's a chance for more progressive cabinet figures if the Democrats manage to win both seats (a 50-50 Senate tie will be broken by Vice President Harris), or a push toward the center if the Senate remains in the hands of the Republicans.
Leadership of the Senate Banking Committee is also up for grabs. If the Republicans do not control the Senate and the body is in a 50/50 tie, then the leadership of the Banking Committee could potentially change parties. But even if the Republicans hold the Senate, Republican leadership will shift. Republicans have committee term limits for chairs. Current Chairman Sen. Mike Crapo will move on and Sen. Patrick Toomey, who has been a free market advocate, could take over.
COVID-19 relief will be at the top of the Biden agenda given much of the relief provided under the CARES Act will be expiring at year's end and efforts to grant further relief in 2020 have stalled. Stimulus checks and enhanced unemployment benefits have helped keep delinquencies in check so far, but a bridge to the other side of the pandemic is needed to maintain stable performance.
While everyone is expecting another relief bill, and putting cash into the hands of consumers will benefit the auto sector in many ways, there is concern that restrictions, such as repossession moratoriums (as then-Senator Harris had herself called for earlier this year), will be imposed as part of any deal. Some have speculated that if Sen. Toomey takes over the Banking Committee, he could shutdown discussions extending relief programs based on his recent criticism.
Given the lack of direct help by the government, lenders and servicers have met the moment with a remarkable volume of extensions, workouts and forbearances. But as discussed at the Non-Prime Auto Financing conference, it will be a challenge going forward to keep up with documentation of modifications and ensure servicing systems properly execute upon what was intended. Further, applying forbearance practices fairly and equally will be a key to avoiding legal troubles. Servicing, collections and repossessions will all be under greater scrutiny as the pandemic persists and threatens the most economically vulnerable consumers.
Regulation and Enforcement
The immediate question is whether there will be an uptick in regulation, legislation, rulemakings or enforcement under the Biden administration that will significantly impact subprime auto participants.
Following this summer's Supreme Court ruling in Seila v. CFPB that permits the President to remove the head of the Consumer Financial Protection Bureau (CFPB) at-will, President Biden is expected to install a new leader. Going forward, we might see the CFPB stretch its reach to the full limit of its authority. With a more consumer-friendly CFPB or Federal Trade Commission (FTC), we might see more coordinated action with the State AGs. In addition, issues, such as disparate impact, that were largely ignored during the Trump administration, may make a comeback.
Taking a look at recent actions from these agencies, we can see
where enforcement might continue or expand. Earlier this year, the
FTC took action against Bronx Honda for discriminatory conduct by
that dealer. One of the Democratic commissioners at the FTC, Rohit
Chopra, put out a statement calling for the FTC
to use the authority it has in rulemaking to act more in the auto
market and focus on discriminatory intent and disparate impact.
Should Chopra (a reformer who helped launch the CFPB) take a
leading role at the FTC, this will likely be on his agenda.
Recently, the CFPB has acted to punish lenders who they argued had knowledge of repossession fees charged by their vendors, entering into at least one consent order were they found repossession agents demanded that consumers pay separate storage fees for personal property left in repossessed vehicles and refused to return the items until the fees were paid. There will likely be more scrutiny on practices related to the foreclosure and repossession process.
In addition to federal agency activity, California's new "mini-CFPB" will be a concern for fintechs offering consumer financial products or services in California. It has set the tone that if Washington won't act, the states will. Auto lenders may be carved out of the new enforcement authority (due to lobbying efforts), but other states may follow California or reconsider how their enforcement mechanisms operate.
With the pandemic continuing and communities facing a return to lockdown situations, lenders and servicers will need to stay up-to-date on all of federal, state and local laws. As the pandemic drags on, states may seek new ways to offer relief where there was none before. Market participants cannot assume that virus-restrictions on collections or repossessions have expired or won't be revived if local circumstances change. Any such activities would be in addition to those of state attorneys general, who are expected to continue the aggressive, coordinated efforts we've become accustomed to seeing over the past four years.
The resiliency, even buoyancy, of the market through the crisis has largely been the result of the government's focus on protecting consumers by putting cash in their banks, which they used to pay their debts. As the sun sets on relief programs without a certain sunrise in the form of further stimulus, the next phase of consumer protection may expand to greater regulation and enforcement, creating a whole new set of challenges for the industry.
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