October 10, 2020
By Carissa Robb
The cost to subprime customers and impact on lenders
Given the spike in unemployment earlier this year, most auto lenders responded to payment relief requests with short-term extensions. Many borrowers believed the relief was free since no initial fee was charged, but daily interest was accruing and a looming balloon payment at payoff was growing. Regulators will be interested in these negative impacts on borrowers, especially if they end in repossession.
We’ll start with the assumption of best foot forward: relief options are offered in good faith to respond quickly, curb delinquency, preserve a borrower’s credit history, and help families recover faster. However, extensions are short-term in nature but being applied as long-term solutions with a limited understanding of each borrower’s financial situation.
We’ll soon know how effective 1-6 month payment extensions were to
cure hardship and prevent vehicle repossessions.
At some point, regulators, shareholders and/or investors will question the transparency of extension programs and whether they were designed to keep people in their vehicles or to preserve portfolio performance. The next few months will likely reveal how aligned the industry is with borrowers' end goal of ownership.
As interim relief options expire, customers need to resume scheduled payments or face the threat of repossession. Recent consumer complaints reveal confusion and misunderstanding of the impact of extensions as lenders restart collection and repossession activity. Damaged credit, mistaken repossessions, long wait times to resolve, and even internal confusion as to who gets what, compounds compliance risks.
Offering multiple short-term extensions has real financial repercussions.
The average interest rate for a used vehicle and subprime FICO hovers at 17.74%. Let’s take a $17,000 balance. At that average rate, the cost of ownership (assuming all payments are made on time) would be $25,251 over the course of a 60-month loan. If a borrower agrees to a 3-month extension, and the last regular payment was made in February of 2020, no payments were required for March, April and May. Collection calls begin with the expiration of the 3-month extension, but in many cases, lenders are offering an additional 3-month extension.
Though no fee was charged when the extension was offered, borrowers are paying per diem interest at a rate of $6-7 a day, which according to CFPB complaints, many did not realize. Every day after the initial extension was offered until the borrower resumes payments, per diem accrues on the loan, extending the cost and duration of the loan. The cost of the 6-month extension results in an additional 25% interest over the life of the loan and a final balloon payment that is six times the original monthly payment.
Following 6 months of non-payment, it will take another 6 months of on-time payments to pay down the accrued and unpaid balance from the 6-month extension since new payments are disproportionately applied to interest over principal.
One year after requesting relief, a borrower will have made $0 of progress towards ownership.
Since there are always two sides to a story, I’ve made it a habit to read through the consumer narratives reported through the CFPB’s complaint database. It keeps me in touch with consumer needs the industry may not be meeting and showcases the misunderstanding of how help can eventually hurt. This quote as recently as September highlights the lack of understanding of extensions and long-term impacts:
“I asked why... almost a year of me paying my car note and balance has only [gone] down $30.00! I was told that that comes from the two payment extensions I requested when I was laid off because of COVID which was communicated [to] them. I was told that while I was granted the 2 [month] extension, I still had to pay daily interest.”
CFPB Consumer Complaint Narrative, Sept. 2020
The database is filled with similar stories. The responses are generally the same: a legal disclosure is provided with all the impacts of extending. Many of these extensions are being followed by collection and repossession action where the borrower feels entirely caught off guard or unaware of how they went from relief to repossession in the midst of a global crisis.
In August 2020, a CFPB customer complaint was resolved with monetary relief to the consumer, citing operational breakdowns and plea for assistance to the CFPB:
“We received approval for our COVID-19 hardship assistance via email…’Thank you for submitting a COVID19 Hardship Assistance request…. A representative will contact you regarding available options for assistance, including loan extensions and waivers of delinquency options to help bring your account current.’ ... I walked outside and noticed our car was gone… Over 3 hours on the phone [and they] would not answer me whether they repossessed our car.... I just really wanted to know if our car was stolen, since we had already been approved for the COVID-19 hardship!...I found the email stating we were approved [and] forwarded her the email stating our COVID-19 HARDSHIP APPROVAL… No return call... Please help.”
I have spent the majority of my career responding to customer complaints. For every misstep, there are plenty of actions with negative consequences to consumers that were within the boundaries of applicable law and closed without further remediation. My goal is to highlight the level of confusion and volatility with consumers that, right, wrong or indifferent, lenders will have to contend with and defend. The intent is to lift our heads and evaluate the success and risks of relief programs applied and proactively prepare for what may be next.
There are real and very costly risks to lenders at a time when
enforcement is on the rise.
Lenders were forced to move fast in the spring in response to a spike in unemployment and requests for payment relief. Details of many programs were unknown, fluid, confusing, and simply lost amidst unprecedented volumes and restricted staffing levels. There are risks emerging from consumer complaints at a time when enforcement is on the rise:
Verbally offered and subsequently rescinded relief options
Confusion on suppressed bureau reporting
Application of relief for already past due loans
Failed processing in systems of records
Extended wait times for answers
Confusion on behalf of borrowers and the staff that tried to help highlights the need for greater precision in the forward-looking strategy.
Repossession activity is once again in flight. As relief options expire and banks are called to categorize additional relief as Troubled Debt, consumer complaint activity will increase as they seek protection from all available resources. Regulatory agencies and oversight entities will monitor complaints, expand examinations and track default progression of these initial relief options that ultimately end in loss of ownership.
Lenders that benefit from per diem during extension periods and later repossession costs will be of great interest to enforcement agencies.
If we do not proactively monitor areas of exposure for consumer harm, and actively mitigate its occurrence, consumer protection agencies will do it for us, with potentially expensive outcomes.
The start of a recovery period is unknown. The actions taken thus far have bought more time. We must now look forward and challenge our own strategies and preparedness for the outcomes that remain unknown, not just the ones we prefer.
As with any car, a shiny exterior will do very little to cover trouble under the hood.
Carissa Robb is the President of Constant. As former SVP and Head of US Loan Servicing for TD Bank, she managed multiple internal and external compliance assessments and regulatory examinations including the identification and remediation of internal exceptions, audit findings, class actions, and consent order activity and has extensive experience with State and Federal regulatory agencies.