The Consumer Financial Protection Bureau released its initial findings on Monday from its Auto Finance Data Pilot deployed last February.

The CFPB made nine market monitoring orders to three banks, three finance companies and three captives to provide information about their auto financing portfolios.

The regulator shared seven main conclusions even though officials said in a news release, “Despite the size and prominence of this market, detailed information about the market is limited or non-existent.”

That’s a claim the American Financial Services Association refuted in an online blog post.

“While we continue to review this initial report, AFSA appreciates the bureau’s clear, objective and straightforward reporting of the data. At the same time AFSA continues to disagree with the bureau over its view of the amount of available data on auto financing. While the bureau states that ‘detailed information about the market is limited or non-existent,’ AFSA has cited many sources for data on the market,” the organization said.

The National Automotive Finance Association shared a similar sentiment about how the bureau approached the information it gathered.

“The NAF Association continues to review and digest this initial Auto Finance Data Pilot report. We appreciate the CFPB’s straightforward and precise reporting of the data from the collection on the financing of negative equity in auto finance transactions,” executive director Jennifer Martin said in a message to SubPrime Auto Finance News.

With the data the CFPB was able to collect, the bureau offered a detailed analysis of financing negative equity, where the trade-in value offered for a consumer’s vehicle is less than the outstanding contract balance and the unpaid balance is rolled into the new contract.

“Including negative equity in financing can place consumers further underwater on their next loan which, for example, may increase the risk of a deficiency balance if the consumer cannot repay the loan,” the CFPB said.

Here are the seven top findings from the nearly 50-page report that’s also available online:

1. More than 10 percent of borrowers financed negative equity from a prior vehicle loan into a new loan. Between 2018 and 2022, 11.6 percent of all vehicle loans in the dataset included negative equity, 32.1 percent included a positive equity trade-in, and 56.3 percent had no trade-in. The percentage of loans in the dataset that included negative equity ranged from just under 8% in 2022 to just over 17% in 2020. Loans observed in the data had larger loan amounts, larger monthly payments, and higher interest rates than transactions with positive equity or no-trade-ins. For loans in the data in which negative equity was included in financing, the mean negative equity amount was $5,073 for new vehicle financing transactions and $3,284 for used vehicle financing transactions. Other reports indicate that the number of transactions that included negative equity and the average amount of negative equity financed both increased in 2023.
2. Consumers who financed negative equity from a prior vehicle loan into a new loan were more likely to have their account assigned to repossession within two years. Consumers who financed negative equity were more than twice as likely to have their account assigned to repossession within two years compared to consumers who had a positive trade-in balance applied and were almost 1.5 times as likely to have their account assigned to repossession within two years than consumers with no trade-in associated with the account.
3. Consumers who financed negative equity financed larger loans than consumers with a positive equity trade-in, which resulted in average monthly payments 27% higher than consumers with no trade-in and 26% higher than for consumers with a positive trade-in. Accounts in the dataset in which negative equity was financed had an average amount financed of $32,316, compared to $28,244 for accounts with a positive trade in balance and $26,767 for accounts with no trade-in balance included. This resulted in an average monthly payment for accounts with negative equity included in the financing of $626 per month, compared to $496 per month for accounts with a positive trade-in and $493 per month for accounts with no trade.
4. Consumers who financed negative equity had lower credit scores, lower household income, longer loan terms and were more likely to have a coborrower than consumers with no trade-in or a positive equity trade-in. The average credit score for consumers who financed negative equity was 704, compared to 752 for accounts with a positive trade-in and 732 for those consumers with no trade-in associated with the account. The average loan term for consumers who financed negative equity was 73 months, compared to 67 months for consumers with no trade-in and 68 months for consumers with a positive equity trade-in.
5. Consumers who financed negative equity had larger loan-to-value and payment-to-income ratios. The average loan-to-value ratio for an account with negative equity financed was 119.3 percent, compared to 88.9 percent for accounts with a positive trade-in and 101.6 percent for accounts with no trade-in. The average payment-to-income ratio for consumers that financed negative equity was 9.8%, compared to 8.2% for consumers with no trade-in and 7.7% for consumers with a positive trade-in balance. Higher loan-to-value ratios generally lead to consumers being underwater for longer during the term of their loans than those with lower ratios. Higher payment-to-income ratios mean that consumers are dedicating a larger amount of their income to auto loan payments, which reduces their ability to weather a financial shock.
6. Nearly a quarter of consumers financing less expensive vehicles financed negative equity into their loans, compared to nearly 16% of consumers who purchased more expensive vehicles. In 2020, consumers who financed negative equity connected to the purchase of a vehicle priced at $50,000 or more financed an average of $7,402 of negative equity for new vehicles and $6,250 for used vehicles. All other price tiers in 2020 averaged between $4,500 and $6,000 of negative equity for new vehicles and $2,700 and $4,500 for used vehicles. Meanwhile, nearly 25 percent of consumers who purchased new vehicles in the $20,000-$29,999 price range in 2020 financed negative equity, compared to 15.8 percent of consumers who purchased vehicles that cost more than $50,000.
7. The percentage of negative equity financed compared to the prices paid for the vehicle was larger for consumers who financed less expensive vehicles. The percentage of negative equity compared to the vehicle purchase price was between 23-25 percent for consumers who purchased vehicles priced at $20,000 or less, compared to 10-14 percent for consumers who purchased vehicles priced above $40,000.