Failed Calif. law would have strained auto finance market, group says

During the coronavirus pandemic, federal, state and local governments have introduced measures designed to prevent the spread of the deadly virus, preserve economic stability and provide for Americans hardest hit by the crisis. Measures at every level have been criticized as being too harsh, too lax, overreaching and incomplete, depending on regional variances.

A failed consumer protection law in California exemplifies contentious legislation in the time of the coronavirus. The American Financial Services Association believed the rule, AB 2501, which the California Assembly declined to approve before it adjourned last week, would have caused more harm to auto lenders and borrowers in the long run.

The COVID-19 Homeowner, Tenant and Consumer Relief Law of 2020 — first introduced in February — would have required creditors to provide up to nine months of vehicle payment relief, suspend repossessions for two years with some exceptions and offer one year of mortgage payment relief in one of the nation’s largest automotive markets. The law also would have capped the rate of interest that could be applied to the consumer’s auto loan account at 7 percent a year.

The legislation was meant to aid consumers in a sweeping gesture, though the American Financial Services Association and its members saw the potential for the opposite to occur. The organization argued that if banks can’t repossess a vehicle or take payment for an auto loan, it would effectively turn the auto loan — a secured credit obligation — into an unsecured loan. This, according to the group’s recent blog post, may have resulted in ratings organizations downgrading vehicle asset-backed securities and “certainly would have led to a collapse in confidence in the marketplace.”

“The legislation, while well-intentioned, would have created greater economic hardship for consumers and businesses alike by limiting consumers’ access to credit and undercutting confidence in some forms of asset-backed securities in the capital markets,” Senior Vice President Danielle Fagre Arlowe said in a statement.

Capping interest rates on auto loans prevents lenders from working with lower-credit customers at risk of default. High interest rates on these loans are considered a viable method of offsetting potential losses from riskier originations.

In this unprecedented time, legislative bodies must work together with industry leaders and citizens to develop workable solutions in the crisis. And lenders should continue working out forbearance strategies with their customers based on individual needs.

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