POLICY FOR AUTO LOAN REFORM

To: The United States Congress and the Legislatures of the Several States

From: We the People

We, the undersigned, call on our elected representatives to reform automobile financing practices to give consumers greater transparency, meaningful repayment choices, and a better opportunity to build equity in the vehicles they are purchasing.

Under a standard fixed-payment auto loan, interest is calculated on the outstanding principal balance. Because the balance is highest at the beginning of the loan, a greater portion of the early payments generally goes toward interest and a smaller portion toward reducing principal.

Meanwhile, the vehicle is depreciating.

The result can be a borrower who has made years of payments but still owes more than the vehicle is worth.

When that vehicle must be replaced or traded, the remaining negative equity can be added to the next automobile loan. The consumer then begins the next loan financing not only the replacement vehicle, but also debt remaining from the previous vehicle.

This can create a continuing cycle of negative equity.

WE ARE NOT ASKING GOVERNMENT TO ELIMINATE TRADITIONAL AUTO LOANS.

WE ARE ASKING FOR TRANSPARENCY, CHOICE, AND A BETTER OPPORTUNITY FOR BORROWERS TO BUILD EQUITY.

STOP THE CYCLE OF NEGATIVE EQUITY

When a borrower owes more than a vehicle is worth at trade-in, the difference is negative equity.

If that negative equity is rolled into the replacement vehicle loan, the new loan begins with additional debt above the purchase price of the replacement vehicle.

Interest is then charged on that larger loan balance.

We call for financing reforms designed to help borrowers reduce principal faster and decrease the amount of negative equity that may have to be carried from one vehicle to another.

HELP BORROWERS BUILD EQUITY FASTER.

REDUCE NEGATIVE EQUITY AT TRADE-IN.

REDUCE THE AMOUNT OF OLD VEHICLE DEBT CARRIED INTO THE NEXT LOAN.

GIVE CONSUMERS A PRINCIPAL-PAYDOWN CHOICE

Lenders offering automobile loans longer than 48 months should also be required to offer consumers an even-principal repayment option.

Under this option:

• The original principal would be divided evenly across the scheduled monthly payments.

• Interest would be calculated on the remaining principal balance.

• Principal would therefore be reduced consistently throughout the loan.

• Because the principal balance declines every month, the amount of interest charged would also decline over time.

The consumer should be able to compare this option with a traditional fixed-payment loan and choose the structure that best meets their needs.

DO NOT TAKE AWAY THE TRADITIONAL LOAN.

GIVE THE CONSUMER ANOTHER CHOICE.

CREATE AN EVEN PRINCIPAL-AND-INTEREST OPTION

We also call upon lawmakers and financial regulators to establish standards allowing lenders to offer a fixed-payment automobile loan designed to apply substantially equal amounts toward principal throughout the scheduled loan term while distributing the projected interest cost more evenly among the scheduled payments.

The purpose would be to combine predictable monthly payments with faster and more consistent principal reduction.

Any such structure should require:

• A clearly defined amount of each scheduled payment to reduce principal.

• Future unearned interest NOT to become part of the outstanding principal balance.

• Additional principal payments to reduce the borrower's outstanding principal balance.

• Early payoff to eliminate interest attributable to the remaining period in which the money is no longer borrowed.

• Complete disclosure showing the borrower how principal and interest will be applied throughout the loan.

THE LENDER SHOULD BE PAID FOR LENDING MONEY.

THE BORROWER SHOULD BE BUILDING EQUITY WHILE PAYING FOR THE VEHICLE.

EARLY PAYOFF SHOULD MEAN THE END OF FUTURE INTEREST

A borrower who pays an automobile loan off early should not be required to pay interest for the remaining months or years in which the money is no longer borrowed.

We call for:

• Future unearned interest to be excluded from the early payoff amount.

• The payoff amount to consist of remaining principal, interest actually accrued through the payoff date, and other lawful amounts already due.

• Prepayment penalties designed to financially penalize borrowers for paying automobile debt off early to be prohibited.

• Every automobile loan agreement to clearly disclose how early payoff will be calculated.

IF THE BORROWER PAYS BACK THE MONEY, FUTURE INTEREST SHOULD STOP.

NO MORE DEBT — NO MORE FUTURE INTEREST.

SHOW THE BORROWER WHERE THE MONEY GOES

Before signing an automobile loan, consumers should receive a clear, standardized comparison showing:

• The purchase price of the vehicle.

• The amount financed.

• Any negative equity from a previous vehicle included in the new loan.

• Any additional products, fees, or charges included in the amount financed.

• The interest rate and APR.

• The loan term and scheduled payment.

• The total projected interest over the full loan term.

• The projected remaining principal balance at meaningful points during the loan.

• How the proposed repayment structure compares with other available repayment options.

A BORROWER SHOULD KNOW WHAT THEY ARE FINANCING, WHERE THEIR MONEY IS GOING, AND HOW QUICKLY THEIR DEBT WILL BE REDUCED.

LONGER LOANS REQUIRE GREATER TRANSPARENCY

Automobile loans of 72 months or longer should include enhanced disclosures explaining:

• The total interest the borrower is projected to pay.

• How quickly principal will be reduced.

• The risk of owing more than the vehicle is worth.

• The financial consequences of selling or trading the vehicle before the loan is paid off.

• How rolling negative equity from a previous vehicle increases the new amount financed and the interest cost.

A LOWER MONTHLY PAYMENT SHOULD NOT HIDE A HIGHER LONG-TERM COST.

WE CALL ON OUR GOVERNMENT TO ACT

We call on Congress and the legislatures of the several states to establish automobile-financing standards that provide consumers with greater transparency and meaningful repayment choices.

The purpose is not to prohibit traditional automobile loans.

The purpose is not to prevent lenders from earning a reasonable return for lending money.

The purpose is to give borrowers financing choices that can reduce principal more consistently, build equity faster, and reduce the cycle of carrying negative equity from one vehicle loan into the next.

LET LENDERS COMPETE.

LET CONSUMERS CHOOSE.

SHOW THE BORROWER WHERE THE MONEY GOES.

HELP BORROWERS BUILD EQUITY FASTER.

REDUCE THE CYCLE OF NEGATIVE EQUITY.

SUPPORT POLICY NOT POLITICIANS.

Signed,

WE THE PEOPLE