Tag Archive | "Auto Finance"

CFPB Auto Finance Guidance Losing Momentum: What’s Next?


The much-heralded CFPB Auto Finance Guidance issued in March 2013 appears to be losing its momentum in the first part of 2015.

You will recall that the Consumer Financial Protection Bureau (CFPB), which lacks jurisdiction under the Dodd-Frank Act over most franchised automotive dealers, claimed that lenders allowing dealers to mark up lender buy rates on credit sales had a “disparate impact” effect on protected classes of persons, principally women and minorities, under the Equal Credit Opportunity Act (“ECOA”). This, they claim, is credit discrimination. Very little detail was given to back up these assertions but the CFPB settled with a large lender for $98 million in December 2013 and several other lenders in September 2014.

In their recently issued 2014 Fair Lending Report, the CFPB indicated it “investigated a number of indirect auto lenders and has a number of authorized lawsuits.” Yet, no such suits have been filed. Also, the CFPB has announced no confidential supervisory settlements of auto finance credit discrimination since September 2013. That’s a long time for what the CFPB had previously characterized as a priority issue.

Debunking the Auto Finance Guidance

The original Auto Finance Guidance was very general and conclusory. It didn’t explain how the CFPB reached its conclusions. You can’t collect racial and demographic information in automotive finance transactions the way you can with mortgages. It took a while, but the CFPB announced it had identified racial and minority persons and their discriminatory rates by using a “proxy” known as the Bayesian Improved Surname Geocoding or BISG proxy. BISG estimates race and ethnicity based on an applicant’s name and census data. But in November 2014, AFSA released a study by the Charles River Associates Group that essentially blew away the credibility of the BISG as a legitimate and accurate way to identify classes of persons.

The Charles River Study calculated BISG probabilities against a test population of mortgage data, where race and ethnicity are known. Among the findings:

  • When the BISG proxy uses an 80 percent probability that a person belongs to an African American group, the proxy correctly identified their race less than 25 percent of the time.
  • Applying BISG on a continuous method overestimates the disparities and the amount of alleged harm and provides no ability to identify which contracts are associated with the allegedly harmed consumers.
  • When appropriately considering the relevant market complexities and adjusting for proxy bias and error, the observed variations in dealer reserve are largely explained. In looking at approximately 8.2 million new and used motor vehicle retail installment contracts originated during 2012 and 2013, the researchers found little evidence that dealers systematically charge different reserves on a prohibited basis and instead found that reserve variations could “largely be explained by objective factors other than race and ethnicity.”

Remember that $98 million CFPB consent decree in December 2013? As if to confirm the Charles River Study’s findings, not one customer refund check has been issued almost 18 months after the fact. Apparently, the CFPB can’t figure out who to send the refund checks to.

Judicial and Congressional Action

The CFPB is also facing a problem in the U.S. Supreme Court. In a case brought challenging the legitimacy of disparate impact credit discrimination under the Fair Housing Act—a law that has exactly the same language as ECOA in prohibiting only intentional discrimination and not disparate impact claims—the Supreme Court is expected to rule on the legitimacy of the disparate impact claim possibly before this article reaches print. In 2005, the Supreme Court ruled in an employment law case, that a disparate impact cause of action had to be legislated by Congress in the very words of the law and not be a product of a regulator’s concoction of what the Congress may have intended. Depending on how the Court rules now, the CFPB may be hard pressed to continue to assert that disparate impact credit discrimination is a viable legal theory.

The Congress has also gotten into the act. Last September, 130 House members of both parties sponsored a bill to repeal the 2013 Auto Finance Guidance. While that bill died at the end of the session, a bill to cut back the CFPB’s budget to a lower portion of the Federal Reserve’s budget (the CFPB is not appropriated by Congress) was recently passed out of Committee and sent to the House floor. Other bills to make the CFPB headed by a panel instead of a single Director and making at least a part of the agency’s funding dependent on Congressional appropriations are also making their way through the Congress.

In the meantime, few lenders have gone to flat fee pricing as the CFPB wants and dealer participation is alive and well. Even the CFPB has hinted that rate markups of 100BP or less have a good probability of not creating statistically significant rate variances.

A Possible Solution

So where will this end? In 2007, the Department of Justice (DOJ) settled two disparate impact credit discrimination claims with automotive dealers and their methodology in doing so may provide the impetus for a resolution now. The DOJ told the dealers to adopt a standard rate markup for all customers. They could deviate downwards (but not upwards) only if there existed a “legitimate business reason” and the DOJ identified seven of them. Every deal jacket would contain a worksheet indicating whether the standard markup or a lower markup was used and, if lower, the legitimate business reason that justified doing so. The DOJ’s Chief of Enforcement confirmed his agency’s support for that solution at a CFPB hearing in November 2013.

NADA has essentially put into words the DOJ’s solution in its Fair Credit Compliance Policy and Program (available at https://www.nada.org/faircredit/) and it is a program that all dealers should consider adopting. As in 2007, you establish a standard rate markup and apply that to all customers unless one of the seven legitimate business reasons applies to justify a lower markup. You document in each deal jacket what the standard rate markup is and whether you used it or a lower amount. If lower, you indicate which of the seven legitimate business reasons justified doing so and keep that worksheet in the deal jacket.

The CFPB is trying to claim that even if every dealer adopted the NADA program, different rate markups by different dealers would create a “portfolio-level disparate impact” for lenders who buy from many dealers. There is no legal authority that supports this position and that argument was pretty well disposed of by the U.S. Supreme Court several years ago in a case against Wal-Mart. In the Wal-Mart case, the Court held that the hiring decisions of individual store managers could not be imputed to Wal-Mart as a whole to prove Wal-Mart was discriminating. In the auto finance context, dealers are independent business people and trying to make a lender liable for rate differences among individual dealers is at least as tenuous as the argument against Wal-Mart for its individual store managers.

So on all fronts—legislative, judicial, statistical—the CFPB is having a hard time defending the 2013 Auto Finance Guidance. That would be consistent with why no actions have been filed or consent decrees issued for almost nine months. The tone of this “disparate impact” issue has definitely changed and is changing and not in a way the CFPB would like.

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CFPB to Oversee Nonbank Auto Finance Companies


WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB)’s proposal to extend its supervision to any nonbank auto finance company that makes, acquires or refinances 10,000 or more loan or leases in a year has cleared its last hurdle, with the bureau publishing this week its finalized rule and the examination procedures it will follow to ensure finance companies are complying with consumer financial laws, reports F&I and Showroom.

The finalized rule, which officials said remained largely unchanged from the bureau’s original proposal last September, marks the first time auto finance companies will be regulated at the federal level. And under the rule, the bureau estimates it will have authority to supervise about 34 of the largest nonbank auto finance companies, including captive finance companies, and their affiliated companies that engage in auto financing. These companies, according to the CFPB, originate around 90% of nonbank auto loans and leases.

“Auto loans and leases are among the most significant and complex financial transactions in a typical consumer’s life,” said CFPB Director Richard Cordray. “Today’s rule will help ensure the largest auto finance companies treat consumers fairly.”

The American Financial Services Association, a national trade group representing the consumer credit industry, had requested in a memo submitted on Dec. 8, the last day of the rule’s public comment period, that the bureau raise its threshold to 50,000 loans and lease, noting that the 10,000-origination threshold contradicted the Small Business Administration’s small business definition. But the finalized rule didn’t reflect that recommendation.

“As anticipated, the [CFPB] only made minor changes to its original proposal to define larger participants in nonbank auto finance,” Chris Stinebert, the association’s president and CEO, said in a statement issued to F&I and Showroom. “The CFPB’s rule retained its original transaction threshold, meaning that nonbank auto finance companies that make, acquire or refinance 10,000 or more loans or leases in a year will come under CFPB supervision and enforcement.”

But not all of the association’s recommendations were ignored. “At the AFSA’s recommendation, the CFPB broadened the definition of asset-backed securities to ensure that they are excluded from the 10,000-transaction threshold,” Stinebert added. “In addition, the CFPB modified the definition of refinancing for the purpose of the threshold. Specifically, the bureau clarified that a refinancing must be secured by an automobile to be included in the definition.”

The finalized rule also defines additional automobile leasing activities for coverage by certain consumer protections afforded by the Dodd-Frank Act. The AFSA, however, had asked that the bureau refrain from overreach regarding leases.

“Basically, the final rule remains largely unchanged regarding auto leasing,” Stinebert noted.

To coincide with its new authority, the bureau updated its Supervisory and Examination Manual to provide guidance on how it will monitor the bank and nonbank auto finance companies that it supervises. Among other things, examiners will be evaluating whether auto finance companies are:

  • Fairly marketing and disclosing auto financing terms: The bureau will be examining auto finance companies that market directly to consumers to ensure they are not using deceptive tactics to market loans or leases. The bureau is also looking to ensure that consumers understand the terms they are getting.
  • Providing accurate information to credit bureaus: The bureau will assess whether information auto finance companies provide to credit bureaus is accurate. The CFPB recently took an enforcement action against an auto finance company that distorted consumer credit records by inaccurately reporting information like the consumers’ payment history and delinquency status to credit bureaus.
  • Treating consumers fairly when collecting debts: The bureau will assess whether auto finance companies are using illegal debt collection tactics. The Bureau will be looking to ensure that collectors are relying on accurate information and using legal processes when they collect on debts. The bureau also will review the repossession process, including the practices of third-party service providers that are employed to repossess autos.
  • Lending fairly: The bureau will assess whether auto finance companies’ practices comply with the ECOA and other bureau authorities protecting consumers.

A copy of the rule can be accessed by clicking here, while the Examination Procedures for Auto Finance can be accessed by clicking here.

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Consumers Want Lenders to Bid for Their Business, Study Shows


CINCINNATI ─ Swapalease.com released today finding of survey that questioned more than 2,500 U.S. drivers and car shoppers about the future of automotive trends. Among the study’s findings, the vast majority of car shoppers are not excited about car-sharing services or autonomous driving.

The online survey, conducted between Feb. 20 and March 15, also showed some key gender differences in how shoppers would like to see the automotive experience in the future.

Both men (66%) and women (56%) would most prefer to identify the car they like and then have dealers submit their best bids. However, women (35%) are interested in “showtailing,” where they look at cars at the dealership but then buy/lease online. Men (33%) would like to buy/lease cars online without ever stepping into the dealership.

In terms of finance options, the combined genders (66%) would prefer to see all their financing and rate options online ahead of time. Separately, though, more men (45%) than women (27%) would be interested in lenders bidding for their business ahead of time.

As for leasing, the combined genders (51%) would prefer to select the lease package that’s right for them from a menu containing various options such as mileage and upfront money. Separately, most men (51%) would like to get out of any lease with a 90-day notice, while most women (54%) would like to lease month-to-month with no extended terms.

As for vehicle features, both genders agree that rear back-up camera systems (65%) and in-car Wifi (60%) are the tech features that will most influence their shopping decision in the future. However, lane departure warning systems saw a large difference, with 52% of men indicating the that as an influential technology as opposed to just 31% of women.

Additionally, both genders are not at all interested in using a car-sharing service such as Uber (43%) as well as autonomous driving (37%).

“The automotive industry continues to evolve before our eyes, especially when it comes to the types of cars manufacturers are producing,” said Scot Hall, Executive Vice President of Swapalease.com. “We’d like to see the industry break out of the mold more when it comes to lease packages and more flexible terms, and this survey shows car shoppers would be in favor of some creative thinking on those fronts.”

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Wells Fargo: Subprime Cap Part of ‘Ongoing Risk Management’


IRVINE, Calif. — A statement released by Wells Fargo Dealer Services didn’t deny the bank has placed a cap on subprime auto loans for this year, but it stopped short of saying the move was the bank’s response to media claims of an overheating auto finance market.

Citing unnamed executives from Wells Fargo, The New York Times reported on March 1 that the bank was limiting the dollar volume of its subprime auto originations to 10% of its overall auto loan originations. For all of 2014, Wells Fargo originated $29.9 billion in auto loans, up 8% from the previous year.

A spokesperson for Wells Fargo Dealer Services said the bank remains committed to the auto finance market and that it remains “firmly committed to responsibly offering access to credit to a wide spectrum of customers during all economic cycles.”

“The percentage of originations we consider subprime, based on our customized scorecard, has remained generally stable over the last decade,” the spokesperson said. “In the fourth quarter, we formalized our existing risk management philosophy. This is part of our ongoing risk management structure and helps us to continue to responsibly manage risk while also tailoring our approach by local market.”

The news comes at a time when several media outlets, including The New York Times, have warned that auto finance may go the way of subprime mortgage in the years leading up to the 2008 financial crisis. Some news outlets have even called on regulators to step in and stop what they called a forming subprime auto finance bubble.

Despite total outstanding loan balance on auto loans reaching an all-time high of $886 billion in the year-end 2014 quarter, finance executives at the 2015 Vehicle Finance Conference in January maintained that the market is operating smartly. They described competition as fierce but disciplined, with one executive noting that finance sources seem focused on smart structures.

Whether motivated by the media or not, state and federal regulators have keyed in on subprime originations and securitizations. Since the summer, regulators have issued subpoenas to several subprime finance sources, including Consumer Portfolio Services, Ally, Capital One, GM Financial, Credit Acceptance Corp, and Santander Consumer USA, requesting documents related to their subprime auto finance businesses.

Speaking to F&I and Showroom at the National Automobile Dealers Association’s 2015 convention, Dawn Martin Harp, who heads up dealer services for Wells Fargo, said regulators have not impacted the bank’s auto origination strategy. She did note, however, that the bank has been working to improve the information it provides to consumers regarding their loans, adding that the bank has more transparency initiatives planned for 2015.

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Consumers Relying on Financing, Experian Reports


SCHAUMBURG, Ill. —Consumers are relying on financing more than ever to buy their next vehicle, according to Experian Automotive. The firm’s latest State of the Automotive Finance Market report shows that the percentage of new vehicles purchased with financing in the fourth quarter of 2014 increased over the previous year to reach 84%. Used vehicles that were financed reached a record high of 55.2%.

Furthermore, the study shows that the average loan amount for a new vehicle in the fourth quarter of 2014 once again hit its highest level on record, reaching $28,381. This represents a more than $950 increase from a year ago and a $582 increase from the previous quarter. For used vehicles, the average loan amount increased $437 from last year to reach $18,411.

“In most parts of the country, vehicles are viewed as a necessity to everyday life, which is why we continue to see consumers willing to take out larger loans as the average price of vehicles continues to rise,” said Melinda Zabritski, Experian’s senior director of automotive finance. “As more consumers lean on financing, it’s important for them to consider all of the factors involved, including monthly payments, interest rates and loan terms. These insights will enable them to have a better understanding of their potential payment obligation and take the appropriate action in order to make the vehicle fit within their monthly budget and more easily meet payment terms throughout the life of the loan.”

Findings from the report also show that leasing continued to gain traction, as it jumped 3.6% from a year ago to reach nearly 30% of all new vehicles financed in the quarter.

In addition to the number of leases increasing in the quarter, the study shows that it was slightly more affordable and easier to obtain one. The average monthly lease payment decreased $12 from a year ago to reach $408 in Q4 2014. What’s more, the average new-vehicle lessee had an average credit score of 717 in Q4 2014, down two points over the same time period.

The study also found that the average credit score for a new-vehicle loan dropped 3 points in Q4 2014 to reach 712, and the average credit score for a used vehicle loan increased 2 points in the quarter to reach 648. Also in the fourth quarter, the average monthly payment for a new vehicle hit $482 — its highest level on record.

Interest rates for new-vehicle loans crept up in Q4 2014 to 4.56% and loan terms for new and used vehicles increased from a year ago to reach 66 months and 62 months, respectively. Captives were the only lender type to see an increase in market share year over year.

Experian’s quarterly State of the Automotive Finance Market report leverages information from its AutoCount database, which enables insights into the automotive-lending market by geography, credit score and vehicle registrations, among other factors.

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New Study Casts Doubt on Latest CFPB Allegations against Automaker Finance Arms


WASHINGTON – A new study by the research firm Charles River Associates (CRA) casts doubts on recent allegations made by the Consumer Financial Protection Bureau (CFPB) against Toyota Motor Credit Corp. and American Honda Finance Corp. concerning disparate impact in the pricing of auto loans, reported the NADA.

Among the CRA study’s key findings was that, when measuring whether such unintentional discrimination has occurred, the CFPB overestimates the number of minority consumers by as much as 41 percent and the pricing differences between minority and non-minority consumers by as much as 87 percent.

CRA noted that several factors (which appear to be completely ignored by the CFPB) further account for pricing differences which are completely unrelated to a consumer’s background.

CRA also noted that while the CFPB’s own study into its testing methodology reveals a significant overestimation of minority populations, the CFPB still does not explain whether or how it corrects for this flaw. Such failings can produce significant distortions and inaccuracies in the CFPB testing results, and should be fully explained by the CFPB before it relies upon them to support an allegation of discrimination.

The study examined the accuracy and reliability of the method used by the CFPB to test for unintentional disparate impact discrimination in an auto lender’s portfolio. After examining 8.2 million auto finance contracts, CRA concluded in its comprehensive report that the CFPB’s testing method is “subject to significant bias and estimation error.”

The CRA study was commissioned by the American Financial Services Association and released on November 19. The allegations made against the automakers’ captive finance companies were publically disclosed on November 25 and December 2, respectively.

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