Tag Archive | "Auto Finance"

Auto Loan Balances Totaled $968 Billion in Q3

SCHAUMBURG, Ill. — Experian Automotive reported today that outstanding automotive loan balances totaled $968 billion in the third quarter. That’s up $98 million from a year ago and up more than 53% from the post-recession low in 2010.

The firm noted that while outstanding balances have grown substantially, borrowers continue to keep the market stable by making on time payments. It reported that 30-day delinquencies dropped from 2.7% in the year-ago period to 2.5%, while 60-day delinquencies fell from 0.74% in the year-ago quarter to 0.73%.

“Continued growth in the automotive finance market is a clear sign of improved consumer confidence over the past few years,” said Melinda Zabritski, Experian’s senior director of automotive finance. “Since bottoming out in the recession, automotive sales have rebounded steadily — a good sign for consumers, vehicle OEMs, lending organizations and the overall economy.

“What’s critical to this success is that consumers stay on top of their payments,” she added. “If they can continue to manage their financial obligations and make timely payments, the automotive industry can continue to flourish and grow for quite some time.”

The report also found that the largest increase in volume of open loans was in the super-prime category, rising 8.3% from the previous year. Subprime and nonprime followed closely, with increases of 7.8% and 7.7%, respectively. The distribution of open loans by risk segment remains relatively unchanged, Zabritski noted, demonstrating that the surge in outstanding automotive financing is driven by consumers across the board, not a specific segment of the market.

Posted in Auto Industry NewsComments (0)

CFPB Considering Ban on Arbitration Clauses

WASHINGTON, D.C. — Today, the Consumer Financial Protection Bureau (CFPB) announced it is considering proposing rules that would ban arbitration clauses in consumer financial services contracts, less than five months after 50 members of Congress urged the bureau to eliminate such clauses.

Describing arbitration clauses as a “free pass” to block consumers from suing in groups to obtain relief, the CFPB said the proposals under consideration would give consumers “their day in court and deter companies from wrongdoings.”

“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” said CFPB Director Richard Cordray in a statement. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”

In its press release announcing its intentions, the bureau cited results of a three-year studyit conducted on pre-dispute arbitration clauses. Released this past March, results showed, among other things, that more than 75% of consumers surveyed did not know whether they were subject to an arbitration clause in their agreements with their financial services providers. The report also concluded that it is common for such clauses to be invoked to block class action lawsuits.

The study fueled more than 50 members of Congress, led by U.S. Sen. Al Franken (D-Minn.) and Rep. Hank Johnson (D-Ga.), to issue a letter to the bureau this past May. It urged the regulator to eliminate arbitration clauses in consumer financial contracts.

“In total, the study conducted by the CFPB at Congress’ request roundly confirms that individuals unknowingly sign away their rights through forced arbitration agreements, which do not reduce consumer costs for financial service,” the letter read, in part. “Moreover, forced arbitration shields corporations from liability for abusive, anti-consumer practices, encouraging even more unscrupulous business conduct at the expense of individuals and law-abiding businesses.

“Based on this substantial bedrock of evidence, we urge the CFPB to move forward quickly to use its authority under the Dodd-Frank Act to issue strong rules to prohibit the use of forced arbitration clauses in financial contracts and give consumers a meaningful choice after disputes arise.”

But not everyone took the study’s findings at face value. In April, Tom Hudson, F&I and Showroom’s legal columnist and Hudson Cook LLP partner, criticized the CFPB’s report for its “gaping holes” — such as failing to address the growing consumer-friendliness of arbitration clauses.

“In fact, it isn’t unusual to see clauses that provide for the payment by the creditor of some or all the costs of arbitration,” Hudson wrote. “Creditors also frequently call attention to the presence of an arbitration agreement by using large type, separately boxing the clause or having it separately signed or initiated. The study offers no insight on whether these best practices might change any of its conclusions.

“There is much to dislike about the CFPB’s work on arbitration,” Hudson added. “You’d think arbitration must have some things to recommend it, since Congress passed the Federal Arbitration Act and nearly all states have enacted laws permitting arbitration. But the bureau seems determined not to see any good in the process.”

The American Financial Services Association also took issue with the bureau’s study and proposals, saying in a statement issued to F&I and Showroom that the bureau has not provided any meaningful link beween arbitration and class action lawsuits. It also noted that academic studies have shown that arbitration cases actually produce more in the way of settlements than class action lawsuits.

“As the CFPB study indirectly points out, class action attorneys are the real winners, raking in excess of $424 million in fees awarded in settlements during the period studied,” the statement read. “The bureau that is entrusted to protect consumers is again making it policy to deprive them of that very protection. In essence, the rules that the bureau is proposing would deprive consumers of a low-cost, lawyer-free dispute resolution system and replace it with an expensive, lengthy, and complex judicial process.”

Included in the bureau’s announcement was an outline of the proposals under consideration. They will be reviewed by a panel of “small industry stakeholders” as the bureau’s first step in its potential rulemaking process. The proposals include a complete elimination of arbitration clauses that block class action lawsuits. The ban would apply to credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans.

Creditors would also have to say explicitly that arbitration clauses found in their agreements do not apply to cases filed as class actions unless and until the class certification is denied by the court or the class claims are dismissed in court. The bureau also wants to require companies that choose to use arbitration clauses for individual disputes to submit to the CFPB the arbitration claims filed and awards issued.

“This will allow the bureau to monitor consumer finance arbitrations to ensure that the process is fair for consumers,” read the CFPB’s press release, which noted that the bureau will seek input from the public, consumer groups, industry and other stakeholders before continuing with its rulemaking process. “The bureau is also considering publishing the claims and awards on its website so the public can monitor them.”

Posted in Auto Industry NewsComments (0)

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.

Posted in ComplianceComments (0)

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.

Posted in Auto Industry NewsComments (0)

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.”

Posted in Auto Industry NewsComments (0)

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.

Posted in Auto Industry NewsComments (0)

Page 5 of 7« First...34567