SubPrime Auto Finance News January/February 2015 : Page 1
Auto Finance News January + February 2015 | Volume 10 | No. 1 Graduates & Instructor Reﬂ ect on First Year of NAF Association Compliance Program 4 ▼ ▼ ▼ Experts Offer Projections of What Might Be Ahead in 2015 Breaking Down CFPB’s Enforcement ‘Chokepoint’ Strategies 6 12 17 ▼ ▼ By Nick Zulovich, Editor Regulatory Developments Leave Industry Bracing for What’s Next By Nick Zulovich, Editor CARY, N.C. — is past fall when the Consumer Financial Protection Bureau con-ducted a eld hearing focused on auto nanc-ing, Bill Himpler closed his prepared remarks with a statement that might have summarized the thinking of many industry players. “Above all, the vehicle nance industry wants to comply with the law and the reg-ulations that are set forth by the bureau, as well as continue to play a positive role in the American consumer experience,” said Him-pler, who is executive vice president of the American Financial Services Association. e volume of inquiries as well as penal-ties that arrived following that declaration is leaving the industry bracing for what might be an active beginning to the regulatory en-vironment in 2015. 24% of Millennials Believe Student Loans Will Be Forgiven Payments: What’s It Really Costing You to Accept Money? Black Book Pushes LTVs as Key Indicator of Loss Severity 22 CARY, N.C. — TransUnion contends the sub-prime share of outstanding auto loan balances previ-ously peaked in 2009 at just above 22 percent of the entire market. While delinquency levels for subprime bor-rowers have grown from 4.2 percent in Q3 of 2012 to 4.5 percent in Q3 of 2013 to 5.3 percent in Q3 of 2014, TransUnion pointed out the con-tribution of this segment to the overall delinquen-cy rate has been muted because their share has re-mained between 14 percent and 15 percent during this timeframe. “ ere certainly appears to be room for growth in the subprime sector,” said Peter Turek, automo-tive vice president in TransUnion’s nancial services business unit. “ ere’s certainly more competition. ere’s more liquidity in the market. Overall, the loans are performing. “Will it get that high again? I don’t know if we have that particular crystal ball, but there is certainly room for continued growth in the subprime sector,” Turek told SubPrime Auto Finance News . No matter if it’s subprime or not, consumers are going to continue to ramp up their auto loan debt in 2015 while delinquencies are projected to tick high-er, too. at covers the two main segments of Tran-sUnion’s annual auto loan forecast that calls for auto loan debt to rise to $18,244 by the end of 2015. at forecast would mark 19 consecutive quarters of in-creases since Q1 of 2011, when auto loan debt per borrower stood at $14,954. PROJECTIONS continued on page 3 CFPB Allegations Against American Honda Finance & Toyota Motor Credit First, the Consumer Financial Protec-tion Bureau and the U.S. Department of Jus-tice delivered notices to Toyota Motor Cred-it Corp., alleging discriminatory practices regarding vehicle nancing. en, American Honda Finance re-vealed it also received the same allegations from these federal regulators. REGULATORY continued on page 16 In association with the National Alliance of Buy-Here Pay-Here Dealers Learn more at bhphreport.com
Experts Offer Projections of What Might Be Ahead in 2015
CARY, N.C. — TransUnion contends the subprime share of outstanding auto loan balances previously peaked in 2009 at just above 22 percent of the entire market.
While delinquency levels for subprime borrowers have grown from 4.2 percent in Q3 of 2012 to 4.5 percent in Q3 of 2013 to 5.3 percent in Q3 of 2014, TransUnion pointed out the contribution of this segment to the overall delinquency rate has been muted because their share has remained between 14 percent and 15 percent during this timeframe.
“There certainly appears to be room for growth in the subprime sector,” said Peter Turek, automotive vice president in TransUnion’s financial services business unit. “There’s certainly more competition. There’s more liquidity in the market. Overall, the loans are performing.
“Will it get that high again? I don’t know if we have that particular crystal ball, but there is certainly room for continued growth in the subprime sector,” Turek told SubPrime Auto Finance News.
No matter if it’s subprime or not, consumers are going to continue to ramp up their auto loan debt in 2015 while delinquencies are projected to tick higher, too. That covers the two main segments of TransUnion’s annual auto loan forecast that calls for auto loan debt to rise to $18,244 by the end of 2015. That forecast would mark 19 consecutive quarters of increases since Q1 of 2011, when auto loan debt per borrower stood at $14,954.
The TransUnion forecast also calls for the national auto loan delinquency rate — the ratio of borrowers 60 or more days past due — to end 2014 at 1.20 percent, and increase slightly to 1.27 percent at the close of 2015.
“We expect the auto loan market to continue to perform exceptionally well in 2015, with more sales leading to continued increases in auto loan debt per borrower as the national portfolio gets younger on average,” Turek said.
“We anticipate the economy to continue to improve next year, with a better employment picture helping the auto industry,” Turek continued. “While the auto loan delinquency rate has slowly risen to a point where it will be above 2010 levels, we are still far off the peaks observed in 2008 and 2009 when delinquencies were more than 30 basis points higher.”
Since 2007, TransUnion indicated the auto loan delinquency rate has been as low as 0.86 percent in Q2 of 2012 and as high as 1.59 percent in Q4 of 2008.
On average, analysts determined the delinquency rate during the fourth quarter between 2007 and 2013 was 1.29 percent.
Looking further back, TransUnion’s data showed the number of subprime borrower accounts are 1.6 million fewer in the third quarter of 2014 than the same quarter seven years ago before the recession.
Meanwhile, Turek emphasized the number of auto loan accounts rose approximately 4 million in that same timeframe.
“The auto loan market has been especially strong for lenders, as much of the growth observed in the last few years has come from prime or better risk tiers,” Turek said.
Looking at the auto finance market in general, Trurek acknowledged, “It’s really set up to have a really strong year for both new and used sales. If you embrace that and understand that a significant portion is going to turn into auto financing, then you would expect that originations will continue to follow right along that path that we’ve experienced over the past several years.”
ABS Market Expectations
Moody’s Investors Service explained in its forecast that loosening underwriting standards and a greater proportion of borrowers with weaker credit characteristics will cause the quality of U.S. auto loan ABS pools to deteriorate modestly in 2015.
Moody explained in its report titled, “2015 Outlook – U.S. Auto ABS: Weaker Credit Quality of New Loan Pools Will Reflect Continued Easing of Underwriting Criteria,” that the improving economy and increasing competition among auto finance companies prompted them to ease the strict underwriting criteria adopted in the wake of the financial crisis.
“Our expectations for cumulative net losses for 2015 transactions will be slightly higher than they were for pools backing transactions issued from 2010 to 2014, but still relatively low compared with losses from pools before the financial crisis,” said Corey Henry, a Moody’s vice president and senior analyst.
Henry indicated economic improvements will help maintain the strong performance of the collateral backing outstanding auto loan ABS in 2015, as will the presence of strong structural features in new and outstanding transactions that protect bondholders.
However, Moody’s acknowledged that continuing regulatory scrutiny could force subprime auto finance to abandon the aggressive collections practices that have helped maximize collections on vehicle loans, causing a short-term decline in credit performance.
Henry pointed out that regulators are levying fines, which could precipitate some finance companies into bankruptcy, requiring other institutions to change their payment collections practices, which could result in fewer recoveries on delinquent loans.
“However, regulatory scrutiny could boost performance over the long term if it curbs unethical lending practices and increases transparency and reporting,” Henry said.
“Nevertheless, operational risks will persist in outstanding auto loan ABS from small independent finance companies that act as lender and servicer,” he went on to say.
4 Other Predictions For 2015
EFG Companies offered four predictions and recommendations for the automotive lending and F&I market, formed through thousands of conversations with the nation’s leading automotive financial and insurance experts.
Steve Klees, senior vice president of specialty channels for EFG, indicated these insights reflect optimism for 2015. However, Klees acknowledged the year will not be without challenges.
Here is the rundown from EFG:
■ Leasing Penetration Slightly Down: EFG forecasted penetration of leasing for new vehicles will be down slightly, especially toward the third or fourth quarter of next year. Meanwhile, a significant volume of vehicles are coming off lease.
“As the supply of late-model used cars comes into the market, used values will go down, pushing residual values down and making leasing not as attractive financially as the last three years,” Klees said.
■ Flat Compensation Programs for Dealers Will Increase: Feeling the pressure from the Consumer Financial Protection Bureau and the Federal Trade Commission, EFG projected that larger-volume indirect-lending banks will migrate to “flat” compensation programs for dealers.
Klees explained this transition will offset potential loan volume decreases with attractive incentives for floor plan and/or capital/commercial loans tied into a production agreement for indirect loan volume.
“For example, lenders could use this type of model to incentivize dealers to present their loans: 2 percent of unpaid balance amount financed and 50 basis point reduction on floor plan if annual loan volume stays at current threshold,” he said.
■ Certified Pre-Owned Vehicle Sales Will Be Robust: With the average price of a new model now exceeding $30,000, and plentiful off-lease vehicles back in dealer lots, EFG predicted consumers will look for a new-car experience (warranty/reconditioned vehicles) at a lower price point.
The average vehicle in the driveway is 11 years old, according to IHS Automotive.
“Customers know a 3-year-old car with the depreciation already reduced is likely to last for at least another seven to eight years,” Klees said. “Lenders should look for captive finance incentives and a potential opportunity for longer CPO warranty terms.”
■ Factory Incentives May Return: If the used-vehicle market takes a dip in price, EFG insisted the average trade-in value will also go down. Klees indicated that development means it will be difficult for consumers to be in an equity position on their trade-in.
“Traditionally, this has been offset with a financial rebate, but this trend all but disappeared during the recession and its recovery,” Klees said. “After four years of robust business growth, manufacturers will feel that the temptation to offer incentives will be too great to resist. If one starts, many will join.
In addition, as Gen Y matures, pays off student debt, and has more income, demand for ‘value cars (high mileage, green, electric, hybrid) will steadily increase,” he continued. “Status and flash will disappear, and the American consumer (just based on sheer numbers) will migrate to more of a European (economic and value-based) mindset.
“Manufacturers have already recognized this and are increasing the number of high value models they carry,” Klees went on to say.
Regulatory Developments Leave Industry Bracing for What’s Next
CARY, N.C. — This past fall when the Consumer Financial Protection Bureau conducted a field hearing focused on auto financing, Bill Himpler closed his prepared remarks with a statement that might have summarized the thinking of many industry players.
“Above all, the vehicle finance industry wants to comply with the law and the regulations that are set forth by the bureau, as well as continue to play a positive role in the American consumer experience,” said Himpler, who is executive vice president of the American Financial Services Association.
The volume of inquiries as well as penalties that arrived following that declaration is leaving the industry bracing for what might be an active beginning to the regulatory environment in 2015.
CFPB Allegations Against American Honda Finance & Toyota Motor Credit
First, the Consumer Financial Protection Bureau and the U.S. Department of Justice delivered notices to Toyota Motor Credit Corp., alleging discriminatory practices regarding vehicle financing.
Then, American Honda Finance revealed it also received the same allegations from these federal regulators.
In documents filed with the Securities and Exchange Commission in early December, officials from the CFPB and DOJ sent a letter to Honda’s captive finance company saying they have authorized enforcement actions alleging discrimination in automobile loan pricing to certain borrowers by dealers and alleging the loan pricing disparities were caused by AHFC’s business practices related to dealers.
AHFC officials added that they also have been informed that the agencies may defer pursuit of this litigation if the captive “works with the agencies to seek a voluntary resolution to these allegations.
“The agencies have informed AHFC that they are seeking monetary relief and implementation of changes to AHFC’s pricing practices and policies, which changes could affect AHFC’s business,” the company said in its SEC filing signed by Paul Honda, the captive’s vice president and assistant secretary.
“AHFC intends to continue to cooperate with the agencies to find a mutually agreeable resolution,” Honda added.
Furthermore, Toyota Motor Credit acknowledged in documents filed with the SEC that the CFPB and Department of Justice sent a letter to the captive finance company alleging discriminatory practices regarding vehicle financing.
The situation first developed earlier last year when these agencies requested that Toyota Motor Credit provide certain information about “purchases of auto finance contracts from dealers and about related discretionary pricing practices.”
Then in the fourth quarter, the captive indicated it received a letter alleging that such practices resulted in discriminatory pricing of loans to “certain borrowers in contravention of applicable laws.”
Toyota Motor Credit also shared in the SEC filing that the letter informed the company that the CFPB and DOJ are prepared to initiate an enforcement proceeding unless “we agree to a voluntary resolution satisfactory to them,” according to document signed by Christopher Ballinger, the company’s senior vice president and chief financial officer.
“The agencies have indicated that they are seeking monetary relief and implementation of changes to our discretionary pricing practices and policies, which changes could adversely affect our business,” Ballinger said. “We intend to continue to cooperate with the agencies to achieve a mutually satisfactory resolution.”
DOJ Subpoenas Ally & Credit Acceptance
As the company exited the Troubled Asset Relief Program (TARP) upon settlement of the sale of stock by the U.S. Treasury in December, Ally Financial revealed in a filing with the Securities and Exchange Commission that it received a subpoena from the Justice Department requesting information in connection with its investigation related to subprime automotive finance and related securitization activities.
“Other financial institutions have disclosed receiving similar requests earlier this year,” Ally said in the filing signed by David DeBrunner, the company’s vice president, chief accounting officer and controller, in reference to acknowledgements by finance companies such as Credit Acceptance.
Meanwhile, Credit Acceptance Corp. posted a filing with the SEC in December stating the company that specializes in subprime auto financing received a civil investigative subpoena from the Justice Department pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989.
The subpoena is directing Credit Acceptance to produce certain documents relating to subprime automotive finance and related securitization activities.
In the same SEC filing, Credit Acceptance also revealed that it received a civil investigative demand from the Office of the Attorney General of the Commonwealth of Massachusetts.
The CID that arrived earlier in December is relating to the origination and collection of non-prime auto loans in Massachusetts, according to the filing.
“The company intends to cooperate with these inquiries,” Credit Acceptance said.
NY Regulators Shut Down Condor Capital
Condor Capital is no longer originating and servicing vehicle installment contracts for dealers who cater to subprime customers in New York or more than two dozen other states.
Just before the holiday season, the New York Department of Financial Services submitted a final consent judgment to be approved by the Empire State’s court system to settle the department’s lawsuit against Condor Capital that first sprouted last spring.
New York Superintendent of Financial Services Benjamin Lawsky sent the order against Condor, a subprime auto finance company based in Long Island, and its sole shareholder, Stephen Baron.
Among other violations, Lawsky claimed the defendants deceptively retained millions of dollars owed to vulnerable borrowers and overcharged them for interest in violation of the Truth in Lending Act.
Under the terms of the final consent judgment, Condor and Baron will make full restitution plus 9 percent interest to all aggrieved customers nationwide, which officials estimated to be $8 to $9 million.
Furthermore, Baron and Condor Capital are ordered to pay a $3 million penalty and admit violations of New York and federal law.
Lawsky highlighted the lawsuit against Condor and Baron was the first legal action initiated by a state regulator under section 1042 of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act, which empowers state regulators to bring civil actions in federal court for violations of Dodd-Frank’s consumer protection requirements.
“We will not tolerate companies that abuse New Yorkers and other customers — particularly vulnerable subprime borrowers who can least afford it,” Lawsky said.
“This case demonstrates that the Dodd-Frank Act provides a powerful new tool for state regulators to pursue wrongdoing and obtain restitution for consumers who were abused,” he continued.
“We hope other regulators across the country will consider taking similar actions when warranted,” Lawsky went on to say.
FTC Says 2 Dealer Groups Broke Consent Orders
The Federal Trade Commission penalized a pair of dealership groups for violations of a previous consent order regarding advertising the cost of buying or leasing a vehicle.
Part of the consent orders established in March 2012 indicated FTC officials could inspect any advertising material distributed by Billion Auto — a chain of 20 family-owned dealerships in Iowa, Montana and South Dakota, and a family-controlled advertising company, Nichols Media — as well as Ramey Motors and three affiliated dealerships in Virginia and West Virginia.
In December, the agency announced that Billion Auto and Ramey Motors violated of those FTC administrative orders, which prohibit the dealerships from “deceptively” marketing elements to making a vehicle purchase such as down payments and annual percentage rates.
FTC officials said Billion Auto and Nichols Media have agreed to settle charges that they violated a 2012 FTC administrative order. That order prohibits Billion Auto, and any companies in active participation with it, from misrepresenting material costs and terms of vehicle finance and lease offers and requires specific disclosures, mandated by the Truth in Lending Act (TILA) and Regulation Z, and the Consumer Leasing Act (CLA) and Regulation M.
The Billion Auto defendants agreed to pay $360,000 in civil penalties.
According to the complaint against Billion and Nichols, the dealerships and advertising company violated the 2012 FTC administrative order by frequently focusing on only a few attractive terms in their ads while hiding others in fine print, through distracting visuals, or with rapid-fire audio delivery.
In a separate action seeking civil penalties, the FTC charged Ramey Motors with violating a similar 2012 FTC administrative order.
Among other things, the FTC contends Ramey Motors’ ads allegedly misrepresented the costs of financing or leasing a vehicle by concealing important terms of the offer, such as a requirement to make a substantial down payment.
The complaint also charges Ramey Motors with failing to make credit disclosures clearly and conspicuously, as required by the TILA. The FTC also alleges that the dealer group failed to retain and produce appropriate records to the commission to substantiate its offers.
Ramey Motors and its affiliates are subject to $16,000 in civil penalties for each alleged violation.