SubPrime Auto Finance News May/June 2017 : Page 1
Auto Finance News May + June 2017 | Volume 12 | No. 3 Annual subprime ABS performance dips for 4th straight year 4 ▼ ▼ Agency update CFPB remains active as lawmakers seek major changes CARY, N.C. — As steam builds on Cap-itol Hill to modify — and perhaps even eliminate the Consumer Financial Protec-tion Bureau — the agency remains quite ac-tive even as the Trump administration pass-es the noteworthy 100-day threshold at the White House. In relation to auto nance, rst the CFPB led a lawsuit in a federal district court in April against the debt collection law rm Weltman, Weinberg & Reis. e CFPB con-tends the rm has been falsely represent-ing in millions of collection letters sent to CORDRAY continued on page 10 Recapping crucial debt collection case before Supreme Court Commentary: With fraud increasing, revisit your red ﬂ ags program Commentary: Is the price right on that vehicle? 6 ▼ Maureen Ohlhausen Image by Gage Skidmore Millennials and their focus on payments By Nick Zulovich, Senior Editor ATLANTA and NEW YORK — Cox Automotive vice president of research and market intelligence Isabelle Helms looked to give auto nance providers insight into how to tackle the challenges presented by millennials: the o en-discussed demo-graphic that’s becoming one of the larg-est potential vehicle-buying segments out there today. During a keynote presentation at the annual event earlier this year, hosted by the Consumer Bankers Association, Helms touched on why millennials are di erent. “Given the time when millennials start-ed to consider buying cars, given their past and some of the challenges they have faced, given the recession we faced in 2008 and 2009, they have a very di erent mind-set when it comes to how they enter the car shopping process,” Helms said during a phone conversation with SubPrime Auto Finance News . “With this crew, a signi cant amount begin with a budget in mind, which is dif-ferent than what we see for older genera-tions,” she continued. According to Cox Automotive, Helms noted that 83 percent of millennials say an a ordable monthly payment is most MILLENNIALS continued on page 3 8 12 ▼ ▼ 6 FTC initiatives meant to eliminate wasteful regulations WASHINGTON, D.C. — Along with planning a workshop to examine -nancial issues and scams that can a ect military consumers, the Federal Trade Commission said in April it is moving “aggressively” to implement presidential directives aimed at eliminating wasteful, unnecessary regulations and processes. Acting chairman Maureen Ohlhau-sen acknowledged excessive regulation and bureaucracy can create signi -cant burdens on the public, while di-verting scarce resources from the OHLHAUSEN continued on page 13 CFPB & industry experts consider potential of alternative data 18 Richard Cordray, CFPB director Cherokee Media Group | 301 Cascade Pointe Lane | Cary, NC 27513 E. GREENVILLE, PA US POSTAGE PAID PRST STD Permit No. 555
CFPB remains active as lawmakers seek major changes
CARY, N.C. — As steam builds on Capitol Hill to modify — and perhaps even eliminate the Consumer Financial Protection Bureau — the agency remains quite active even as the Trump administration passes the noteworthy 100-day threshold at the White House.
In relation to auto finance, first the CFPB filed a lawsuit in a federal district court in April against the debt collection law firm Weltman, Weinberg & Reis. The CFPB contends the firm has been falsely representing in millions of collection letters sent to consumers that attorneys were involved in collecting the debt, allegations the firm fervently denies.
Then later in the month, the bureau said that Security National Automotive Acceptance Company (SNAAC) violated a consent order from 2015, demanding that the finance company make good on the redress it owes to consumers and pay an additional $1.25 million penalty.
“This company violated a bureau order when it failed to get money back to service-members it had hounded with illegal debt collection tactics,” CFPB director Richard Cordray said. “We are making sure this company finally rights its wrongs.”
SNAAC, based in Mason, Ohio, is an auto finance company that operates in more than two dozen states and specializes in financing to service members, primarily to buy used vehicles.
The company shared a statement with SubPrime Auto Finance News, stating that “the settlement resolves a disagreement between SNAAC and the CFPB over the interpretation of part of a consent order.”
The company continued, “SNAAC agreed to this settlement to close this matter and move forward in serving customers in the respectful, honorable manner that has been the company’s tradition.”
SNAAC pointed out that the CFPB acknowledges in the settlement agreement that “SNAAC has consented” to the order “without admitting” to its findings. The original consent order covered approximately 2,200 of the more than 83,000 accounts serviced by SNAAC between 2011 and 2015.
“At issue in this disagreement was the application of credits provided to a fraction of those accounts that had already benefited from a settlement balance for substantially less than was owed,” SNAAC said.
“Although SNAAC disagreed with the CFPB’s interpretation of the 2015 consent order, the company offered to pay all the disputed amounts in order to move forward,” the company continued. “The CFPB declined the offer and began an inquiry. SNAAC fully cooperated and responded quickly to all requests for data, reports and testimony.”
Meanwhile, Weltman, Weinberg & Reis issued what it called “a clear message” in response to the lawsuit filed against by the CFPB. The bureau believes the law firm made statements on collection calls and sent collection letters creating the false impression that attorneys had meaningfully reviewed the consumer’s file, when no such review has occurred.
Th e CFPB is seeking to stop the unlawful practices and recoup compensation for consumers who have been harmed.
“Debt collectors who misrepresent that a lawyer was involved in reviewing a consumer’s account are implying a level of authority and professional judgement that is just not true,” said CFPB director Richard Cordray.
“We fundamentally disagree with the CF-PB’s allegations and believe that this lawsuit is the result of our firm’s refusal to be strong armed into a consent order,” managing partner Scott Weltman said in a news release. “We are a law firm that is legally allowed, under federal and state law, to provide collection and legal services. We are being truthful with consumers and factually accurate when we use our name and our company’s letterhead for proper debt collection activity.
“WWR has taken every reasonable step to ensure that it collects on consumer debts in compliance with those statutes and to ensure that every statement made to consumers is accurate and not misleading. I’d also like to emphasize that the CFPB’s two-and-a-half-year investigation into our firm did not uncover a single instance of consumer harm,” Weltman continued.
The firm said it cooperated fully with the CFPB since it initiated its civil investigative demand (CID) in September 2014, producing hundreds of thousands of pages of documents and more than 1 million collection phone call recordings, and submitting to two investigational hearings. Weltman, Weinberg & Reis insisted these actions were done at significant cost to the firm, but with the goal of proving to federal regulators that its attention to compliance and its by-the-book ethical practice of law is exemplary.
Weltman, Weinberg & Reis acknowledged that it is not unusual for any large entity in the financial services industry to receive a CID from the CFPB. The firm, which has 65 attorneys and more than 650 employees, represents many of the largest financial institutions in the U.S. in bankruptcy, consumer and commercial collections, litigation, and real estate default matters.
Weltman, Weinberg & Reis maintained that it has not been the subject of any other formal government actions or disciplinary reviews.
“The result of the CFPB’s investigation of our law firm is based on its interpretation of the law, and not on any actual violation of federal or state laws or regulations as they are written today,” Weltman said. “We will continue to vigorously defend WWR’s honest, ethical and compliant collection practices, and we look forward to our day in court.”
No matter what operation the CFPB might be investigating, how the bureau conducts its business might be changing dramatically.
Last summer, Rep. Jeb Hensarling, the Texas Republican who also is the U.S. House Financial Services Committee chairman, introduced a plan he described as a way to replace the Dodd-Frank Act and promote economic growth.
This spring, the outspoken critic of the Consumer Financial Protection Bureau is circulating an update to his proposal, which includes renaming the bureau as the Consumer Financial Opportunity Agency.
Among the eight pages of modifications now being dubbed the Financial CHOICE Act 2.0, the American Financial Services Association highlighted some of the most note-worthy, including:
Allowing the sole director to be removed at will by the president
Removing the bureau’s supervisory authority
Limiting the CFPB’s enforcement authority to enumerated statutes
Removing its unfair, deceptive, and abusive acts or practices (UDAAP) authority
Repealing mandatory advisory boards and market monitoring authority
“Ending the bureaucratic nightmare that is Dodd-Frank and replacing it with the simpler capital rules of the Financial CHOICE Act is imperative. America has struggled for too long,” Hensarling said.
As likely expected, the ranking member of the Financial Services Committee staunchly pushed back against Hensarling's latest proposal. Rep. Maxine Waters, a California Democrat, outlined 11 different qualms she had with the Financial CHOICE Act 2.0, including repeal of the Volcker Rule, among other objections.
“The so-called Financial Choice Act is a piece of legislation that will essentially kill the most important aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was designed to prevent another financial crisis. Republicans and Donald Trump have once again prioritized the needs of Wall Street over the needs of hard-working Americans, with a proposal that would take away much-needed protections and put our economic security at risk,” Waters said.
“Simply put, the Wrong Choice Act bows down shamefully to Wall Street’s worst impulses, and would lead us back down the road to economic catastrophe,” she continued.
“The new version, which is even worse than chairman Hensarling’s first draft, cannot be allowed to become law. There is too much at stake for consumers and for our economy at large,” Waters went on to say.
Read the full article at http://digital.subprimenews.com/article/Agency+update/2787027/408697/article.html.
6 FTC initiatives meant to eliminate wasteful regulations
WASHINGTON, D.C. — Along with planning a workshop to examine financial issues and scams that can affect military consumers, the Federal Trade Commission said in April it is moving “aggressively” to implement presidential directives aimed at eliminating wasteful, unnecessary regulations and processes.
Acting chairman Maureen Ohlhausen acknowledged excessive regulation and bureaucracy can create significant burdens on the public, while diverting scarce resources from the agency’s core mission to protect consumers and promote competition.
“I welcomed the president’s directive, and we’re already working hard to achieve it,” Ohlhausen said. “The FTC will continue to pursue the right answer for consumers, but we will work hard to get there as efficiently as we can.
“We are focusing our resources where they will do the most good for the public and eliminating wasteful, legacy regulations and processes that have outlived their usefulness. American taxpayers deserve and expect nothing less from us,” she continued.
Though only in the early days of the new administration, the FTC highlighted that the following initiatives are already underway:
New groups within the Bureau of Competition and the Bureau of Consumer Protection are working to streamline demands for information in investigations to eliminate unnecessary costs to companies and individuals who receive them.
Both enforcement Bureaus are reviewing their dockets and closing older investigations, where appropriate.
The entire agency continues to work to identify unnecessary regulations that are no longer in the public interest.
The Bureau of Consumer Protection is actively reviewing closed data security investigations to extract key lessons for improved guidance and transparency.
The Bureaus of Consumer Protection and Economics are working together to integrate economic expertise even earlier in FTC investigations to better inform agency decisions about the consumer welfare effects of enforcement actions.
Because the agency said great ideas often come from within, Ohlhausen established a new capability within her office to collect and review ideas on process stream-lining and operational efficiency opportunities from across the agency.
These initiatives are only the first steps, according to Ohlhausen, who added, “improving efficiency and productivity never stops in the private sector, government should operate no differently.
“I intend to keep focused on this issue, working collaboratively with career staff and agency leadership to identify and implement further streamlining and process improvements,” she went on to say.
The FTC also announced that it is hosting a workshop in San Antonio on July 19 to examine financial issues and scams that can affect military consumers, including active duty service members in all branches and veterans.
Officials indicated the workshop also will mention FTC resources available to military consumer advocates and representatives on financial readiness and fraud prevention, including the FTC’s Military Consumer Toolkit, available at Military.Consumer.gov. The toolkit can allow personal financial managers, counselors and others in the military community to share practical financial readiness tips and can be individually customized and easily shared on social media.
“Servicemembers and veterans have made great sacrifices to serve our country,” Ohlhausen said. “Protecting military consumers through law enforcement and education is a top priority of the commission.”
The FTC’s Military Consumer Financial Workshop: Protecting Those Who Protect Our Nation will bring together military consumer advocates, consumer groups, government representatives (local, state, and federal), military legal services and legal clinics (including those at universities), all service branches, and industry representatives.
Topics of discussion at the daylong event include:
Auto purchase, financing and leasing
Student and other lending, including installment credit practices
Information security issues
Financial literacy and capability, including identity theft and financial resources
Millennials and their focus on payments
ATLANTA and NEW YORK — Cox Automotive vice president of research and market intelligence Isabelle Helms looked to give auto finance providers insight into how to tackle the challenges presented by millennials: the oft en-discussed demographic that’s becoming one of the largest potential vehicle-buying segments out there today.
During a keynote presentation at the annual event earlier this year, hosted by the Consumer Bankers Association, Helms touched on why millennials are different.
“Given the time when millennials started to consider buying cars, given their past and some of the challenges they have faced, given the recession we faced in 2008 and 2009, they have a very different mindset when it comes to how they enter the car shopping process,” Helms said during a phone conversation with SubPrime Auto Finance News.
“With this crew, a significant amount begin with a budget in mind, which is different than what we see for older generations,” she continued.
According to Cox Automotive, Helms noted that 83 percent of millennials say an affordable monthly payment is most important when evaluating their financing options. She described the ramifications that’s resulted in that factor being so crucial to consummating a vehicle delivery.
“What that’s translated into for the industry, quite frankly, is these long terms,” Helms said. “They’re very comfortable financing a car for 60 or 72-plus months so long as the monthly payment looks right. They don’t give too much thought to how long they’ll be upside down on the vehicle. They just simply don’t.
“That is one key thing for the financial community that’s targeting this market to think about. (Millennials) want to hear about monthly payment. They’re not so interested in total cost of ownership. That’s another key difference between the generations,” Helms went on to say.
That emphasis on monthly payment is creating another difficult situation for finance companies to handle.
Moody’s sees consumers on ‘trade-in treadmill’
In a new report released in late March, Moody’s Investors Service explained what likely might be happening in the war rooms at auto finance companies nowadays.
Financing providers are increasingly faced with the choice of taking on greater risk by rolling negative equity at trade-in into the next vehicle loan. The credit rating agency believes finance companies are increasingly accepting this choice, resulting in mounting negative equity with successive new-car purchases and growing credit risk.
“Now that new-vehicle sales have plateaued, the competition for remaining loan supply will intensify, driving increased cred-it risk for auto lenders,” according to Jason Grohotolski, a Moody’s vice president and senior credit officer.
Moody’s pointed out that the need for auto finance companies to be more accommodative to sustain or increase origination volumes is compounding credit risk on their balance sheets at a time when the average dollar amount of negative equity at trade-in is at record levels.
According to Edmunds data, an estimated 32 percent of all trade-ins toward the purchase of a new model through the first three quarters of 2016 were underwater. This is the highest rate on record, and it’s up from 30 percent of all trade-ins toward new-vehicle purchases from January to September of last year. These “upside down” shoppers had an average of $4,832 of negative equity at the time of trade-in, also a record.
The phenomenon of upside down trade-ins is not limited to new-model purchases. According to Edmunds’ Q3 Used Vehicle Market Report, a record 25 percent of all trade-ins toward a used-car purchase in the third quarter had negative equity. These shoppers had an average of $3,635 of negative equity at the time of trade-in, also a Q3 record in the used market.
“It’s curious to see just how many of to-day’s car shoppers are undeterred by how much they owe on their trade-ins,” Edmunds senior analyst Ivan Drury said. “With today’s strong economic conditions at their back, these shoppers are willing to absorb a significant financial hit to get into a newer vehicle.”
Moody’s also mentioned that finance companies also have accommodated borrowers by extending original loan terms, slowing principal amortization for the sector at large.
“As a result, auto lenders increase the collateral deficiencies in their portfolios, and thereby increase loan-loss severities, upping the pressure on their already thin profitability,” Moody’s said in the report, titled “Auto Finance — United States: Credit Risk Increases for Lenders, with Negative Equity at an All-Time High”.
The report goes on to note that an accommodative financing environment has allowed vehicle buyers to purchase a new model while simultaneously rolling negative equity from a prior loan balance into a new installment contract. Grohotolski explained this pattern is achieved with longer loan terms, higher loan to values and higher interest rates, which creates a “trade-in treadmill” where vehicle buyers are in a cycle of regularly renewing their loans at increased negative equity at trade-in.
Therefore, each successive vehicle installment contract is riskier, according to Grohotolski.
“Consumers will have to get off the treadmill, and the industries’ response will help dictate how painful it is,” Grohotolski said.
What ﬁnance providers and dealers can do
With millennials constituting such a large portion of potential buyers, dealers and finance companies certainly cannot ignore them. Helms offered some recommendations; some of which were received with some apprehension by the provider community.
Helms shared Cox Automotive data that indicated millennials spend about 17 hours shopping for a vehicle and evaluating options, with more than 60 percent of that time being spent online. Then, they roughly spend about three hours at the dealership finalizing the contract and delivery.
“While they have very high expectations for the dealership experience, they leave far more disappointed than older generations,” Helms said. “If you think about the experiences they’ve had so far in their lives, when it comes to purchasing major ticket items, and for them it’s probably technology, think about Amazon or the Apple Store and how easy and pressure-less these environments are. Their expectations at the dealership are very much the same.
“There’s a lot of work that dealers and lenders have to do,” she added.
And one of the most difficult segments occurs in the F&I office, according to Helms, who said, “that is the low point in the emotional journey.” She recommended the dealers and finance companies work on solutions so more information about what’s pitched in the F&I office is available online, especially since so many millennials might be under water.
“They turned down GAP insurance be-cause they didn’t know what it was and be-cause they were fearful the dealer was trying to sell them something they didn’t need,” Helms said while referencing an example of a millennial stretching terms to 72 months to compensate for negative equity.
“Had that consumer had the opportunity to do their research in advance of the dealership visit and learn about the benefits of GAP insurance, they probably would have been far more likely to purchase it,” she continued.
“If you present these options to consumers online, they’re more likely to purchase them,” Helms went on to say. “It created a little apprehension in the room because when you talk about the F&I office, that’s usually a closed environment that you only get visibility into when you visit the dealership.
“One of the things we found through our research is if you educate the consumer about what you might be pitching them in the F&I office they’re far more likely to buy the things they may need,” she reiterated.