Auto Loan Pricing Could Lead to Enforcement

by Darren Waggoner

DEC 1, 2014 1:24pm ET

The pricing of auto loans through dealerships by Toyota Motor Credit Corp., the lending arm of Toyota Motors Corp., could lead to an enforcement action from U.S. authorities, the company said.

The possible action could force the company to reimburse borrowers or lead to a fine.
Ally Financial Inc. last December was forced to pay $98 million to resolve similar discriminatory loan pricing charges from the U.S. Department of Justice and the Consumer Financial Protection Bureau.
The Justice Department and CFPB last week sent a letter to Toyota Motor Credit, stating that its auto lending practices "resulted in discriminatory pricing of loans to certain borrowers in contravention of applicable laws," the company said in a filing with the U.S. Securities and Exchange Commission.

The Justice Department and the CFPB are prepared to bring an enforcement action, the filing said, unless Toyota Motor Credit agrees to a resolution with the agencies voluntarily, including possibly changing its loan pricing policies.

Toyota Motor Credit officials said the company would work with the agencies to reach a resolution.

In April, BMO Harris announced that it was switching to a flat-fee pricing structure, in a move that drew praise from the CFPB.
Discretionary markups are just one area in which auto lenders are facing scrutiny from regulators. The Justice Department, the SEC and the New York District Attorney's Office have all opened inquiries related to subprime auto lending.
Fifth Third Bancorp and Honda's finance arm have also disclosed receiving similar requests for information.

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Fitch Expects Subprime ABS Performance to Soften

NOVEMBER 3, 2014BY CODY LYON

Subprime auto ABS losses reached the highest level in four years last month, according to the latest quarterly auto ABS index from Fitch Ratings. The report also said used vehicle values have fallen for five straight months.

Despite the jump over the past quarter, asset performance remains on track within Fitch’s initial forecasts to date. That said, subprime ABS performance will likely be softer moving into late 2014 and early 2015, according to the company.

The report also indicated used vehicle values have fallen for five straight months.

“While still healthy, the wholesale auto market will be pressured from rising volumes into 2015,”said Senior Director Hylton Heard in an email statement.

Recent vintages continued to see YOY increases in losses. Losses on the 2010–2011 vintages are tracking at approximately 9.5% while the 2012–2013 vintages have projections of 10.0%–10.5% to date.

Fitch said recovery rates on subprime securitizations have been softer because of the softening wholesale vehicle market. The ratings agency said it will continue to closely watch collateral trends and wholesale vehicle market conditions in late 2014.

Meanwhile, Fitch noted that Federal bureaus have begun investigations into subprime lenders over concerns over the lending practices of subprime originators. Santander Consumer USA and General Motors Financial received such subpoenas. Nonetheless, Fitch so far believes the regulatory investigations will not negatively impact those company’s outstanding transactions.

Primed and Ready
On the prime side, losses and delinquencies rose in 3Q14, driven by seasonal pressures and shifting collateral trends. But levels observed have been within expectations and remained low relative to historical experience.

The overall climb in delinquencies and losses for U.S. auto ABS during third-quarter 2014 followed the typical fall season patterns, Fitch said, indicating the slowdown will likely to continue this quarter and into next year. Although delinquency and loss levels were higher than a year ago, losses were still well within historical levels and in line with the solid 2005–2006 period.

Lease residuals are also seeing some pressure. Auto lease ABS residual values losses rose in 3Q’14, with some platforms now seeing losses for the first time in several years. Fitch’s RV Index declined to a 2.1% gain through 3Q2014, down from 8.4% through Q2.

Auto lenders are all competing for marketshare as car sales hovered at 16.5 million units. Not surprisingly, that increased market competition is contributing to the recent market volatility.

“With auto lenders jostling for market share, both underwriting and credit quality will suffer if lenders look to expand share and grow their portfolios aggressively,” said Heard.

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SEC Requests Subprime ABS Documents From Ally

OCTOBER 31, 2014BY CODY LYON

Ally Financial Inc. recently received a document request from the U.S. Securities and Exchange Commission in connection with an investigation related to subprime automotive finance and related securitization activities, the company said in 10-Q filing today.

An Ally spokeswoman wouldn’t comment much beyond what was revealed in the filing. “Ally has been requested to provide data and records relating to our auto finance activities and will respond accordingly to the SEC,”  Ally spokeswoman Gina Proia wrote in an email to Auto Finance News.

Since 2013, Ally Financial has issued $6.7 billion in asset-backed securities, according to data from Deutsche Bank Securities Inc.

All SEC investigations are conducted privately, according to the SEC website. Typically, the SEC’s Enforcement Division obtains evidence of possible violations of securities laws from sources including market surveillance activities, investor tips and complaints, other divisions and offices of the SEC, the self-regulatory organizations, and other  securities industry sources and media reports.

This latest move by a regulatory agency comes on the heels of last week’s revelation by General Motors Financial  Co. in a 10-Q that it had been served with “additional investigative subpoenas to produce documents from state attorneys general and other governmental offices relating to our subprime auto finance business and securitization of subprime auto loans.”

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Fico To Release New Scoring Model

September 6, 2014 by

Auto Finance News

Fair Isaac Corp.has announced the newest update to its Fico scoring model, Fico 9, which is slated for release to lenders later this year. The new model gives less weight to medical debt and debts that previously went to collections but have since been paid. This will give lenders a better assessment of consumer risk when extending auto loans, said Anthony Sprauve, a Fico senior consumer credit specialist. “Previously, all collections we
re lumped together, so we didn’t have the ability to analyze medical debt separately than other types of debt,” Sprauve told Auto Finance News. “Now that we can do that, we are able to take a look and see if that is the only negative, and if it is an indication of someone being in trouble.” With the new scoring model, a consumer with a good credit history whose only negative is medical debt collection may see about a 25-point bump in score. “So, certainly, it could push them from one tier of a loan to another,” he said. Fico 9, the company’s first update since 2008, is currently being evaluated by the credit bureaus.

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Dealer Friends,
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There’s No ‘Ticking Time Bomb’ in Auto Finance

August 8, 2014 by JJ Hornblass

Some have suggested recently that auto finance underwriting is going so sideways that the sector is standing at the very same precipice of financial calamity as did the mortgage industry in 2006. Or, as a hyped Automotive News implied Tuesday, that subprime auto finance, in particular, might be “a ticking time bomb for the U.S. economy.”
Simply put, there is no evidence of this today.
We are in the boom phase of the auto finance credit cycle. You need look at only one number for proof of that: the seasonally adjusted annual rate of new car sales in America, known in the industry as the SAAR. July saw a SAAR of 16.5 million, which is a strong, pre-crisis level of new car sales.
According to the current forecasts from IHS Automotive, a consultancy that offers one of the more reliable SAAR forecasts, new light-vehicle sales in 2014 are on track to reach 16.24 million units in North America.
The accuracy, or lack thereof, of that 16.24 million forecast is beyond the point. Rather, what is important is recognizing that a SAAR above 16 million would make 2014 a strong one for new-car sales. The auto finance sector roots out of the SAAR. As the SAAR goes, so goes auto finance. Indeed, a review of a sampling of eight auto finance companies’ performance last quarter found stellar performance. The basket of companies — Ford Credit, Ally, Santander, Fifth Third, Wells Fargo, Chase, Credit Acceptance Corp., and U.S. Bancorp — enjoyed an average of more than 2% growth in their portfolios in the quarter and greater than 12% growth rate on a year-over-year basis.
The SAAR tends to correlate to prime auto finance. To gauge the state of subprime lending, it is beneficial to consider the asset-backed securitization market, which finances a good portion of subprime auto lending. Through the first six months of the year, subprime issuance is 15% higher than it was in 2013, with $11.4 billion coming to market by midyear. S&P is projecting $20 billion this year, up from $17.8 billion last year, and $22 billion next year. These are strong numbers.
All this strong performance, however, begs this question: Is all the volume growth coming at the expense of credit performance? Overall, credit performance — and specifically auto loan charge-offs — remains within acceptable bounds. The prime side is still solid. At U.S. Bank, for example, but 0.01% of its prime portfolio of $14.1 billion of auto loans were non-performing last quarter. Not every prime lender posts U.S. Bank-like credit performance, but USB shows just how nominal prime delinquencies and chargeoffs could be.
And on the subprime side? Standard & Poor’s made some waves in the market in June with a report that said subprime auto finance performance was deteriorating. But S&P’s warning deserves a closer inspection. The report stated that the performance of the loans backing subprime auto ABS is weakening. S&P pointed out that annualized net losses on subprime auto loans increased in the first quarter of 2014 to 5.79%, up from 4.16% in the first quarter of 2013.
Is 5.79% a relatively steep increase? Yes. But it pales in comparison to the 9.39% net loss rate in 2009. There is inherent unevenness in credit performance today. A review of individual subprime lenders will find some posting “bad” or “good” results. For some lenders, Exeter is one, credit performance is trending worse than expected, but for others — First Investors is an example — cumulative net losses are better. That’s not a sign of a ticking time bomb, just of a normative market.
This is the first in a series of posts on the state of auto finance today.

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Tools for Helping Consumers with Their Credit Scores

Posted by JJ Hornblass on Jul 30, 2014 in Operations, Sales & Marketing | 0 comments

A borrower’s deal often boils down to her credit score. This matters because lender marketing often hinges on that score, too.
There’s an opportunity for auto lenders to be a more valuable resource to consumers who are seeking to better understand their credit scores and borrowing potential, even though few lenders think about credit score services as a marketing opportunity. VantageScore, the credit scoring company, recently offered a roster of credit score tools for consumers that lenders can use or share with prospective borrowers. Here’s a rundown:

• There are a variety of websites giving away free VantageScore credit scores, including Credit.com, CreditKarma.com, and Quizzle.com. Companies like Mint.com and CreditSesame.com are also giving away commercially available credit scores, such as the Experian National Risk Score and the Equifax Risk Score. A variety of credit card issuers are additionally giving away credit scores. These links can be shared with consumers.
• For those consumers that are mystified by credit scores, there are several free resources chock-full of reliable information about how they’re calculated and why they matter. Reasoncode.org contains a list of factors that impact credit scores, as well as strategies to improve scores. The Credit Score Quiz lets consumers test their knowledge about credit scores, and YourVantageScore.com can help bust some of the common scoring myths.
• Thanks to the Fair Credit Reporting Act, every consumer has the right to claim a free copy of all of his credit reports once every 12 months from the website www.annualcreditreport.com. Again, lenders can generate marketing goodwill by directing consumers to this link, too.

• 

Car Sales Climb, But Will That Continue in a ‘Soft’ Economy?

JULY 11, 2014BY LARISSA PADDEN

Will strong car sales continue?

If this question doesn't keep you up at night, you’re not a true auto finance professional. In a way this is the only question that matters.

The dilemma is this: Yesterday, George Storch, the former Toys “R” Us Inc. chief executive, told CNBC that despite what we might have heard, the economy is in poor shape.

“There’s no doubt the economy is soft,” Storch told CNBC. “I’ve been saying this consistently. The other thing was a silly, silly waste of time: the weather discussion during the first quarter. Go back, the weather is a ridiculous argument that hid the fact that it was weak in the first quarter, too. It’s been weak the whole time. It never got strong. It was weak over Christmas. Weak in the first quarter. Employment picture, taxes, concern over healthcare. It’s not a robust time.”

We are not sure we have heard a stronger, more-succinct condemnation of the economy in recent weeks.

Yet, car sales during the period Storch references have been strong, as evidenced by the car sales numbers this week. Chrysler celebrated sales growth for the 51st straight month. General Motors posted a rise in sales last quarter, despite heavy recalls. How does Storch’s opinion on the overall economy reconcile with the auto industry’s performance?

Two points to consider: 1) The Department of Transportation recently reported that vehicle miles driven rose 1.8% in April as compared with the year-prior period; and 2) IHS Automotive reported in June that cars on the road are on average 11.4 years old, a record. Older cars, driving more miles, could — or maybe should — equal more vehicle sales in the near future.

Will car sales increase despite the economy? Or, will the economy overwhelm these systemic trends related to car usage and age?

Two more questions to keep you up at night.

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New Regulator Addresses Gap in the Market

For dealers offering vehicle finance, 2014 has already proved to be a period of transition due to the change in industry regulator to the Financial Conduct Authority. The FCA’s focus is on consumer protection and transparency.

As well as amending the ways dealers must offer vehicle finance, the FCA has raised the area of guaranteed asset protection (GAP) insurance as part of its first market study. The regulator found that consumers had a poor understanding of GAP policies and product coverage, and didn’t receive value for money, partly because of a lack of competition.

The FCA is therefore proposing a major change to the selling model. The change would mean that the sale of GAP insurance cannot be concluded at point of sale of the vehicle, but only at a later point, and that the consumer must be given information about alternatives if the product is offered at point of sale. There are also plans that would require dealers to publish claims ratios to highlight product value.

―Courtesy Motor Finance

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Student Loan Debt Could Impact Auto Loan Debt Growth

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Kroll Bond Ratings said that growth in the student loan debt market could have future negative impacts on the growth of mortgage debt and auto loan debt. The information came in Kroll’s first quarter 2014 US Consumer Credit Update. Student loans are the largest component of non-mortgage and home equity debt, at $1.111 trillion. uto loans represent the second largest segment of non-mortgage and home equity consumer debt balances, the report says. Both auto and student loan debt have increased over the past few years, after declining during the recession. Today, auto loan debt balances are the highest they have been in the last ten years. Over the past quarter, student loan debt increased by $31 billion and auto loan debt was up by $12 billion.

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FPB Review of Auto Dealer Markups May Raise Lender Costs

CFPB Review of Auto Dealer Markups May Raise Lender Costs

Fitch Ratings-Chicago-16 January 2014: Heightened scrutiny of potentially discriminatory auto lending practices by the U.S. Consumer Financial Protection Bureau (CFPB) will likely raise lender regulatory costs in 2014, according to Fitch.

The CFPB started investigating the auto finance industry last year concerning allegations that it may be discriminating against consumers based on race and violating the anti-discrimination provisions of the Equal Credit Opportunity Act. Fitch believes the CFPB is currently in discussions with various auto finance players, including banks, captive finance arms of auto manufacturers and independent finance companies regarding their lending practices.  The regulatory actions pertain to the auto lending industry's widely used practice of making indirect loans through  dealers, rather than direct lending (whereby a consumer enters a dealership with a qualified loan from a bank). The  indirect lending system allows dealers to mark up the interest rate submitted by the lender.  In December, Ally Financial Inc. (Ally) became the first lender to enter into consent orders with the CFPB and the U.S. Department of Justice regarding the allegation of disparate impact in the auto finance business. Despite reaching an agreement, Ally maintains that it does not make loans to consumers, but rather, it purchases installment contracts originated by auto dealers. Ally has further stated that its underwriting process does not include information on a consumer's race or ethnicity, but rather, is based solely on a consumer's creditworthiness and contract characteristics.
As part of the consent orders, Ally agreed to a $98 million settlement (an $18 million civil penalty fee and an $80 million contribution to a settlement fund). The order also requires Ally to implement a compliance program to monitor dealer markups in order to prevent future discrimination or eliminate dealer markups altogether. Fitch believes Ally's acceleration of the settlement ahead of its competitors may be partly due to the lender's desire to allay investor concerns ahead of a potential IPO.  Fitch also notes that CFPB does not have jurisdiction over auto dealers and their practices. Actions taken against lenders could be an indirect way to regulate dealers.  We expect this issue to receive considerable attention in 2014, with more banks and finance companies subject to fines and settlements. This could ultimately lead to changes in established business practices, including an elimination of the dealer markups altogether in favor of flat dealer fees.
Regulatory scrutiny from the CFPB is expected to remain elevated for the foreseeable future. Moreover, increased regulatory costs and compliance requirements are expected to continue to weigh on operational flexibility and the financial performance of auto lenders in 2014.

Contact:
Mohak Rao, CFA
Director
Financial Institutions

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