The Truth About Cars » Lending The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. Wed, 23 Jul 2014 18:25:17 +0000 en-US hourly 1 The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars no The Truth About Cars (The Truth About Cars) 2006-2009 The Truth About Cars The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars » Lending Captives Dominating Auto Financing As Banks Resort To Risky Loans Thu, 19 Jun 2014 15:27:47 +0000 logo_toyota_credit_a

OEM captive financing arms are increasing their share of new car loans, with banks resorting to underwriting riskier loans in the used car market and to less credit-worthy buyers.

Citing data from credit agency Experian, Reuters reports that the captive arms of Ford, Honda and Toyota made up half of all new car loans in Q1 of 2014, up from 37 percent in the prior year. Buoyed by low interest rates, which allow for greater incentives, captive financing arms can offer better rates and other subsidies to consumers, enabling them to get in a new car more easily, while generating stronger sales numbers for the OEM.

At the same time, low interest rates have also created an environment where fixed income yields are low, causing investors to turn towards securities backed by auto loans, which can provide greater yields than other fixed income investments. This in turn is said to be fueling the supply of available credit for auto loans.

According to the article, certain banks (Ally and US Bancorp were among the examples cited) have turned towards financing used cars and buyers with subprime credit scores as a way of competing in the lucrative auto financing market. US Bancorp now makes 15 percent of its auto loans to buyers with subprime scores, compared to zero in previous years. Although it only represents one data point regarding financial institutions, the Reuters piece also claims that captives are increasing their share of subprime loans, while offering increasingly longer loan terms – in line with previous reports regarding declining underwriting standards and lengthier loans.

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Subprime Lending Still On The Rise As GM Financial Grows Prime Lending Operations Tue, 25 Mar 2014 20:05:02 +0000 450x236xGM-Establishes-GM-Financial-1024x539-450x236.jpg.pagespeed.ic.I-LWSrSJhA

Subprime auto financing continues to grow, and while one analyst at Moody’s says that banks are largely staying out of the subprime space, overall lending continued to rise, with retail banks seeing some of the strongest growth. This expansion in lending, particularly subprime, was attributed as a key driver in auto sales. SNL cited forecasts for a SAAR of between 16 and 16.7 million in 2014, up from 15.5 million in 2013.

SNL Financial, a finance industry trade publication, directly attributed strong auto sales to the increase in subprime financing, drawing a connection between the increased SAAR and an increase the portfolios of subprime lenders. Consumer Portfolio Services Inc saw a 37 percent growth in receivables year-over-year, with over $1.2 billion in receivables for Q4 2014.

The increase in subprime lending along with looser underwriting standards has led ratings agencies to view the sector in a negative light. Fitch, which has issued a negative outlook in the sector as a whole, told SNL that overall, losses were at “historical lows” and that the increase in lenders will make the segment more competitive.

SNL also reports that Moody’s has cast an eye on underwriting standards, with Moody’s VP Mark Wasden stating that longer loan terms (due to higher prices, more durable cars and increased ownership periods) is a major factor.

While Wasden noted that banks were remaining “relatively conservative” regarding subprime lending, savings banks saw the biggest growth in overall lending among depository institutions, growing 16.06 percent year over year (compared to 11.24 percent for credit unions and 10.04 percent for commercial banks). Even so, commercial banks remained the dominant force, issuing $331.92 billion in loans, with savings banks accounting for just $21.49 billion.

Another notable development is the increasing reliance of GM Financial on General Motors – while this sounds redundant, General Motors vehicle financing now accounts from 70 percent of GM Financial’s business, and receivables have more than doubled to $33 billion in Q4 2013 from just $13 billion a few years ago. GM Financial, once known as AmeriCredit Corp, was largely a subprime focused business when GM bought it in 2010, but plans are underway to transition GM Financial to prime lending. While GM Financial is now stepping into the role that the legendary GMAC once occupied, Ally (GMAC’s successor), is shrinking from the auto lending market, suggesting a reversal of roles for GM’s two finance arms .

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U.S. DoJ, Consumer Financial Protection Bureau Investigate Toyota, Honda, Other Automakers’ Credit Arms For Lending Bias Mon, 23 Sep 2013 16:20:15 +0000 CFPB

According to regulatory filings by Toyota Motor Credit Corp., the giant automaker’s car financing arm, and American Honda Finance Corp., which fills a similar role for Honda, the United States Consumer Financial Protection Bureau and the Department of Justice are investigating major auto manufacturers for possible lending bias based on race, which would be a violation of the 1974 Equal Credit Opportunity Act.  According to Bloomberg, the agencies are looking into how loans that the automakers’ credit companies provide to auto dealers are priced. Bloomberg reports that as many as seven car companies have been asked for data that may be related to the borrowers’ races and interest rates charged. Both government agencies declined to comment on the matter.

The Justice department and the CFPB are apparently looking into what the consumer protection agency calls “dealer markup”, what the industry refers to “dealer participation” or “dealer-assisted finance”, the practice of lenders allowing dealers to add to the interest rate they are charged by the automakers’ credit arms so they can pocket the difference. Dealers say that the added interest is a fair price for arranging the loan, processing the paperwork and related services. Consumer activists say the arrangement gives dealers an incentive to push more expensive loans.

In March, the CFPB warned banks that they face the agency’s enforcement procedures if they are found to be funding discriminatory vehicle loans provided by car dealers. At the time, car dealers widely criticized the agency for what the dealers say is an attempt to get around statutory restrictions on the CFPB’s power. The 2010 “Dodd-Frank” law that created the agency explicitly exempted automobile dealers from being regulated by tha CFPB. Dealers say that the CFPB is using the automakers’ credit arms to do what Congress specifically prohibited the government from doing. Members of Congress have asked the agency how it will determine the existence of discrimination.

The CFPB said last year that it would use a controversial legal theory known as “disparate impact” which says that even if there is demonstrably no intention to discriminate, if statistical analysis shows that the result of policies is over or under representation in the results relative to demographics, that itself can be used as proof of discrimination. Because the theory is based on statistical analysis, the agencies have requested a large amount of data on borrowers’ races and the interest rates they were charged. Critics of “disparate impact” say that besides ignoring intent, an important factor in American jurisprudence, the theory’s advocates apply it in a discriminatory manner themselves.

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Question Of The Day: When Financing A Car, What Information Should Be Fair Game? Fri, 07 Dec 2012 15:56:59 +0000

Your personal information is valuable.

When I liquidated vehicles for Capital One, we typically examined over 14,000 variables before lending out our money to a customer.

Any customer. A credit card. An automobile. A commercial loan. It didn’t matter. We needed to get to know the economics of you first.

All of the low rates and big profits were dependent on buying your personal information, and then crafting decision models and metrics to determine your personal risk.

Our success in auto finance generated low rates for our customers and low delinquencies for our investors. But they both could have been far lower.

There is a line of demarcation between what is private, and what is public.

Your payment history? Public for the most part. There are those landlords, small money lenders and car lots that don’t report your credit history. But most utilities, credit cards, mortgage companies, and auto finance companies do so on a regular basis.

It’s a trade. You get money. They get the opportunity for a profit. Along with the right to buy and sell the resources needed to make sound future decisions.

Even the low tech version of a customer’s credit history work fairly well. Pay stubs, utility bills, bank statements, references, and recent housing information are typically used by car dealers to determine your eligibility.

So are criminal histories. In certain areas of this country you can type in a person’s name , state of residence, and the word “mugshot” or “arrested”. Or even access a state information database that records prison histories.

Lo and behold, you may see a familiar face staring right back at you.

All of these things are publicly available. But what about a few of the private things? Should they be fair game too?

If you were financing a car to a complete stranger, wouldn’t you want to know their recent accident history? Or the number of times over the last few years that their insurance was dropped due to non-payment of their premium?

I had three customers who wrecked their cars so far this year. Thankfully, they all kept paying on their full coverage insurance with a $500 deductible. That alone made a $13,000 difference to my bottom line.

A credit union that had the means to examine this behavior could make a lot of better decisions for their members.

A lot of insurance companies these days levy their premiums based, in part, on a customer’s age.

I am not convinced if that is always a fair way to measure risk.

That rare young adult who has managed to find a stable good paying job. Or that student who has earned a free ride to school and kept their GPA on the high end. I think they are far more responsible and creditworthy than that fifty year old who has consistently wrecked cars and dropped their insurance.

So where should that line be?

Should certain resources that are now publicly available become private?

Should other things that are only available upon a special request, become just as accessible as your credit report?

It’s a tough question. Ponder it.

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Quote Of The Day: You Can Trust Your Dealership After All Edition Thu, 24 Jun 2010 19:11:43 +0000

Throughout the debate on Wall Street reform, I have urged members of the Senate to fight the efforts of special interests and their lobbyists to weaken consumer protections.  An amendment that the Senate will soon consider would do exactly that, undermining strong consumer protections with a special loophole for auto dealer-lenders.  This amendment would carve out a special exemption for these lenders that would allow them to inflate rates, insert hidden fees into the fine print of paperwork, and include expensive add-ons that catch purchasers by surprise.  This amendment guts provisions that empower consumers with clear information that allows them to make the financial decisions that work best for them and simply encourages misleading sales tactics that hurt American consumers. Unfortunately, countless families – particularly military families – have been the target of these deceptive practices.

This is what president Obama said just six weeks ago about efforts to exclude car dealership financing from consumer protection measures included in the forthcoming Financial Reform bill. With that bill moving towards Obama’s desk, all that stands in the way of its passage are angry dealers who don’t want to be subject to oversight. And despite the tough talk about standing up to financial interests to pass this reform, it seems Obama has caved to America’s auto dealers.

Today, the White House released a statement, reported by Automotive News [sub] that said

The president vowed to fight efforts to weaken this bill and find ways to strengthen it, which is why he opposes carve-outs like this one that would exempt auto-dealer lenders from new consumer protections. While we knew that we’d not win every fight, the president will soon sign into law historic Wall Street reform that includes the strongest consumer protections ever

So, why did Obama speak out against dealer finance’s exemption from oversight if he was willing to cave on it? That, so far, is a mystery. And though the bill does cover a number of important issues outside of the car industry, this is definitely the wrong message to be sending. With GM already looking to subprime loans for sales growth, the temptation to goose sales with ever-riskier and more-exploitative loans, whether on the dealer or OEM level, is undeniable. Sales have been flat since mid-2009, and in the established order of business for the car industry, financial trickery is the first resort of a struggling firm. And if the last two years have taught us anything, it’s that redlining sales with creative lending creates unsustainable growth. If Obama figures less regulation at the dealer level will boost overall sales, helping GM go private and him get re-elected, he’d better consider the possibility of another car sales crash in his second term. And in the meantime, anyone who gets screwed by an unscrupulous dealer will have their president to thank.

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