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CFPB Takes Center Stage

Strong words at NADA 2014 and the Vehicle Finance Conference indicate that both sides of the rate participation debate are preparing for a long, drawn-out battle.

March 2014, F&I and Showroom - Cover Story

by Gregory Arroyo - Also by this author

Her smile to the packed room inside the Sheraton New Orleans ballroom offered no hint of her unofficial title as the Consumer Financial Protection Bureau (CFPB)’s liaison to the auto finance industry, and neither did her request for continued dialogue. But when Patricia Ficklin addressed the crowd at the American Financial Services Association (AFSA)’s 2014 Vehicle Finance Conference, she sought to clarify and emphasize the bureau’s concerns and expectations regarding rate participation programs. Her unflinching gaze befit an attorney who has spent much of her 20-plus-year legal career defending civil rights, consumer protection and fair lending laws.

“To be clear, we are not challenging the industry’s use of appropriate underwriting practices,” said Ficklin, assistant director for the CFPB’s Office of Fair Lending and Equal Opportunity. “It’s the discretion of the dealer after the lender underwrites the loan.”

Forrest McConnell, the National Automobile Dealers Association (NADA)’s 2014 chairman, was equally as direct in defending rate participation against the CFPB’s claims of discrimination. “The truth is, the indirect system works for customers,” the former attorney said during the NADA Leadership Panel that preceded Ficklin’s address. “We force everyone in the business to keep finance rates low. We drive competition.”

Ficklin said she was aware of those claims, but said CFPB analysts “have still not seen solid data showing that.” Her comment spoke to what was really the top-of-mind topic at the conference and in the aisle ways of the 2014 NADA Convention & Expo: Big Data.

Big Data
The last time the NADA held its annual get-together in New Orleans was February of 2009. As that year wore on, the global financial crisis would drive new-vehicle sales to record lows. The credit markets have since thawed, but the credit freeze that led to the Great Recession remained top of mind for most lending executives.

During the Vehicle Finance Conference’s CEO Panel, Chase Auto Finance’s Thasunda Duckett said data — not a race for market share — is what’s driving the bank’s strategy. That’s how the bank plans to stay “nimble, flexible and fast” in a year in which new-vehicle sales are expected to crack the 16 million-unit, prerecession mark, she added.

“Chase has been one of the players that’s stayed disciplined,” Duckett said. “I’d say, with respect to risk appetite and [cycles], there’s more data available today than ever before. … I think we have to be students of the data.”

Data was a big topic during the Vehicle Financial Conference’s CEO Panel, with executives from GM Financial, Chase Auto Finance and Toyota Financial Services saying they’re firms are operating with more data than ever before.
Data was a big topic during the Vehicle Financial Conference’s CEO Panel, with executives from GM Financial, Chase Auto Finance and Toyota Financial Services saying they’re firms are operating with more data than ever before.

Duckett was joined by Dan Berce, president and CEO of GM Financial, and Michael Groff, Toyota Financial Service’s newly appointed president and CEO. Berce said GM Financial is managing the business to build enough liquidity to withstand another cycle, but he noted that having access to nonsecured funding is helping to provide a better backstop should the market face another credit freeze.

“The biggest risk … is when the economy and competitive cycles collide,” Berce said. “But I think the [next] economic cycle has a bit of a runway.”

As for Toyota Financial, Groff said the captive continues to run simulations to ensure the company has enough funding to withstand a future crisis. “We don’t get funding from Japan,” he clarified. “We have to stay competitive like everyone else.”   

Melinda Zabritski, senior director of automotive finance for Experian Automotive, said none of the data she has seen indicates that the market is slipping into a dangerous race for market share. The industry is moving at a brisker pace, with outstanding loan balances reaching a new high in the fourth quarter — rising 11% from the year-ago quarter to $798.5 billion. However, she noted, 30-day delinquencies fell 3.5% from a year ago, while the 60-day delinquency rate remained flat.

Terms are rising, however; Zabritski noted that year-to-date data in November showed that terms between 61 and 72 months accounted for 42.1 percent of originations, with the 73- to 84-month term band showing the most growth. She said she had even noticed growth in 85-month terms and above.

“The numbers are small despite the growth,” she said, noting that most loans originated at terms above the 84-month band were for luxury makes and vehicles financed for business purposes.

During the NADA Leadership Panel, Chairman Forrest McConnell defended the indirect financing channel, saying dealers force lenders to keep rates low.
During the NADA Leadership Panel, Chairman Forrest McConnell defended the indirect financing channel, saying dealers force lenders to keep rates low.
Members of the NADA’s board of directors were asked about the stretching of terms, particularly 97-month loans, during the Vehicle Finance Conference’s NADA Leadership Panel. They agreed longer terms aren’t good for the industry, but they were split on whether finance sources should reel them in.

“We’ve got to realize that a 97-month payment is not good — that 150% financing over book is not good,” said David Williams, a member of the NADA board of directors and president of Newark, Del.-based Anchor Buick GMC.

McConnell, president of Montgomery, Ala.-based McConnell Honda and Acura, and panelist Brian Leary, vice president of F&I for the Salt Lake City-based Larry H. Miller Dealerships, didn’t disagree, but they said it’s critical that those options exist. “It may not be good for customers, but they need to have options,” Leary said. “And for us to service the demand, we need those options.”

According to Equifax, the total balance of new credit for auto loans from January to December 2013 accounted for 49% of all new nonmortgage credit, with 20.2 billion new auto loans originated for a total of $405.2 billion — the highest origination total in eight years. But just like Experian’s Zabritski found, balances rose as delinquencies fell to levels not seen since mid-2006.

Lou Loquasto, Equifax Auto Finance’s vertical leader, said there’s a simple reason for those milestones: data. He said finance sources are looking beyond credit scores and seeking out new data sources, which is why Equifax has invested heavily in its auto business unit the last three years. Those investments led to the launch of a new income and employment verification tool in 2012. This year, the company added payment history verifications for expenses such as rent, telecom and insurance.

“It’s designed to eliminate stips on subprime deals, saving time for finance sources while allowing them to improve their capture rate,” Loquasto said, adding that the solution is also available to dealers. “Finance sources have adopted big data. As for dealers, we always talk about tech, but we don’t talk about data.”

Seeking Answers
Data is what the AFSA is using to respond to the CFPB’s concerns. In January, the association kicked off a yearlong study that will examine rate participation and other compensation models. Chris Stinebert, the association’s president and CEO, mentioned the study during his address to open the second day of the AFSA’s conference. “We all want to do the right thing,” he said. “We just want to make sure the direction is the right one.”

Glenn Roberts points to Zurich’s new dealer compliance suite, which is designed to standardize a dealer’s desking process. It includes a software-based reporting tool.
Glenn Roberts points to Zurich’s new dealer compliance suite, which is designed to standardize a dealer’s desking process. It includes a software-based reporting tool.

The CFPB’s Ficklin spent most of her 40-minute session reviewing the guidance the bureau issued last March. That document laid out the bureau’s expectation for how rate participation policies should be managed and monitored. Ficklin also discussed the bureau’s $98 million consent order against Ally Financial, which the bureau alleged overcharged more than 235,000 minority borrowers in interest rates between April 2011 and December 2013 as a result of its “discriminatory pricing system.”

According to the March bulletin, finance sources can either eliminate dealer discretion or integrate a robust monitoring program and retain discretionary markups. Should they choose the latter, the bulletin calls on lenders to communicate to dealers their expectations regarding compliance under the Equal Credit Opportunity Act (ECOA), conduct regular analyses of loan pricing, propose corrective actions should they spot discriminatory pricing, and properly remunerate affected consumers.

“I do think there’s more in [the bulletin] than folks realize,” Ficklin said. “The consent order goes a step further. It lays out our expectation.”

Ficklin also said its a misconception that the bureau views a move to flat fees as the only alternative. “The bulletin does not require a flat dollar amount as compensation,” she said, noting that the bureau will study all forms of compensation.

When Stinebert asked if the ECOA, which prohibits discrimination in finance transactions, regulates discretion, Ficklin acknowledged it didn’t. However, she said discretion has historically presented a fair lending risk, adding that establishing monetary controls is the underpinning of the bureau’s expectation.


  1. 1. David Ruggles [ April 01, 2014 @ 06:31PM ]

    I'd sure like to know what they "Bayesian Improved Surname Geocoding proxy method's" margin for error is. I'd sure like to know what determines if a person is Asian, Black, Hispanic, or what in this day and age of inter racial marriage. The following is an excerpt from a piece I wrote with Cliff Banks:

    "As mentioned previously, the CFPB is not empowered to regulate auto dealers, with the previously mentioned exception for Buy Here Pay Here auto dealers.

    Other than that, the CFPB can only directly regulate lenders, in this case "finance source-assignees." Imagine, if you will, two auto dealers. One is in Iowa, a low cost market with mostly “White” consumers.

    The other is in Los Angeles, a high cost market made up primarily of “protected class” consumers. Each dealer holds their own “financing paper” in house, advancing his/her own money to make auto loans. The dealer approves the credit, takes the risk, advances the money, holds the Retail installment Sale contract and collects the monthly payments. No "finance source-assignee" is involved at this point. The dealer in Iowa charges his/her borrowers 5% per loan. The Los Angeles dealer charges 7%.

    No law has been broken even though the LA dealer is charging “protected classes” an extra 2%. After a couple of years, the dealer in LA finds a need for additional working capital and sells off some of his/her retail installment contracts to a finance source. At that point a law has been broken as the finance source has now become “complicit” with the dealer for “facilitating discrimination” under “disparate impact.” The CFPB can get at the auto dealer by penalizing the lender."


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