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.
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.”
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.
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.”
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.”
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.[PAGEBREAK]
Ficklin was succinct in her description of the bureau’s methodology for determining whether discrimination — whether intended or not — is present in a finance source’s portfolio, telling the audience that the CFPB is using the same method employed by the U.S. Department of Justice (DOJ). As for identifying race, she reiterate the bureau’s use of U.S. Census data and the Bayesian Improved Surname Geocoding proxy method, which assumes surnames are predominantly associated with a particular race or ethnicity and that many neighborhoods are segregated by race.
When Stinebert asked how the bureau’s approach accounted for regional differences, Ficklin said the agency’s analytics do account for those factors. And when it does, she said, the question then becomes, “Can it be explained by legitimate means?” That is the question the bureau is expecting finance sources to answer when monitoring their portfolios.
The NADA staged a press conference the day after Ficklin’s presentation to unveil a new fair lending program. It was designed to help dealers respond to lender inquiries about rate pricing. There to announce the solution was the NADA’s legal and regulatory affairs team, including Andy Koblenz, executive vice president, and Paul Metrey, chief regulatory counsel. Both of them reiterated their belief that the bureau has “misdiagnosed the situation”; Koblenz added that the agency has produced little evidence to support its allegations of discrimination.
“However, at the same time, there are things going on in the marketplace that our members have to deal with,” Koblenz said. “There are lenders who are approaching them and asking them questions about results in their portfolios. And so dealers have been asking us, ‘Can you give us guidance?’
“One of our jobs is to advocate in Washington so that the rules get developed correctly. The second job is to provide our members with tools that are necessary to help them navigate those waters, and this falls into the latter category.”
Similar to solutions introduced last year by organizations such as RouteOne, Dealertrack and the Association of Finance and Insurance Professionals (AFIP), the NADA’s program requires that dealers first establish a preset amount of compensation included in credit offers made to customers. It then recommends that dealers only offer discounts based on “legitimate factors that can affect finance rates,” and that they document those reasons on the program’s template.
The solution and others like it are based on a 2007 consent agreement in which the DOJ sought to address alleged unintentional disparate impact discrimination at two Pennsylvania dealerships. The regulator stated then that such templates were an appropriate way to address questions about rate markups.
Inside Zurich’s booth on the NADA show floor, Glenn Roberts, the company’s national business development manager, and Hudson Cook LLP partner Patricia Covington showcased a new dealer compliance suite that goes beyond addressing the CFPB’s scrutiny of rate participation programs. The Zurich/Hudco solution was designed to standardize a dealer’s desking process by offering recommendations on everything from quoting rates to menu usage.
“Right now, everyone is focusing on the CFPB’s concerns related to rate participation, but there are other issues out there, such as payment packing and potential discriminatory markups on ancillary F&I products,” Roberts said. “With the help of Hudson Cook, we’re giving them specific recommendations on what they can do.”
The compliance suite addresses rate participation much like the NADA’s solution, although Covington emphasized the importance of F&I managers collecting proof as to why they deviated from the dealer’s standard participation. She said the same goes for F&I product pricing.
The compliance suite also offers a software–based reporting package designed to allow dealers to track rate and product pricing by F&I manager and FICO score, a feature aimed directly at helping dealers respond to lender inquiries. “We’re in a regulatory environment where not only do you have to do the right thing, you have to have the process that demonstrates you’re doing the right thing,” Covington said. “And that’s what this does. It builds that infrastructure so you can demonstrate that.”
Capturing the Data
RouteOne rolled out its Dealer Pricing Risk Control program this past October, but Dan Doman, the company’s vice president and general counsel, acknowledged that such solutions present a couple of “threshold issues” for dealers. Not only do they need to standardize rate markups and reasons for deviating from that standard, they need to standardize what the markup will be for each reason.
“Let’s say you have a customer that comes in and says I’ve got a credit union down the block that will give me 5%. Are you going to beat it?” he said. “Let’s say you beat it by 10 basis points. Well, you have to apply that 10 basis points on every single case where you’re beating competition.”
The next step for RouteOne is to integrate its solution into its econtracting process. “The dealer will be able to choose what that markup would be. If he deviates from the standard markup, up pops this form,” Doman said.
Todd Mason, RouteOne’s chief product and marketing officer, said that fits the company’s overall initiative with econtracting: to insert and automate a dealer’s process steps into the system. He believes today’s regulatory environment is helping to push the econtracting discussion beyond the “chicken-or-the-egg” debate that has plagued the technology since it was introduced in the late ’90s, noting successful adoption efforts by Ford Motor Credit and Toyota Financial Services.
“I think it’s the tip of the iceberg,” Mason said. “I think the success [Ford Motor Credit] and [Toyota Financial Services] had will start putting greater pressure on finance sources across the board to adopt econtracting.”
Toyota Financial’s Groff talked about the captive’s econtracting partnership with RouteOne during the CEO Panel. He told the audience the company beat its initial goal of 30% utilization, ending the year with the company’s look to book being 56% electronic. “From a compliance standpoint, for the dealer to have a system to catch everything is a step forward from not just an efficiency standpoint, but customer satisfaction,” he said, noting that the captive waited until last year to roll out econtracting because it wanted a game plan in place for converting forms to electronic and training dealers.
When asked why the industry has yet to take to econtracting, Berce spread the blame around. He said dealers are simply slow to embrace technology, saying, “That’s been their M.O. for years.” But he added that the onus really falls on finance sources, noting that it was lenders that drove adoption of point-of-sale credit portals.
“I think the reason [those systems] were embraced was because the lender paid for it,” he said. “It’s the same with econtracting; lenders need to pay for it.”
Dealers on the NADA Leadership Panel also discussed econtracting, with Anchor Buick GMC’s Williams saying simply, “We don’t do it. I don’t know why.”
Larry H. Miller’s Leary shared that the group recently worked with a few lenders on econtracting. He said the experience was difficult, especially when it came to meshing the system into the group’s existing processes. He stressed the importance of training and communication with F&I managers, a point echoed by William Fox, a member of the NADA’s board of directors and partner at Fox Dealerships Inc. in upstate New York. “Econtracting is good as long as we are up to snuff,” he said.
The room fell silent, however, when panelists asked finance execs in the audience when customers will be able to electronically sign all forms associated with a vehicle transaction, noting that econtracting has yet to live up to its promise of a paperless process. The question caught the attention of executives from Open Dealer Exchange (ODE), the firm created in 2009 through a joint venture between ADP and Reynolds and Reynolds.
“The reason econtracting has struggled in the industry is because it was defined as econtracting, but that’s just one document. Open up a deal jacket. There are dozens of documents,” said Steve Luyckx, the company’s general manager. He noted that ODE has a built-in advantage: ADP and Reynolds have spent decades building electronic libraries of state, provider, dealer and lender forms. And after spending much of its short existence perfecting its contract validation solution, the company, he said, is shifting its focus to helping lenders receive those contracts electronically.
“Now the industry is ready, the point of sale is ready, the lenders are now interested in building that electronic catcher’s mitt,” Luyckx said.
As for econtracting’s link to compliance, Luyckx said: “There’s so much guidance around what’s going to be monitored. And a lot of those guidelines are mathematically driven. So we’re able to provide a lot of data to the lender and work with them to make sure they have the right data to run the right analytics to ensure they’re inside what I call the ‘green zone’ with CFPB guidelines.”
When the AFSA’s Stinebert questioned Ficklin about what an adequate monitoring program looked like, she referred back to the bureau’s fair lending guidance. And after telling finance execs that dealer discretion is what the bureau is concerned about, she said: “We’re not saying dealers should do the work and add value for free. They’re entitled to be compensated.
“There are times when individual determinations might be valuable to a borrower,” she added. “But we don’t have a specific system to tell you what you should do.”
In his first address as chairman of the association, McConnell didn’t mince words when discussing the CFPB. “Many of you know that the government has been trying to impose more regulations over our $783 billion finance market. Why? Because they don’t understand our business,” he said. “The NADA will keep hammering Washington that dealers don’t add to customers’ credit costs. We save our customers money, period.”