Texas dealer and 2019 NADA Chairman Charlie Gilchrist told Vehicle Finance Conference attendees that new-vehicle affordability remains a “top concern” for the association. 
 - Photos courtesy EPNAC.com

Texas dealer and 2019 NADA Chairman Charlie Gilchrist told Vehicle Finance Conference attendees that new-vehicle affordability remains a “top concern” for the association.

Photos courtesy EPNAC.com

The 2019 outlook is generally strong for auto sales and auto finance, with low likelihood of a recession this year, according to panelists at the American Financial Services Association’s Vehicle Finance Conference & Expo, held immediately before the National Automobile Dealers Association’s NADA Show 2019 in January in San Francisco.

“It’s a healthy, robust industry, and we’re looking for a great year,” said Charlie Gilchrist, president of the North Texas-based Gilchrist Automotive group and 2019 NADA chairman, in a Jan. 24 AFSA session.

On the downside, affordability is a serious headwind, Gilchrist warned an audience comprised mostly of executives representing auto finance sources and related service providers. Interest rates are up, and average amounts financed and average monthly payments are at record-high levels, according to Experian Automotive.

“New-vehicle affordability continues to be a top concern for NADA,” Gilchrist said.

Moody’s Analytics’ Alex Lowy said the combination of tax reform and increased government spending injected more “federal money” into the economy. 
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Moody’s Analytics’ Alex Lowy said the combination of tax reform and increased government spending injected more “federal money” into the economy.

AUTO FINANCE AND THE U.S. ECONOMY

Despite some negatives, an economic recession is unlikely in 2019, said Alex Lowy, an analyst and regional account associate for Moody’s Analytics, at the AFSA conference on Jan. 22. That likelihood increases in 2020, he said.

“The economy is strong, near-term prospects are good,” Lowy said, citing the latest employment figures reported by the U.S. government. “The job numbers in December are incredibly strong.”

Near-Term Prospects

Tax cuts last year had a positive effect, along with higher federal spending expected this year.

“More federal money pumping in the economy gets the economy moving,” Lowy said, noting that rising interest rates — including three small increases expected in 2019 — could create a problem for subprime sources that have been accustomed to funding new originations at a low cost of funds based on low interest rates. “It’s easy to compete when your funding costs are zero or next to zero.”

Rising interest rates, Lowy added, “are going to separate the lenders that are doing a good job from those that have some work to do.”

Editor’s note: On Jan. 30, Chairman Jerome Powell announced the Federal Reserve Board would suspend the interest-rate hikes planned for 2019.

Higher Debt

Finance sources that invest in up-to-date technology have advantages of speed and efficiency in an era of thin profit margins, said Lou Loquasto, auto finance leader for Atlanta-based Equifax, in the same panel discussion on Jan. 22.

“Banks that invest in tech are doing OK. Banks that stick with the way they’ve been doing things 30 or 40 years ... that’s where we see some weakness,” he said.

Loquasto agreed with other panelists that affordability is a problem, but he pointed out that the rise in amounts financed is at least in part because consumers are opting for bigger, more expensive light trucks, and skipping smaller, less expensive cars.

“Outstandings are $1.3 trillion in auto finance debt, and that is an all-time high,” he said, joking that some light trucks are so big and luxurious, they’re like buying a house. “The vehicles being financed now, a lot of them have media rooms and a spare bedroom.”

The average new-vehicle loan was $30,977, up 2.1% from a year ago, as of the third quarter of 2018. That’s the latest quarter for which detailed results are publicly available, according to Experian Automotive. The average used-vehicle loan was $19,861, up 3%.

A Shift to Used?

It’s pretty clear auto lending and auto sales are entering a cyclical downturn as opposed to a bursting bubble, Loquasto said. However, it’s still to be determined whether customers would react to higher prices, longer loan terms, and higher interest rates by simply hanging onto their vehicles longer than they are already, and what effects that would have, he said.

“Will customers stay in vehicles longer, and what effect will that have on profitability for auto lending? Is it a bubble? No. Is it a cycle? Yes. We’re trying to figure out where are we in the cycle, and what does that mean for lenders regarding what they should be doing.”

Mike Stanton, senior vice president and COO of NADA, said in the panel that positives for 2019 include low gas prices and the demand for light trucks. Headwinds include rising interest rates and lower standard deductions on consumer income taxes.

More consumers could react to higher new-vehicle prices by switching to nearly-new used vehicles, including three-year-old units coming off leases, he said. That might be OK for dealers since they sell new and used, but harder on the OEMs, since their business depends so much more on new-vehicle sales, Stanton said.

“Are we pushing prices up so high, to where the average consumer can’t afford a new vehicle?” Stanton asked. “The ‘nearly new’ are going to entice customers who would’ve been new-vehicle buyers. It may be bad for our OEM partners.”

The vast majority (93%) of data breaches start with an employee opening a hacker’s email, said information security expert Harold Gonzalez of Santander Consumer USA.
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The vast majority (93%) of data breaches start with an employee opening a hacker’s email, said information security expert Harold Gonzalez of Santander Consumer USA.

CYBERSECURITY AND FRAUD PREVENTION

Most data breaches that start on the inside of an organization happen when an employee ignores instructions and clicks on an attachment in an email from an unknown source, cybersecurity and fraud experts said at the AFSA conference.

“It’s not necessarily very sophisticated,” said Harold Gonzalez, chief information security officer for Santander Consumer USA, in a Jan. 23 panel discussion. “Ninety-three percent of breaches began with an email somebody clicked on.”

That basic “people component” is something every organization needs to focus on, said Ryan Bachman, chief information security officer for GM Financial. “An email is sent to an employee, they click on an attachment, and it’s game over.”

Outside Threats

Threats from the outside are another matter — they’re increasingly sophisticated, and are increasingly built around so-called “synthetic” identities. That’s where fraudsters cobble together a phony identity, often using stolen bits and pieces of real customer data. They apply for credit, incur small debts, and pay them off on time, creating a genuine, attractive-to-lenders credit history for that phony persona.

This can go on for a long time, before a fraudster suddenly runs up a lot of debt, possibly including a loan for a car or truck, and then disappears with the merchandise or proceeds from loans, panelists said.

Bachman said that, according to the FBI, “When an intrusion occurs, the actor has been in the space exceeding a year without detection. They can take their time. They can be persistent. They can focus on trying to stay quiet and undetected as long as possible.”

Unintended Consequences

If that sounds like a lot of work, fraudsters are working harder in part because computer chips that have been added to credit cards in the last few years made it much more difficult to create a phony credit card, the experts said.

“Chip cards have driven fraudsters into synthetic identities. The chip has protected the card,” said Doug Clare, vice president, cybersecurity solutions, for FICO. “As a result, there’s a lot of expertise that’s been developed in synthetic identities.”

When a fraudster uses a genuine customer’s account information, panelists said one way to detect a problem is to know from experience when a customer deviates from “usual” behavior.

“One of the things that’s very important for us, is to know our customers … how our customers act, what they behave like. What are the standard things they do? Is this particular customer behaving normally? Is the same IP address filing 10 different credit apps? What does normal business look like?” said GM Financial’s Bachman.

Someone Else’s Problem?

Panelists said any major breach, wherever it occurs, can affect banks and finance companies. The stolen customer data will probably end up on the online black market.

“Today’s data breach, whether it’s a hotel chain or whatever, all of that information becomes pieces of synthetic identities that get put together,” said FICO’s Clare. “Those are all ingredients for somebody who will use that to create a synthetic identity and go and perpetrate fraud.”

Panelists agreed businesses need to realize that online data breaches are a question of when, not if. Clare told the AFSA audience, “The average card in your wallet has been breached three-and-a-half times.”

Pressure from federal regulators is “decidedly off,” according to Charles Rivers Associates’ Arthur Baines, who believes the CFPB has ended its pursuit of dealer markup. 
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Pressure from federal regulators is “decidedly off,” according to Charles Rivers Associates’ Arthur Baines, who believes the CFPB has ended its pursuit of dealer markup.

GUIDANCE FOR DEALER MARKUP AND F&I PRODUCTS

Maybe the auto finance industry will stay on the back burner at the Consumer Financial Protection Bureau, but a Democrat-led U.S. House of Representatives could try to turn the heat back on, panelists said at the American Financial Services Association Vehicle Finance Conference here.

“At least at the federal level, the pressure is decidedly off,” said Arthur Baines, vice president and co-practice leader at Charles River Associates, in an AFSA panel discussion on Jan. 22. He said the current CFPB appears to be “done” with the issue of dealer markup.

Congress last year repealed official guidance the CFPB issued in 2013 under the Obama administration, accusing lenders of condoning discrimination based on race, by allowing dealers to set different rates for similarly qualified loan applicants.

Stick to the Plan

Despite the repeal, NADA chairman Gilchrist said on Jan. 24 he hopes dealers will continue to follow NADA’s 2014 recommendation for limiting dealer markup.

A dealer adhering to the suggested policy sets a fixed markup on dealer-arranged financing and never deviates from that rate except for specified “business reasons,” such as beating a competing offer. “I worry, because I think dealers have relaxed a little bit on that,” Gilchrist said.

He said NADA is also working on a similar template for vehicle protection products. Those would include extended service contracts and GAP.

Change in the Winds?

The legal and regulatory environment could change, said attorney Mark Kenney, chairman of Severson & Werson, who moderated a separate panel on Jan. 23. “The big news is the 2018 election,” Kenney said.

“We have hope,” said Celia Winslow, AFSA’s vice president of legal and regulatory affairs. That’s partly because CFPB Director Kathy Kraninger, who was confirmed by the U.S. Senate in December, is a Trump appointee, she said. Winslow said another Trump appointee, former acting director and now acting White House Chief of Staff Mick Mulvaney, said, “If you like me, you’ll like her.”

On the other hand, a prominent critic of the Trump Administration, Rep. Maxine Waters, (D-Calif.) recently took over chairmanship of the House Financial Services Committee. She replaced a sworn enemy of the CFPB, Texas Republican Jeb Hensarling, who retired.

Blue to Deep Blue

Besides potentially more friction in Washington, the auto finance industry could also face more flak in state legislatures, said Danielle Fagre Arlowe, AFSA senior vice president.

“At the state level, the obvious change is, seven chambers flipped red to blue,” she said. “Some blue states went to deep, deep blue, like Massachusetts, California, and New York. Those states went from difficult to incredibly difficult … to get our message heard.”

Nevada also went from “pretty red” to “deep blue,” Arlowe said. In addition, she said California last year passed what she called a “behemoth” new privacy law, and other states could follow suit. That could have an effect on policies, disclosures, forms, and recordkeeping for auto lenders and dealers.

AFSA’s then-president-elect Bill Himpler said he has been told by White House staff the Trump administration is “fully committed” to repealing the 2017 reinterpretation of the Military Lending Act that effectively prohibited the sale of GAP to servicemembers. 
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AFSA’s then-president-elect Bill Himpler said he has been told by White House staff the Trump administration is “fully committed” to repealing the 2017 reinterpretation of the Military Lending Act that effectively prohibited the sale of GAP to servicemembers.

MLA Update: Still Trying

In addition, AFSA is still working on getting the U.S. Department of Defense to repeal a December 2017 interpretation of the Military Lending Act that had the effect of prohibiting the sale of GAP to military members.

AFSA hinted strongly last year that the interpretation would soon be repealed, but it’s still in place, even though AFSA “pushed very hard,” said Bill Himpler, AFSA president-elect, on Jan. 22.

“I stood before this conference a year ago fully expecting it would be taken care of last Memorial Day,” he said. Recently, he added, “I have been personally assured by White House staff they remain fully committed to getting this done.”

Jim Henry is a freelance writer based in the greater New York City area. Contact him at [email protected]

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