Tag Archive | "Auto Finance"

FTC Approves Consent Order in Texas Dealer’s Deceptive Advertising Case


WASHINGTON, D.C. — Following a public comment period, the Federal Trade Commission (FTC) said this week it has approved the final consent order settling its deceptive advertising charges against Cowboy AG LLC, a Dallas-based company doing business as Cowboy Toyota and Cowboy Scion.

The announcement is related to a December 2017 compliant related to Cowboy Toyota’s Spanish-language newspaper ads. According to the FTC, the dealership violated the FTC Act by misrepresenting the cost of purchasing or leasing cars as well as the qualifications or restrictions for financing or leasing cars. It also mispresented the availability of vehicles for sale, according to the FTC’s complaint.

The regulator also charged the dealership with failing to disclose credit or lease terms required under the Truth in Lending Act (TILA) or Consumer Leasing Act when it touted certain “triggering” terms of credit or lease, such as the monthly payment. The complaint also alleged that favorable terms were prominently stated in the Spanish-language ads, with material limitations to those terms provided only in fine-print English at the bottom.

The final order settling the FTC’s charges prohibits Cowboy Toyota from misrepresenting the cost of financing, buying, or leasing a vehicle. The order also requires the dealership to accurately represent any qualifications or restrictions on a consumer’s ability to obtain offered financing or lease terms, including restrictions based on their credit history.

The order also prohibits the dealership from misrepresenting the number of vehicles, makes, or models available for purchase or lease. Cowboy Toyota is also required to clearly and conspicuously disclose all financing and lease terms in its ads, as well as all related qualifications or restrictions. And if Cowboy Toyota makes a representation in one language, it must state clearly and conspicuously any material limitations in the same language, the FTC said.

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Judge Again Rules in Favor of Trump in Battle for Control of CFPB


WASHINGTON, D.C. — A federal judge once again sided with the White House in the battle for control of the Consumer Financial Protection Bureau, denying last Wednesday a request by CFPB Deputy Director Leandra English for a preliminary injunction to remove President Donald Trump’s appointee as acting head of the agency.

The ruling comes less than 50 days after U.S. District Judge Timothy J. Kelly denied English’s request for a restraining order to block President Trump’s appointment of White House Budget Director Mick Mulvaney as acting director. It now sets the stage for an appeal by English, who has said she is the rightful acting director.

“The Court finds that English is not likely to succeed on the merits of her claims, nor is she likely to suffer irreparable harm absent the injunctive relief sought,” Judge Kelly wrote in his 46-page decision. “Moreover, the balance of the equities and the public interest also weigh against granting the relief. Therefore, English has not met the exacting standard to obtain a preliminary injunction.”

Judge Kelly originally denied English’s request for a temporary restraining order to block Mulvaney’s appointment on Nov. 28. The ruling, however, pertained to the restraining order and not the merits of the case, with English’s attorney Deepak Gupta hinting that Kelly’s ruling “would not be the final answer.”

Gupta then filed an amendment complaint on behalf of English on Dec. 6 requesting a preliminary injunction. Unlike the temporary restraining order, the injunction can be appealed to the U.S. Court of Appeals for the D.C. Circuit if not granted.  Gupta gave no indication that Wednesday’s ruling would be appealed, although he expressed disappointment in Kelly’s decision in a Twitter post.

“The law is clear: President Trump may not circumvent the Senate confirmation process by installing his White House budget director to run the CFPB part time,” Gupta wrote. “Mr. Mulvaney’s appointment undermines the bureau’s independence and threatens its mission to protect American consumers.”

When Cordray formally resigned as CFPB director on Nov. 24, he elevated English, his former chief of staff, to deputy director. The move established her as acting director until the Senate confirms Trump’s permanent appointee.

Hours after Cordray’s announcement, Trump appointed Mulvaney as acting director, citing his authority through the Federal Vacancies Reform Act (FVRA). English filed suit two days later to block the appointment, arguing that she was the rightful acting director due to a successor statute in the CFPB-creating Dodd-Frank Act.

English’s attorneys also questioned whether allowing Mulvaney, who once characterized the bureau as a “sick joke,” to continue serving as a White House official would compromise the bureau’s independence. The argument was backed by the former lawmakers who championed the CFPB-creating Dodd-Frank Act.

“That was our intent, to strip this away from the politics of the moment, to give consumers the sense of confidence that there was one place here — when it came to their financial services — [where] there would be people watching out for them, regardless of political party or partisanship,” said former Sen. Chris Dodd during media call on Nov. 30.

Dodd joined former Rep. Barney Frank and more than 30 current and former members of Congress in writing one of five separate amicus briefs in support of English’s position. In Wednesday’s ruling, however, Judge Kelly said that argument is completely without support in the text of the Dodd-Frank, adding that the court “declines to create such a restriction out of whole cloth.”

“Simply put, Dodd-Frank does not prohibit the director of the OMB from also serving as the acting director of the CFPB,” Kelly wrote in his ruling.

“The President has designated Mulvaney the CFPB’s acting director, the CFPB has recognized him as the acting director, and it is operating with him as acting director,” Kelly continued. “Granting English an injunction would not bring about more clarity; it would only serve to muddy the waters.”

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CFPB: Longer-Term Loans Not Having Desired Effect for Borrowers, Finance Sources


WASHINGTON, D.C. — At F&I Think Tank 2017, held in Dallas on Sept. 14, F&I trainer Tony Dupaquier of The Academy revealed that the Consumer Financial Protection Bureau (CFPB) was actively monitoring the auto finance industry, performing audits to ensure finance sources are adhering to buying guidelines it’s helping to shape.

The revelation was based on interviews with representatives from four primary finance sources, two factory finance companies, and one secondary finance company. And according to those conversations, Dupaquier shared, what the regulator is concerned about is financial stress of the consumer.

On Tuesday, the CFPB released “Growth in Longer-Term Auto Loans,” and eight-page report that seemed to back the claims of Dupaquier’s anonymous sources. The bureau, however, noted that the report is part of a series of quarter reports of consumer credit trends using a “longitudinal, nationally-representative sample of approximately five million de-identified credit records from one of the three nationwide credit reporting agencies.”

The report centered on loan terms, noting that 42% of auto loans made in the last year carried a payback term of six or more years, compared to 26% in 2009. It also warned that six-year auto loans are riskier, cost more, are often used by consumers with lower credit scores to finance large amounts, and have higher rates of default.

“The move to longer-term auto loans is opening up more risk for consumers,” said CFPB Director Richard Cordray. “These loans are more expensive and can result in consumers continuing to owe even after they are no longer driving their car. Consumers should know before they owe and shop for the best deal based on costs incurred over the life of the loan.”

The report does concede that consumers are simply financing larger amounts, and are electing for longer terms to keep monthly payments affordable. The regulator, however, notes that the availability of longer-term loans may be the reason car buyers are financing more.

According to the bureau’s report, the average original loan amount for a five-year loan was $20,100, compared to $25,300 for a six-year loan. The average finance amount for loans with terms of seven years or more was $32,200. “To the extent that consumers are buying more expensive cars, making smaller down payments, or otherwise financing larger loan amounts, the increased use of these longer-term loans may be a result,” the report states.

The bureau notes in its report that the average amount financed in 2009 was $18,179. By 2016, the average increased by 16%. And because of longer-term loans, the average monthly payment increased only 7% over that same period. However, the report also shows that loans with terms of six years or more had a default rate that exceeded 8%, whereas shorter-term loans have had default rates closer to 4%.

“That means that six-year loans are about twice as likely as five year-loans to result in a default,” the report states, in part. “The greater adoption of these loans may potentially pose greater risks to both consumers and lenders.”

The reason, according to the bureau, is consumers with lower credit scores are typically the ones electing for longer-term loans. The report notes that the average credit score for borrowers who take out six-year loans is 674, which is 39 points below the average for borrowers who take out five-year loans.

“The higher default rates observed for six-year loans should not be interpreted as a causal relationship,” the bureau warns. “Borrowers who expect to struggle making the payments on a loan financed over five years may be more likely to opt for longer-term financing to ease their financial burden each month. Riskier borrowers may thus prefer longer-term loans, which is consistent with our [findings] that borrowers taking out six-year loans tend to have lower credit scores than borrowers with five-year loans.”

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Business Leaders Cautiously Optimistic About Trump, Economic, Auto Sales


ALPHARETTA, Ga. — Twenty senior industry leaders expressed cautious optimism about the economy and the automotive retail industry in White Clarke Group’s annual U.S. Auto and Equipment Survey.

The chief executive officers, directors, chairmen and president surveyed by the technology firm were optimistic about new-vehicle sales, which are on the decline but should remain among the highest on record in 2017. What has them cautious is President Donald Trump, whose communication style has them wondering if his administration can deliver on its pro-business campaign promises.

“As a result, business is falling back into cautious and hesitant state,” said Pacific Rim Capital CEO David Mirsky, noting the economic outlook was favorable following the November election. “The coarseness of our President’s communication style hasn’t helped. Even though most businesses agree with a lot of what Mr. Trump wants to do, we don’t like the way he has operated so far.”

According to the National Automobile Dealers Association, new-vehicle sales should end the year at 17.1 million units. During the first six months of 2017, the report noted, 8.4 million new cars and light trucks were sold. That’s down 2.2% from the year-ago period. Despite the decline in vehicle purchases, economic experts remain optimistic about the market.

One of the reasons is the $1.1 trillion auto finance market, which has fueled the industry’s rebound from the financial crash and recession of 2008-2009. Since then, U.S. light vehicle sales have delivered seven consecutive annual gains — the longest upward streak in decades, with sales peaking at 17.55 million new-vehicle registrations in 2016.

The concern, however, is affordability. According to Experian, the average finance amount for a new vehicle reached a record $30,621 in 2016, while the average finance amount for used also achieved new peaks at $19,329 per car. And in order to lower monthly payments, consumers are extending loan terms. In the fourth quarter of 2016, for instance, the 73- to 84-month term band rose 29% from the prior-year period.

“With the average loan amount for new and used vehicles hitting all-time highs, we are seeing the need for affordability drive consumer purchasing behavior,” said Melinda Zabritski, senior director of automotive finance for Experian Automotive. “Our latest research shows an $11,000 gap between the average loan amount on a new and used vehicle — the widest we have ever seen.”

Then there are hurricanes Harvey and Irma, which market analysts are still assessing but are believed to have damaged up to 1 million vehicles — 300,000 to 500,000 in the Houston area alone. This, analysts said in the report, could lead to a substantial increase in demand for new vehicles. It may also help with the oversupply problem in the used-vehicle space, which remains robust.

As for the U.S. economy, the report noted it grew at an annualized rate of 2.6% during the second quarter, with some financial institutions, such as Goldman Sachs, estimating it grew 3%. On the global stage, the International Monetary Fund and the Organization for Economic Cooperation and Development predicted that the global economy will expand by 3.5% this year.

The report also looked at regulatory threats, specifically those posed by the Consumer Financial Protection Bureau. Since opening its doors in 2011, the regulator, which oversees banks, credit card companies, and lenders, has returned about $12 billion in restitution to almost 30 million Americans. If Trump delivers on his promise of less regulation, however, the bureau faces a reduced role in 2018, the report noted.

The report touched on several other topics, including the impact of mobility on ownership models, the equipment finance market, new technology, and the impact of rising interest rates. However, most economic outlooks seemed to rest on the ability of a Republican White House and Republican Congress to deliver on their pro-business promises.

“It’s becoming clearer now that there is dysfunction in the White House and the Republican Party is fractured, so all early attempts to pass meaningful economic legislation have failed,” said Adam Warner, president of Key Equipment Finance. “Business confidence has eroded and will likely continue to be challenged in 2018.”

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CUDL: Credit Unions Capitalizing on Bank Retreat


ONTARIO, Calif. — Credit unions and captives continued to take advantage of the pullback by banks in the second quarter. The message coming out of CU Direct (CUDL)’s Sept. 28 webcast is that credit unions need to act fast before banks reconfigure their strategy.

Banks continued to hold the largest share at 32.3% in the second quarter, although the segment’s hold on the market fell 2.5 percentage points. Captives picked up some of that, increasing their share by 1.6 percentage points to 28.6%. Credit unions were the biggest benefactors of the pullback by banks, increasing their hold on the auto finance market by 1.6 percentage points from a year ago to 20.3%.

CUDL executive Michael Cochrum said the subprime pullback was only partially to blame for the bank retreat, noting that competition also played a role in the segment’s pullback. “They feel like competition is too strong, and it’s difficult to maximize your profitability in a market that’s highly competitive,” Cochrum said, adding that the real competition lies in the used-vehicle space.

On a quarter-over-quarter basis, captives continued to pick up share in the second quarter, while credit unions led the way in terms of auto lending growth. Despite the pickup in originations, credit unions saw their share fall two percentage points from the previous quarter to 24%. Banks, however, saw their hold on the market fall 5% from the first quarter, while captives took back some share from the previous quarter.

In the new-vehicle space, captives continued to dominate with a share of 53.2%, up from 52.2% in the year-ago quarter. Banks saw their share of new financing fall from 31.7% in the year-ago period to 28.8%, while credit unions increased their share slightly from 11.4% to 12.7%.

In the used space, banks held the largest share at 35.2%, which was down from 37.3% in the year-ago period. Closing the gap were credit unions, which increased their share 1.6 percentage points from a year ago to to 26.7%. Captives captured 8.1% of that market, down from 7.4% in the year-ago quarter.

Cochrum said the used-vehicle market represents a key opportunity for credit unions to grow their share. The key for that lending segment is strategizing with dealers to create more reasonable loan terms, especially since leasing seems to have plateaued after five years of growth at about 30.8%.

Cochrum attributed the flattening of leasing to residual values, with the glut of off-lease vehicles causing collateral values to fall. He said captives are likely to respond by shifting from leasing to buying programs, which he believes could present credit unions with an opportunity to offer leases on late-model used vehicles to buyers looking for affordability.

In the second quarter, used-vehicle leasing accounted for 3.61% of the lease market, down from 3.71% in the year-ago quarter.

Focusing on the high-risk tiers represents another option for credit unions to grow share. The segment, however, has mostly focused on high-quality buyers — the reason for the segment’s higher average credit score than all other lending segments.

To move downstream on the credit spectrum, however, will require a better understanding of the risk associated with lower credit scores, Cochrum said. Credit unions have also been known to underprice loans involving borrowers with credit scores below 700, the executive noting that the segment will need to rethink pricing strategies in order to maximize returns in the high-risk tiers.

“Even above a 700 credit score, credit unions are priced 50 to 80 basis points under their competitors,” he said.

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S&P/Experian: Auto Default Rate Registers Largest Increase Since December 2011


NEW YORK — Auto loan defaults in increased nine basis points from July to August, the largest month-over-month increase since December 2011, according to the S&P/Experian Consumer Credit Default Indices.

Despite the drop, the auto loan default rate remains low relative to historical levels. In fact, the rate is closer to levels recorded one year ago. The same is true for the composite rate for overall consumer defaults and first mortgage defaults, both of which increased three basis points from July.

“Overall, consumer credit defaults show no reason for alarm,” said David M. Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices. “Defaults on first mortgages are flat to down while defaults on auto loans have risen slightly in recent months. Consumer credit defaults on bank cards continue their upward creep since the end of 2015 despite a recent drop. The combination of an improving labor market, low inflation, and low interest rates are the principal factors behind currently favorable consumer credit conditions.”

The bank card default rate fell 12 basis points from July to 3.19% — the lowest level since December 2016. Bank cards were the only loan type to register a decrease in August.

Out of the five major cities analyzed by S&P/Experian, three registered increases in their default rates in August. New York recorded the largest increase, up 13 basis points from July to 0.95%. Los Angeles reported a rate of 0.66% for August, up three basis points from the previous month. Chicago came in at 0.94%, up four basis points from July.

Dallas reported a decrease of three basis points from the previous month to 0.74%, while Miami’s rate fell 10 basis points from July to 1.13%.

“Some future developments could affect consumer credit defaults: Auto sales have fallen since December 2016 and are down 11%. Declining auto sales and the normal end-of-model year push to make room for new cars may encourage easier credit conditions and raise concerns about future defaults,” Blitzer noted. “Hurricane damage in Houston and across Florida is creating substantial financial stress. The impact on mortgages on damaged or destroyed homes is not yet clear. Job losses and rising spending needs could lead to increased consumer credit defaults in coming months.”

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