Tag Archive | "Auto Finance"

Wells Fargo: Subprime Cap Part of ‘Ongoing Risk Management’


IRVINE, Calif. — A statement released by Wells Fargo Dealer Services didn’t deny the bank has placed a cap on subprime auto loans for this year, but it stopped short of saying the move was the bank’s response to media claims of an overheating auto finance market.

Citing unnamed executives from Wells Fargo, The New York Times reported on March 1 that the bank was limiting the dollar volume of its subprime auto originations to 10% of its overall auto loan originations. For all of 2014, Wells Fargo originated $29.9 billion in auto loans, up 8% from the previous year.

A spokesperson for Wells Fargo Dealer Services said the bank remains committed to the auto finance market and that it remains “firmly committed to responsibly offering access to credit to a wide spectrum of customers during all economic cycles.”

“The percentage of originations we consider subprime, based on our customized scorecard, has remained generally stable over the last decade,” the spokesperson said. “In the fourth quarter, we formalized our existing risk management philosophy. This is part of our ongoing risk management structure and helps us to continue to responsibly manage risk while also tailoring our approach by local market.”

The news comes at a time when several media outlets, including The New York Times, have warned that auto finance may go the way of subprime mortgage in the years leading up to the 2008 financial crisis. Some news outlets have even called on regulators to step in and stop what they called a forming subprime auto finance bubble.

Despite total outstanding loan balance on auto loans reaching an all-time high of $886 billion in the year-end 2014 quarter, finance executives at the 2015 Vehicle Finance Conference in January maintained that the market is operating smartly. They described competition as fierce but disciplined, with one executive noting that finance sources seem focused on smart structures.

Whether motivated by the media or not, state and federal regulators have keyed in on subprime originations and securitizations. Since the summer, regulators have issued subpoenas to several subprime finance sources, including Consumer Portfolio Services, Ally, Capital One, GM Financial, Credit Acceptance Corp, and Santander Consumer USA, requesting documents related to their subprime auto finance businesses.

Speaking to F&I and Showroom at the National Automobile Dealers Association’s 2015 convention, Dawn Martin Harp, who heads up dealer services for Wells Fargo, said regulators have not impacted the bank’s auto origination strategy. She did note, however, that the bank has been working to improve the information it provides to consumers regarding their loans, adding that the bank has more transparency initiatives planned for 2015.

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Consumers Relying on Financing, Experian Reports


SCHAUMBURG, Ill. —Consumers are relying on financing more than ever to buy their next vehicle, according to Experian Automotive. The firm’s latest State of the Automotive Finance Market report shows that the percentage of new vehicles purchased with financing in the fourth quarter of 2014 increased over the previous year to reach 84%. Used vehicles that were financed reached a record high of 55.2%.

Furthermore, the study shows that the average loan amount for a new vehicle in the fourth quarter of 2014 once again hit its highest level on record, reaching $28,381. This represents a more than $950 increase from a year ago and a $582 increase from the previous quarter. For used vehicles, the average loan amount increased $437 from last year to reach $18,411.

“In most parts of the country, vehicles are viewed as a necessity to everyday life, which is why we continue to see consumers willing to take out larger loans as the average price of vehicles continues to rise,” said Melinda Zabritski, Experian’s senior director of automotive finance. “As more consumers lean on financing, it’s important for them to consider all of the factors involved, including monthly payments, interest rates and loan terms. These insights will enable them to have a better understanding of their potential payment obligation and take the appropriate action in order to make the vehicle fit within their monthly budget and more easily meet payment terms throughout the life of the loan.”

Findings from the report also show that leasing continued to gain traction, as it jumped 3.6% from a year ago to reach nearly 30% of all new vehicles financed in the quarter.

In addition to the number of leases increasing in the quarter, the study shows that it was slightly more affordable and easier to obtain one. The average monthly lease payment decreased $12 from a year ago to reach $408 in Q4 2014. What’s more, the average new-vehicle lessee had an average credit score of 717 in Q4 2014, down two points over the same time period.

The study also found that the average credit score for a new-vehicle loan dropped 3 points in Q4 2014 to reach 712, and the average credit score for a used vehicle loan increased 2 points in the quarter to reach 648. Also in the fourth quarter, the average monthly payment for a new vehicle hit $482 — its highest level on record.

Interest rates for new-vehicle loans crept up in Q4 2014 to 4.56% and loan terms for new and used vehicles increased from a year ago to reach 66 months and 62 months, respectively. Captives were the only lender type to see an increase in market share year over year.

Experian’s quarterly State of the Automotive Finance Market report leverages information from its AutoCount database, which enables insights into the automotive-lending market by geography, credit score and vehicle registrations, among other factors.

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New Study Casts Doubt on Latest CFPB Allegations against Automaker Finance Arms


WASHINGTON – A new study by the research firm Charles River Associates (CRA) casts doubts on recent allegations made by the Consumer Financial Protection Bureau (CFPB) against Toyota Motor Credit Corp. and American Honda Finance Corp. concerning disparate impact in the pricing of auto loans, reported the NADA.

Among the CRA study’s key findings was that, when measuring whether such unintentional discrimination has occurred, the CFPB overestimates the number of minority consumers by as much as 41 percent and the pricing differences between minority and non-minority consumers by as much as 87 percent.

CRA noted that several factors (which appear to be completely ignored by the CFPB) further account for pricing differences which are completely unrelated to a consumer’s background.

CRA also noted that while the CFPB’s own study into its testing methodology reveals a significant overestimation of minority populations, the CFPB still does not explain whether or how it corrects for this flaw. Such failings can produce significant distortions and inaccuracies in the CFPB testing results, and should be fully explained by the CFPB before it relies upon them to support an allegation of discrimination.

The study examined the accuracy and reliability of the method used by the CFPB to test for unintentional disparate impact discrimination in an auto lender’s portfolio. After examining 8.2 million auto finance contracts, CRA concluded in its comprehensive report that the CFPB’s testing method is “subject to significant bias and estimation error.”

The CRA study was commissioned by the American Financial Services Association and released on November 19. The allegations made against the automakers’ captive finance companies were publically disclosed on November 25 and December 2, respectively.

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Comment Period Opens for CFPB’s New Rule


WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB)’s proposed rule that would give it supervisory authority over larger participants in the nonbank auto finance segment was published in the Federal Register on Oct. 8, kicking off a 60-day public comment period that ends on Dec. 8.

If adopted, the proposed rule would generally allow the CFPB to supervise nonbank auto finance companies that make, acquire, or refinance 10,000 or more loans or leases in a year. The bureau has estimated that about 38 auto finance companies, which originate around 90% of nonbank auto loans and leases, would be subject to this oversight.

“Nonbank auto finance companies extend hundreds of billions of dollars in credit to American consumers, yet they have never been subject to any supervisory oversight at the federal level,” CFPB Director Richard Cordray said at an auto finance hearing on Sept. 18. “These companies have also played a significant role in the growth of subprime auto lending by making loans to consumers with lower credit scores. In this market, as in others, subprime borrowers may be more vulnerable to predatory practices, so direct oversight of their lending practices is essential.”

The CFPB began regulating the auto finance market in March 2013, when it issued a bulletin stating that lenders that offer auto loans through dealerships will be held responsible for discriminatory rate markups on retail installment sales contracts. The regulator has also expressed interest in the marketing of loans and leases, the accuracy of information given to credit bureaus, and the treatment of consumers during debt collection.

The proposed rule is the fifth in a series of rulemaking to define larger participants in consumer financial markets.

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Auto Loan Default Rate Falls to Eight-Year Low


NEW YORK — The default rate for auto loans fell to its lowest level in eight years last month, according to the S&P/Experian Consumer Credit Default Indices.

Default rates for all loan types except bank cards fell for the fourth consecutive month, reaching their lowest levels since at least the end of the recent economic crisis. The national composite declined to 1.86 percent in April from its 1.96 percent March rate.

The rate of default for auto loans fell from 1.11 percent in March to 1.07 percent last month. The first mortgage default rate decreased from March’s 1.88 percent to April’s 1.76 percent, while the second mortgage default rate also declined from 1.03 percent in March to 0.93 percent. The default rate for bank cards increased marginally in April to 4.49 percent from its 4.47 percent March level.

“April data show the continuation of the positive trend we saw in the first quarter of 2012,” said David M. Blitzer, managing director and chairman of the Index Committee for S&P Indices. “Not only have we continued the general downward trend in consumer default rates that began in the spring of 2009, but we appear to be reaching new lows across many of the loan types.”

The first mortgage default rate fell by 12 basis points in April over March and is the lowest rate since July 2007. The second mortgage rate also fell during the month by 10 basis points, and is at a seven-plus year low. The auto loans default rate hit the lowest rate in the history of this data tracking. While the bank card rate rose, it was not by much and is still close to the recent low reported in February.

Four of the five cities the indices cover saw their default rates drop, with all four at post-recession lows. For the fourth consecutive month, Chicago saw a decline, moving from 2.84 percent back in December 2011 to 2.21 percent in April. That’s a 0.63 percentage point decline and a new low.

New York and Miami both fell for the third consecutive month. New York dropped almost a quarter percentage point over the month from 2.01 percent in March to 1.78 percent, while Miami decreased by almost a half a percentage point from March’s 3.62 percent to April’s 3.14 percent.

“While still the highest default rate, Miami hit a post-recession low,” said Blitzer. “Dallas hits its lowest rate in its eight years of history, moving from 1.44 percent in March to 1.25 percent in April and retains the lowest rate among the five cities we follow. Los Angeles is the only city where default rates remained flat at 1.88 percent.”

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Independent Auto Finance Company AFC HoldCo will Close


AFC HoldCo LLC, an independent auto finance company that provided auto loans through more than 4,000 dealerships in 40 states, is shutting down, reported Automotive News.

AFC’s parent company, Mitsui & Co. of Japan, said today it will liquidate the company because of the downturn in auto sales.

The Japanese trading house acquired 87.5 percent of the Wilmington, Del., company for $63 million in 2007 expecting the auto finance business to expand. But it shrank in the wake of the financial crisis.

“We cannot foresee a recovery in auto finance business,” Mitsui said in a statement.

It said the liquidation will have little impact on its financial statements for the fiscal year ending in March.

AFC HoldCo was created in 2007 through a merger of two companies — Affiliated Financial Corp. and BayQuest Capital Corp. The owners of those firms held a 12.5 percent stake in the new company.

The company is unrelated to Automotive Finance Corp., an independent finance company in Carmel, Ind., that is affiliated with the auto auction chain ADESA Inc.

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