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Archive for April, 2013

Car Loans, Mortgages Not Really the Same

Automotive News’ special correspondent Jim Henry wrote Wednesday that the Consumer Financial Protection Bureau (CFPB) leans towards equating auto dealers and mortgage brokers “using questionable logic.”

According to Henry, CFPB sees the similarity between dealers and brokers as both act as third party who can mark up the interest rate they will charge consumers. Greater markups translate to more profit for them.

However, Arthur Baines, vice president of a consulting firm Charles River and Associates (CRA), does not agree with how CFPB compares auto loans and mortgages. He said that “they’re very different.”

In his interview with Henry he said that the two transactions may begin to look the same in the case of a home buyer who is purchasing a new house from a mortgage broker’s inventory. The broker is not only arranging financing for the buyer but is also purchasing the buyer’s existing house. And the buyer calls the mortgage broker after a year to have roof problems fixed.

Baines and his colleague Marsha Courchane have explained this in their whitepaper published last month in CRA’s website.

“In a vehicle purchase, the dealership and the consumer are simultaneously pricing multiple products and services in a single transaction, while the mortgage broker and the consumer price a single product in a transaction that is dependent on a series of related but separate transactions. Both markets are highly complex, but starkly different. “



SEC Fines Capital One $3.5M Over Auto Loan Losses

The Securities and Exchange Commission (SEC) Wednesday charged Capital One Financial Corporation $3.5 million for its alleged misdeed in reserving for the impending auto-loan losses months before the financial crisis hit.

SEC said that Capital One, one of the nation’s largest banks, was not able to keep a good amount of money when the losses on auto loans went higher than what was forecasted.

SEC Division of Enforcement Co-Director George Canellos said, “Capital One failed in this responsibility by under-reporting expenses relating to its loan losses even as its own internal forecasting tool had signaled an increase in incurred losses due to the impending financial crisis.”

Capital One under-reported their expenses which supposed to have contributed to their auto-loan losses. It also experienced “significantly higher” loan charge-offs and delinquencies than what was expected, according to SEC.

Since Capital One had determined that the raised losses were caused by external economic factors, it should have added $72 million to their reserves for auto-loan losses in Q2 2007 and $85 million in the third quarter of the same year.

But because it failed to do so, it resulted in a total loan and lease provision for losses that is understated by 18 percent in the second quarter of 2007 and 9 percent in the third quarter.

Had Capital One factored in external factors in its report for the second quarter, its total loan-loss expense would have been $473 million which is 18 percent higher than it actually reported. And its total net income would have been $699 million, 7 percent less than it reported for the same period.

Two executives of the bank are also to settle charges against them.


Peter Schnall, Capital One’s former chief risk office, failed to raise the issue to the higher management and former credit officer David LaGassa was not able to ensure the inclusion of the external factors, such as the economic crisis and declining credit environment, in the loss forecast, according to SEC.

Schnall and LaGassa agreed to pay $85,000 and $50,000, respectively in settlement. However, the banks and the executives did not admit nor denied the allegations.

“The settlement will not affect any current or future business activities by Capital One,” a spokeswoman for the bank said. She also said that the company “continues to have confidence in Mr. Schnall and Mr. LaGassa and we believe that they can perform in their current roles with the company.”

Capital One had already paid millions of dollars to settle two separate cases this year.

It paid Consumer Financial Protection Bureau and Office of the Comptroller of the Currency (OCC) over $200 million for the alleged lapses in monitoring third-party sales of add-on products to credit card holders.

The U.S. Justice Department and the OCC not long after fined the bank more than $10 million over collection and other issues involving military borrowers.



Expert: Long Car Loan Terms Make You Owe More

Expert: Long Car Loan Terms Make You Owe More

A car loan term extending up to eight years or 96 months can bring you under water on your loan, an expert told Wall Street Journal’s MarketWatch.

“You will be under water on your loan almost as soon as you drive the car off the lot,” Alec Gutierrez, a Kelley Blue Book senior market analyst said. “The longer you extend your terms, the longer it’s going to take to come to a break-even position on your loan.”

Experian Automotive recently reported that the average loan term for new cars today is 65 months. More people are moving toward longer loan terms mainly because of higher new car prices and competition among lenders. About 17 percent of new car loans fell between 73 and 84 months in the last quarter of 2012. There was just 11 percent in the same period in 2009.

With more expensive cars in the market, lower monthly payments in long-term car loans allow car buyers to afford the car they want to buy.

However, they are just “lowering the monthly payment at the expense of increasing the overall costs to own that vehicle,” Gutierrez said.

MarketWatch made a comparison between the payments in a 60-month and 96-month car loans.

With new car prices averaging at around $31,000 today, a 10 percent down payment would reduce the loan amount to $27,900. The monthly payment in 60 months or five years at around 2.5 percent interest would be $495. The total interest that will be paid at the end of the term is $1,810 which will kick up the purchase price of the vehicle to $32,810.

Meanwhile, a car buyer would pay $353 every month at a five percent interest rate for a 96-month or eight-year car loan. He or she would pay a total of $6,000 in interest.

This is why Gutierrez said, “It’s silly to do something like a 96-month loan or even a 72-month loan.”

He also added: “At the end of the day, if it’s only a few hundred dollars, then that might work for you. But if it’s $1,000 or more, you should consider if that money can be better spent elsewhere.”

Car buyers are encouraged to avoid long loan terms as much as possible. Consumer Reports recommends paying a larger down payment and considering getting financing from a credit union which offers competitive rates at shorter terms.



How Not to Pay Auto Dealers Over $25B in Interest

Not all car buyers know how much they really pay for their car. Center for Responsible Lending (CRL) reported that car buyers paid as much as $25.8 billion additional interest in 2009 due to dealers’ markup. The average interest rate markup for every consumer was $714.

“Dealers argue that the rate markups are legitimate compensation for a valuable service the F&I office provides,” CRL notes.

However, there is not enough explanation why dealers have to charge for this service and how they come up with the interest rates they charge consumers. The apparent lack of disclosure leaves car buyers clueless about how much they are really paying the dealership.

Determining the Interest Rate

According to, there are four factors that affect the interest rate that will be charged a consumer.

The first one is the lender that the car dealership is doing business with. Car loan rates normally vary in banks, credit unions, and other financing institutions.

The type of car and the year model also affects the interest rate. In general, financing for new cars have lower rates than financing for used cars.

The third factor is the length of the loan. Short loan terms have lower interest rates than longer terms.

Lastly, the credit score, which has perhaps the greatest impact on the interest rate, is an important determinant. Low scores indicate a bad credit which normally gets a high interest rate. Car buyers with good credit can enjoy lower rates.

Getting a Low Interest Rate

Car buyers do not have to pay too much for their car just because of the dealer’s marked up interest rate. Here are some ways they can find the lowest interest rate available to them.

1. Securing financing first

According to the Kelley Blue Book, shopping around, comparing rates from multiple lenders, and arranging financing before stepping into a dealership somehow make consumers cash buyers.

2. Negotiating for a lower rate

Many car buyers forget that they can always bargain for a better interest rate at the dealership. Buyers should never agree with the dealer’s first offer. The first offer is often, if not always, hiked up.

3. Doing away with a long loan term

The Wall Street Journal recently reported that long loan terms are trending in today’s auto lending industry. Although many car buyers are going with the flow, a long loan term is really not the best way to go to get the lowest interest rate.



Fed: Home, Auto Loans Help Expand Economy

The overall demand for home loans and auto loans has helped in the economy’s moderate growth, the Federal Reserve reported in their latest Beige Book update released recently.

From the information gathered from late February through April 5, the housing and automobile sectors showed strongest growths across Fed’s 12 districts.


“Most Districts said residential and commercial real estate improved markedly since the last report. Home prices were rising in many areas of the country. Loan demand was steady to slightly up in most Districts,” the Book reported.

Home prices were up in Atlanta, Dallas, Minneapolis, Kansas City, San Francisco, and New York districts. Great improvement in residential real estate—including both housing and apartments—was seen in the New York district. Moreover, sales in the housing sector are still in good shape in most Districts.

Meanwhile, several Districts reported a robust auto industry, particularly strong auto sales and demand for financing, while few noted a slight decrease in used car sales.

“Overall vehicle sales remained strong or increased, but sales of used automobiles declined in some Districts,” said the report.

The Districts where the auto sector is strongest include Philadelphia, Cleveland, Chicago, St. Louis,
and Minneapolis, among others.

Aside from residential construction and automobiles, Districts also saw growth in other sectors like manufacturing, consumer spending, travel and tourism, and nonfinancial services.



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