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Archive for November, 2013

CFPB Now with Justice Dept. in Discriminatory Auto Lending Scrutiny

A contestation is growing between the government and the auto industry, one of the key drivers in the US economic recovery, as the former continues to act against expensive auto lending to minorities and women.

A Justice Department senior official said last week that federal prosecutors are working with the Consumer Financial Protection Bureau (CFPB) to probe the reported discrimination in auto lending.

Dealers, in their role as a middleman in arranging auto financing for their customers, can mark up the interest rate given to them by lenders. The difference becomes their profit and goes directly to their pockets.

According to a study done by the bureau in 2011, the average dealer markup, or the points added to the auto loan rate to make profit, was 2.5 percentage points. It translated to an additional of $714 in interest payments on a 60-month auto loan. However, the National Automobile Dealers Association (NADA) countered to say that the markup is only 1 percentage point for new cars and 0.7 for used cars.


Recently, the CFPB accused Ally Financial of failing to make sure the dealers in their network keep the Equal Credit Opportunity Act.

In a forum last week, the CFPB suggested three pricing models for dealers to avoid discrimination while trying to make profit from arranging vehicle financing for consumers.

One is the compensation to dealers can be tied to the length of the loan and the loan amount through a hybrid system. Another is dealers can be paid a fixed percentage of the loan or a flat fee for every transaction.

While the bureau suggests more than a couple of alternative compensation models, it said that it welcomes any other strategy that can help reduce the risk of unfair lending. Lenders have the final say to make adjustments on how dealers are compensated.

CFPB Director Richard Cordray said, as quoted by The Washington Post, “We recognize that auto dealers play a valuable role in auto lending that occurs in this country, and they deserve to be compensated fairly for the work they do…(but) no one should have to worry about having to pay more to finance a vehicle because of race, ethnicity or any other protected characteristic under federal law.”

Early this month, a bipartisan group of 22 senators sent a letter to the bureau’s chief to ask for more proof of the existence of discriminatory lending practices in the auto industry.

In last week’s forum, the president of the National Association of Minority Automobile Dealers, Damon Lester, admitted that there are bad entities in the industry. He said that a markup policy should be adopted by dealers.

Lester also said that several dealers use markups to compensate for the risk in lending to people with bad credit. But consumer advocates contend that lenders already price the risk in the rates they give dealers.



More People Borrow Money for Cars, Pay Back

More consumers took out auto loans while fewer fell behind on their payments, a report just out last week shows.

U.S. borrowers owed $782.9 billion on auto loans in the third quarter of this year, Experian Automotive report shows. It is $103 billion more than the amounts owed in the same period the year before. This is the highest in seven years since the credit-reporting agency began tracking the numbers.


Moreover, 30-day auto loan delinquencies fell to 2.58 percent from 2.67 percent last year. It is not surprising why lenders can easily and comfortably loosen their credit standards.

Experian Automotive Senior Director of automotive lending Melinda Zabritski said in a statement, “The combination of higher loan balances and relatively flat loan delinquencies is good news for everyone connected to the automotive industry, including consumers, lenders, retailers and manufacturers.”

The credit bureau also said that low delinquencies stimulate lending, which stimulate more auto purchases, building up all the members of the industry all at the same time.

California, Texas and Nevada are among the states with quickest loan balances. Meanwhile, Hawaii, Vermont and Oregon demonstrated the biggest improvements in 30-day auto loan delinquencies.



Subprime Auto Loans Up, Regulators Worried

Lenders are giving more auto loans to people with low credit scores. They make subprime auto loan packages with bonds and sell them on Wall Street. This looks like the housing bubble in 2005. And this is why regulators are getting nervous.

The New York Federal Reserve noted in August that subprime auto loans are going back to its pre-recession levels. About 27 percent of auto loans were made to borrowers with credit scores below 500, the highest since 2007. These loans back $17.2 billion worth of bonds issued this year, just a little less than the $20 billion recorded eight years ago.

The increase in subprime auto loans boosted the U.S. auto sales, but regulators are not very happy about the situation. Consumer activists are not confident it would last.

In addition, auto loan delinquencies are falling, but have not yet reached pre-recession marks.

One that worries consumer advocates is the independent lenders that are usually backed by financial institutions or automakers. They began providing auto loans to dealers in 2010 after Dodd-Frank became a law. This law created the Consumer Financial Protection Bureau or CFPB that basically serves as a watchdog in consumer lending, but with auto dealers absolutely excluded from its oversight.

While this worries consumer groups, investors see it as an opportunity to increase interest rates in times of low yields.

The CFPB tirelessly watch over the auto lending market and fight against unfair and damaging practices in it.


Currently, the bureau has placed auto lenders in the hot seat, aiming at the regulation of dealer markups which push borrowers to get auto loans they cannot really afford. The CFBP has suggested the adoption of a flat fee as compensation for dealers instead of markups to prevent possible abuses.

In the meantime, the CFPB has asked the lenders that are within its purview to keep an eye on their dealers to ensure that there is no discriminatory lending happening against women and minorities.

Ally Financial has announced early this month that they are being probed by the regulator with regards to their supervision of lending discrimination.



7-Year Loans Become More Popular to New-Car Buyers

Loans of up to seven years are becoming more popular to new-car buyers, but experts are worried.

Loan terms of 73 to 84 months make up 19.5 percent of new-vehicle loans in the second quarter of this year. According to Experian Automotive, it is the fastest growing loan-length category which jumped 25.1 percent last year.

The next shorter category, 61 to 72 months, accounted for 41.7 percent of new-auto loans. It went down 3.2 percent but is still the biggest category.

But while longer loan terms become more popular, shorter terms fall behind. Vehicle loans of 37 to 48 months fell by 2.4 percent in the second quarter. The shortest loan-length range, 25 to 36 months, plummeted by 24.7 percent.

The average loan terms for new cars and used cars are 65 months and 61 months, respectively, both up by 1 month.

There seems to be several factors contributing to the phenomenon: low interest rates, declining delinquency rates, higher used car prices, and old trade-ins.

Vehicles stay on the road for an average of 11 years. But according to automotive pricing information source TrueCar, the average transaction price of new cars is now at $30,592 from $25,703 in 2002.

That means the trade-ins today for new vehicles are worth practically nothing. To make a new-car purchase comfortably possible, people resort to longer auto loans with lower monthly payments.

With the same interest rate, a 48-month auto loan and an 84-month auto loan have thousands of dollars of difference in total cost. But that is an underestimate because long terms carry higher interest rates than short terms.

Bankrate senior financial analyst Greg McBride told USA Today that people are upside down longer than usual when they opt to take out a longer-term auto loan. They repay the loan very slowly while their car depreciates very quickly.

Some auto dealers are concerned about their customers’ preference for lower monthly payments and longer loan terms. But some lenders are confident, noting that a lot of their customers who choose long terms have strong credit and pay off the loans even before reaching seven years.



Senators Criticize CFPB Over Discriminatory Auto Lending Claim

They may not agree on ObamaCare, but Senators are united this time in criticizing the efforts of Consumer Financial Protection Bureau (CFPB) against the alleged discriminatory lending in the automotive industry.

Led by Senators Rob Portman (R., Ohio) and Jeanne Shaheen (D., N.H.), the bipartisan group of 11 Republicans and 11 Democrats sent a letter to the regulator’s chief, Richard Cordray, asking for more proof that a problem such as discriminatory auto lending indeed exists.

The Wall Street Journal reports that the senators asked in the letter “why the CFPB warned auto lenders about the discrimination issue without an official rule-making process, and whether it conducted a cost-benefit analysis of changes to the auto lending market.”

It further reports that Portman is “concerned about the Bureau’s lack of transparency and unwillingness to make public the basis for its policy decisions, especially those that could negatively impact competition and consumers.”

CFPB has been pushing for the standardization of the interest rate charges added by car dealers. About seven months ago, it released guidelines for lenders to make sure auto lending remains lawful and to stop the discrimination against women and minorities.

But Shaheen said that the guidelines “could restrict legitimate credit options and increase costs for many Americans looking to finance their cars,” WSJ reports.

Auto dealers have been insisting that there is no evidence of discrimination. They also argue that the loan pricing system of the industry allows car buyers to obtain discounts from what direct lenders like banks could otherwise charge.



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