State Farm Bank is not required to pay a civil penalty after settling Consumer Financial Protection Bureau claims that it had allegedly violated the Fair Credit Reporting Act on some auto loan and credit card accounts.
A Dec. 6 consent order alleged that State Farm reported inaccurate customer information to the credit bureaus and pulled credit reports without a permissible purpose. State Farm Bank President and Chief Executive Joe Monk Jr. signed the consent order without admitting or denying any of the findings.
“The concerns outlined in the consent order affected only a small percentage of credit card and vehicle loan applicants, and we are not aware of individual consequences to consumers,” a bank spokesman wrote in an email to Auto Finance News.
Though the consent order did not specify the volume of auto loans affected, State Farm Bank — with $16.7 billion of assets — had an $8.5 billion auto loan portfolio at yearend 2017, according to Big Wheels Auto Finance Data.
Meanwhile, State Farm Bank has been ordered to “not violate the Fair Credit Reporting Act or Regulation V and must implement and maintain reasonable written policies, procedures, and processes to address the practices at issue,” according to the consent order.
State Farm has already started to adjust its credit reporting practices. “Protecting customer information is important to State Farm, and we took this matter seriously,” the bank spokesman said. “The bank strengthened processes and training related to the concerns, including the implementation of voice-recorded customer consent and email consent options for customers.”
The bank practices in question revolve around the consumer lending business, which consists primarily of “consumer credit cards and vehicle loans, many of which are loans to refinance existing vehicle loans,” the CFPB noted.
Westlake Financial Services is gearing up to expand its direct lending portal, LoanCenter, beyond its current California footprint.
“Historically, we always pilot everything in our backyard,” VP of Westlake Services and Lending Solutions Ralph Ontiveros, told AFN. Now, nearly two years after launching the pilot, Westlake Financial is ready to take the portal nationwide. The rollout will start in 2019 with Westlake’s major markets, notably Arizona, Florida, New York, and Texas, as 40% of the lender’s business stems from those states, Ontiveros said.
LoanCenter consolidates Westlake’s direct-to-consumer offerings, including auto, title, and unsecured loans, as well as refinancing options.
Westlake Financial will rely on its network of consumer lead aggregators, namely online loan marketplaces Springboard Auto, LendingTree, and MyAutoLoan.com, to help market the LoanCenter brand and drive traffic to the site.
The LoanCenter rollout comes on the heels of enhancements made to the site in the third quarter. “We saw the need to really give consumers what they’re looking for, which is hassle-free ease of use,” Ontiveros said. “They want to know everything that has to do with the not-sexy part of the transaction — the loan — so that they go in and do the exciting part of the transaction of getting into your new car.”
Anticipated growth in originations to subprime borrowers is a sign that the auto industry is normalizing and will stay healthy in 2019, Brian Landau, senior vice president and TransUnion’s auto line of business leader, told Auto Finance News.
Following a lender pullback from the subprime space in 2016 and 2017, subprime as a percent of overall origination volume is expected to rise to 16.5% in 2019, compared with 15.1% in 2017, according to TransUnion’s 2019 consumer credit forecast. “The auto market is starting to recalibrate itself after the pullbacks,” Landau said
Positive economic trends and opportunities to boost profits are spurring the growth in subprime, Laundau said. Specifically, lenders feel more confident going back to subprime because of macroeconomic performance like stabilizing delinquencies and a low unemployment rate, he said. The 60-day delinquency rate is anticipated to stay flat at 1.44% through 2019.
Also, lenders are looking for new profit pools because of weighing consumer demand and increased competition. “If [a lender] is going to tap into subprime consumers, so are other lenders,” Landau said. “The profit is in subprime, and lenders have to make money.”
However, the percentage of subprime loan originations remains below what was observed at the onset of the last recession, TransUnion notes. In 2007, 20% of auto loan originations were subprime.
Despite industry apprehension that a downturn is looming, TransUnion says that an increase in subprime borrowers should not serve as a sign of concern. “Balancing risk and returns is an instrumental part of consumer lending, and small increases to delinquency rates are often part of the planning process — a normal derivative of granting wider access to credit,” said Matt Komos, vice president of research and consulting for TransUnion.
“Even though it has now been a decade since the last recession, lenders continue to be cautious,” Komos added. “In our estimation, the rise in nonprime borrowing we have observed and expect to see next year is a net-net positive.”
One area of concern for 2019 surrounds vehicle affordability. “Many factors may impact auto affordability in the coming year, which could result in a slowdown in origination growth,” TransUnion notes in its consumer credit forecast. “The potential of rising tariffs could materially impact vehicle prices and consumer affordability. Furthermore, many consumers are purchasing and financing more expensive vehicles, such as SUVs and hybrids. Headwinds such as rising interest rates and fuel prices could also further impact auto affordability.”
New- and used-car dealership chain AutoNation is the lead investor in Vroom’s $146 million series G funding, announced today. Other investors were T. Rowe Price, L Catterton, General Catalyst, and Fraser McCombs Capital.
In October, AutoNation had pumped $50 million into Vroom in exchange for a 7% stake.
Vroom CEO Paul Hennessy told Auto Finance News that increased collaboration between the two companies is “the next logical phase to [AutoNation’s] business evolution.” Over time, the companies will explore key areas of strength to leverage, he added.
AutoNation, too, has hinted at further collaboration. “Many synergies exist between the companies,” Donna Parlapiano, AutoNation EVP of franchise operations, mergers and acquisitions, and corporate real estate, told Auto Finance News via email. “It’s too early to tell exactly how this might take shape, but we are open to any opportunities that benefit the AutoNation business.”
“We believe investing and collaborating with progressive companies such as Vroom, as the digital transformation [of AutoNation’s vehicle sales strategy] continues, is prudent,” Parlapiano added. She noted that AutoNation isn’t slated to partner with any other digital-first automotive sales or fintech companies.
The latest funding round will be used in part to bolster digital offerings and for customer acquisition. “Whether it’s website development, mobile experience development, hiring smart engineers or really smart data scientists, the investment is going to go into this improvement of tech and process,” Hennessy said. To start, New York-based Vroom plans to increase traditional and digital advertising in the Dallas and Orlando markets.
Consumers looking to buy cars on Vroom’s platform can secure financing from a dozen lending partners, including Capital One Auto Finance, TD Bank, Ally Financial, and SunTrust Bank.
Kathleen Kraninger, director of the Consumer Financial Protection Bureau
Though newly appointed Consumer Financial Protection Bureau Director Kathy Kraninger will likely continue Mick Mulvaney’s efforts to dismantle the agency, chances are high that she will face tougher oversight than her predecessor, as Democrats take control of the House next year, several attorneys told Auto Finance News.
Kraninger, President Donald Trump’s nominee for the CFPB post, was approved by the Senate in a 50-49 vote last Thursday.
Kraninger will succeed Mulvaney, White House budget chief, who was an outspoken critic of the agency. His agenda to weaken the agency’s enforcement and rulemaking has been widely denounced by Democrats and consumer advocates. While at the helm of the bureau, Mulvaney reversed the CFPB’s crackdown on short-term, high-interest loans, slashed the bureau’s spending, and laid the groundwork to massively reduce the agency’s reach and authority.
Repossessions, add-on products, and the “Larger Participant” rule will likely be at the top of Kraninger’s auto finance list, lawyers said.
For one, Hudson Cook LLP partner Eric Johnson, the firm’s authority on auto finance and fintech practices, suspects Kraninger will place a continued emphasis on add-on products, wrongful repossessions, and other practices often deemed deceptive.
Also, Kraninger’s views on the larger participant rule, which allowed the CFPB to regulate nonbanks that originated at least 10,000 loans or leases annually, will be worth monitoring, according to Troutman Sanders LLP lawyers Chad Fuller and Virginia Flynn. “The amount of oversight we were seeing with Cordray was a huge burden and expense, especially when state laws and AGs were already overseeing a lot of what auto lenders were doing anyway,” Flynn, an associate of consumer financial services, said in an email. “We are hopeful that the CFPB under Kraninger will rethink the definition of larger participant and increase the annual originations to a much larger number or remove it all together.”
On the whole, though, Johnson is not holding out for many new rules and regulations to be written. “It’s highly unlikely that Mulvaney, Kraninger, or the current Justice Department would choose to greenlight a disparate impact investigation in the auto finance world,” he said, adding that the expectation shouldn’t erase all concern about what she and the bureau might do if, and when, they reevaluate their positions.
Kraninger’s road to CFPB director was a controversial one. She was largely criticized by Democrats for having no finance or consumer protection background. Republicans retorted, affirming her OMB background puts her in a good position to curb CFPB spending.
Kraninger will serve a five-year term as CFPB director, which may provide some impetus for Democrats and Republicans to truly consider a commission structure, John Redding of Buckley Sandler LLP told AFN. Earlier this year, the CFPB fell under the scrutiny of Judge Loretta Preska of the Southern District of New York who ruled that it was unconstitutional of the CFPB to be structured as an independent agency that exercises substantial executive power and is headed by a single director. “It will be interesting to see how the Democrats approach the bureau’s single director mode, particularly if they believe they can take the White House in the next election,” Redding said, “since Director Kraninger’s term will last approximately three years into the next president’s term.”
However, given the likelihood of Maxine Waters’ (D-Calif.) appointment as chair of House Financial Services Committee, Kraninger is likely going to experience heightened scrutiny from the incoming Democratic House.
“She’s going to have to justify what she’s doing and not doing consumer protection-wise with the House,” said Johnson of Hudson Cook. “She will likely face a tremendous amount of pressure by representatives from the House and certain senators to protect consumers.”
Redding affirmed that pressure on Director Kraninger from Cong.Waters is likely, and “could result in distractions from the bureau’s core mission of protecting consumers.”
The CFPB declined to comment on how the agency’s auto-related initiatives may be affected with Kraninger as director.
Coastal Federal Credit Union is on track to increase auto loan originations 10% this year, to $600 million, despite reducing its footprint within its home state of North Carolina.
“We’re doing more business but doing it in a smaller area,” David Jacobs, vice president consumer lending at Coastal Federal Credit Union, told Auto Finance News. “We’ve pulled back in some of the territories that we were in.” Coastal Federal Credit Union, which had been operating in four states — Georgia, South Carolina, North Carolina, and Virginia — now operates in 16 North Carolina counties.
By yearend, the Raleigh, N.C.-based credit union expects to originate 26,000 direct and indirect auto loans. On the indirect side, 55% of volume stems from the 16-county footprint. “We feel like the Raleigh, Durham, Cary areas are insulated from some of the bad economic factors that happened in the past,” Jacobs said.
Meanwhile, members have been requesting longer loan terms. “More consumers have higher debt ratios,” he said. “People are cycling back to 2008, 2009 where they were overwhelmed with debt. We are starting to see that more and more. With that, we have more requests for 84-month terms.”
While loan performance has been “good” and the credit union “feels secure about the portfolio,” Jacobs is “keeping an eye on it from month to month,” he said. Currently, 85% of Coastal Federal’s indirect auto loans are made to consumers with 680-or-higher credit scores.
According to the Credit Union National Association (CUNA), “69% of credit union auto loans originate through the indirect channel, and only 5% of those indirect members use additional credit union products.” Once the indirect loan has been paid off, it is challenging for the lender to extend the customer relationship. Any future engagement is with the dealer for service and maintenance.
Profitability is continually squeezed due to steady increases in dealership fees, which have grown considerably in most markets, and in turn, reduce margins. In addition, quicker rates of pay-off, increased charge-offs and delinquencies add to profitability concerns with indirect lending. Marginal applications (not up to the institutions underwriting standards) and dealership loan documentation discrepancies further create the need to have effective oversight.
Of course, most credit unions also provide direct lending. This helps create stronger member relationships and enhances the credit union’s ability to sell other lending products to their members. However, the availability of auto loans through a credit union does not equate to increased direct lending volume.
The decision to focus on indirect lending vs. direct lending for auto loans is more than just a coin toss. For many credit unions who based the bulk of their portfolios on dealer-driven loan business, the decision to increase focus on direct lending can seem empowering. However, to be successful, lenders seeking to increase their direct lending portfolio will need to focus on savvy marketing, customer service, and differentiated loan offerings with consumer protection products.
Focus on Existing Members First
Credit unions are making advances with student loans, credit cards, and first mortgages. These existing members are great prospects for an auto loan. The relationship already exists, and the lender is intimately familiar with the member’s credit history. But don’t assume the member will automatically turn to you when shopping for a new vehicle!
Through direct lending, your loan officers have the opportunity to develop a one-to-one line of communication with qualified, vetted members. However, you can’t just rely on individual conversations to increase auto loan volume. Enhance that personal touch by putting into place a continuous contact strategy through email, social media, and print materials to proactively educate your members on the benefits of getting their auto loan with you. Millennial and Gen Z consumers demand online communication and will select a provider based on ease-of-use.
When it comes to differentiating your institution with both members and nonmembers, think beyond competitive interest rates and provide tangible value with consumer protection products. Products like a vehicle service contract and vehicle return protection protect the vehicle, consumer and lender in case of an unexpected vehicle breakdown or life event which could hinder timely payment.
Building a Profitable Relationship
The goal of direct lending is to gain a lifelong relationship with a new member, not just a loan. Having membership-friendly, built-in incentives for cross-sales helps generate faster on-boarding for additional services. Competitive rates, optimized consumer protection products, and a lender that understands the customer’s needs are all benefits that will pay dividends in a competitive market.
With more than 40 years of experience in the retail automotive industry, EFG can help your institution stay at the forefront of the changes affecting your industry today. Contact us today to learn how to get started.
BMO Harris Bank is accepting online auto loan applications in California thanks to a newly inked partnership with AutoGravity, with plans to expand its online business eastward in 2019.
“Primarily [the loan applications are] just from the West Coast now, and we anticipate that as the relationship [with AutoGravity] grows, we’ll see a movement more toward the bulk of our dealer groups, which is in the Midwest,” Craig Harter, BMO’s head of U.S. indirect auto, told Auto Finance News.
The AutoGravity partnership, announced Wednesday, marks Chicago-based BMO Harris’s first move to enable customers to shop for cars and apply for loans online. With AutoGravity, the lender expects to strengthen its dealer relationships, Harter said. “This helps us provide customers to our dealers, so it really helps us out as far as that relationship that we have with the dealership,” he said. “This is just another way for us to provide an opportunity for the dealership to get their cars out and sell them to the public.”
Separately, BMO Harris added seven states, primarily in the northeast, to its 22-state footprint of which the bank conducts business in. Harter anticipates moving into four or five additional states next year. “We contracted a few years ago, but now we’ve entered growth mode,” he said. “We partner very closely with our dealer finance group, so as they expand into other states, we’re usually right behind them, or vice versa.”
AutoGravity is a platform that connects car buyers with lenders and dealers. It provides consumers with prequalified finance offers for vehicles from partnered dealerships listed on the AutoGravity site. Buyers can use their computer or smartphone to browse local inventory for new or used vehicles, shop by monthly payment amount, and apply for financing directly through the platform. AutoGravity has attracted nearly 3 million users nationwide.
GM Financial displays its logo at its NADA Convention & Expo booth. (Photo by Auto Finance News)
General Motors‘ latest executive management change is a move to push for integration between the OEM and captive finance arm GM Financial, Jeremy Acevedo, Edmunds‘ manager of industry analysis, told Auto Finance News.
Chief Executive Mary Barra is taking charge of GM Financial, according to several reports. GM’s President Dan Ammann, who had been overseeing GM Financial and other operations, was named late last month as chief executive of the OEM’s Cruise Automation autonomous vehicle subsidiary.
GM did not immediately respond to a request for comment.
Acevedo sees the move as tightening the integration between GM Financial and the OEM’s other operations. GM is “laddering up top-level perspective to make sure all of GM’s branches are really working together, especially long-term, as [GM] is pairing its manufacturing prowess with electrification and autonomous driving,” Acevedo said.
For now, no one is set to replace Ammann at GM, which would keep Barra overseeing the captive. “If it’s going to be Barra up top, this could be a lateral movement to really get all the business components [of GM] talking to each other by having one oversight,” Acevedo said.
“The auto sector is so siloed, so to have that umbrella oversight to bring things together makes sense,” he added. “It could be an interim thing, but I wouldn’t be surprised if it’s a longer-term solution to see if it is functional for their ultimate goals.”
Ammann’s move follows just a week after the OEM announced plans to shutter five North American plants, cut 15% of its staff, and halt the manufacture of several car models to improve near-term performance and set itself up for a future of electronic and autonomous vehicles.
Auto Finance News today introduced a new event, called Auto Finance Accelerate. The week-long event series focuses on all facets of auto finance operations including sales, marketing, innovation, and risk. The inaugural Auto Finance Accelerate week will take place May 13-16, 2019, at the Omni San Diego.
Auto Finance Accelerate will kick off with the Auto Finance Sales & Marketing Summit, which will feature thought leaders discussing best practices for sales and marketing within an auto lending and leasing operation. Participants will gain insights on increasing volume in a declining sales environment, developing a direct lending marketing strategy, technologies to improve marketing efficiencies, and more. That event will be followed by the Auto Finance Innovation Summit, which will delve into ways lenders can embrace new technologies and invest in innovation. The 2019 agenda focuses on topics such as the successes and pitfalls of subscription services, practical applications for machine learning, and increased competition in technologies and services. In addition to practical insights, Auto Finance Innovation is the only event of its kind to feature demos of cutting-edge technology through its DEMOvation Challenge. Hosted in a unique setting where attendees have direct access to startups for questions and networking, this is a forum for showcasing new technologies that are disrupting the industry.
Even more opportunities will be available to attendees through the Auto Finance Risk Summit, an event focused on resolving the most critical risk factors lenders and lessors face today. The 2019 Auto Finance Risk Summit agenda will include sessions on the influence of used-car values on portfolio mix, vendor risk management, and protection against cybersecurity. Speakers will share their experiences and insights on how to utilize risk management to exact greater profits while minimizing losses. With many elements of auto finance relying on proper risk management, this event will allow auto finance companies to develop a plan of action toward greater success. The full speaker roster will be posted on the event’s official website and announced here on Auto Finance News as names are made available in the weeks and months to come. Sign up for the AFN email alert for daily updates or subscribe online to get monthly magazines, a weekly newsletter, and special event perks. For more information on the event, travel, lodging, and to register, please visit the website by clicking here.
State Farm Bank is not required to pay a civil penalty after settling Consumer Financial Protection Bureau claims that it had allegedly violated the Fair Credit Reporting Act on some auto loan and credit card accounts. 
