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The White House is planning on revising Department of Defense (DoD) rules to more freely allow the sale of add-on products to military servicemembers at the same time that the Consumer Financial Protection Bureau prepares to scrap supervisory examinations of lenders in regards to violations of the Military Lending Act.

The proposed changes were revealed in documents signaling that President Donald Trump’s administration is moving to support dealer trade groups that have been calling for the change, arguing that servicemembers should have the same access to add-on products at the dealership as other consumers. The New York Times and NPR reported the news Friday after receiving the documents.

However, critics say the changes could make servicemembers more susceptible to predatory lending practices and would make the CFPB less proactive in policing violations.   

Late last year, the DoD changed how it regulates the Military Lending Act such that GAP waivers and other add-on products must be included in the calculation of the borrower’s military annualized percentage rate (MAPR). The law states that MAPR cannot exceed 36% and since F&I managers at dealerships weren’t adequately trained to calculate this rate with the add-on products included, many lenders decided to stop funding loans to servicemembers seeking GAP waivers.    

Auto Finance News has not obtained the documents so it’s unclear if the proposed plan would revert to the system in which GAP waivers are excluded from the calculation, or if there are other changes in the works. But in a statement regarding the regulation of add-on products, the DoD said changes would be made “only if necessary and in a way that does not reduce the MLA protections afforded servicemembers and their families.”

NPR had Christopher Peterson, a law professor at the University of Utah who helped write the original regulations, review the documents. He said the proposed plan would make it easier for dealers to sell add-on products to servicemembers while characterizing the sales as “overpriced rip-off products.”

At large the industry feels add-on products, such as GAP waivers, are valuable because it protects consumers who increasingly find themselves in negative equity positions on their auto loan.

However, the Military Lending Act was designed to protect servicemembers from falling into bad financial positions, and critics argue these add-on products make loan payments too high for the borrower to cover. Servicemembers can lose security clearances, get distracted by financial trouble at home, or even get kicked out of the service for the inability to handle financial affairs.

On top of the changes at the DoD, the CFPB is looking to eliminate supervisory examinations that would proactively protect servicemembers from violations of the law. Interim director Mick Mulvaney argues that the examinations are not explicitly laid out in the Military Lending Act.

Despite plans to roll back enforcement, Mulvaney is simultaneously seeking the Congressional authority to perform active monitoring of lenders under the legislation.  

“It will go from a proactive system to something that is completely reactive,” Peterson told the New York Times.

The bureau will still bring individual cases against lenders who are found to violate the law and will continue to supervise lenders under other statutes, according to reports.

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The U.S. Department of the Treasury called for the modernization of collection laws in the financial services industry in a report issued last week in order to clarify the regulation of digital communications.

Specifically, the Treasury called on the Bureau of Consumer Financial Protection to update rules on the Fair Debt Collections Practices Act (FDCPA).

“We need the law to keep up with the digital age,” Scott Weltman, managing partner of the Cleveland-based debt collection law firm Weltman, Weinberg & Reis Co., told Auto Finance News. “If the bureau came out with standards that say, ‘Debt buyers are provided A, B, and C,’ it makes it a lot clearer for debt collectors.”

The Treasury is calling on the BCFP to establish minimum federal standards governing third-party debt collectors, including a clear determination of the information needed to validate that the debt is owed. In the spring, the bureau detailed its rulemaking agenda, which includes “preparing a proposed rule focused on FDCPA collectors that may address such issues as communication practices and consumer disclosures.”

The current FDCPA rules “inadvertently” make interactions between debt collectors and consumers “needlessly cumbersome” because it prohibits debt collectors from disclosing information about a consumer’s debt to unauthorized third parties and allows consumers to terminate communication with the collector, the report states.

“Our goal is to engage in dialogue,” Weltman said. “The way a lot of the laws are structured related to the digital age — it makes that challenging.” But the bureau can be more “nimble” with the rulemaking process — unlike Congress which takes a long time to pass laws, Weltman said.

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CarFinance.com is building a platform for its lender partners to “build their own” portals on the website, chief executive Craig Hewitt told Auto Finance News.

The new offering from CarFinance.com will allow its lender partners to pick and choose the financial products they offer through the portal, Hewitt said.

“We’re designed to be the consumer landing page where you come to CarFinance.com and you [consumers] may be looking for refinancing, dealer purchase, private party, lease buyout, cash out refi, or commercial financing,” Hewitt said. “We are built to give a lending partner that kind of modularity. … [As a lender] I may not want to participate in all six of those transaction types, but I might say I want to participate in a select three.”  

CarFinance.com is preparing to split from its parent company, Flagship Credit Acceptance, to become an independent company, AFN reported last week. Flagship and CarFinance combined to originate $264.1 million last quarter. About $30 million of loans are now being originated quarterly on CarFinance.com.

Hewitt wants to make CarFinance.com an online destination for automotive financing, and that includes offering services to the lender.

“Our lending partners can choose from a menu of services we provide, including both a platform as a service or software-as-a-service,” he said. Lenders “can choose from staffing services, platform marketing, lead generation, credit underwriting, loan decisioning, credit execution, loan validation, loan funding, or title management. Or you can look at different parts of our software licensing.”  

For now, CarFinance.com can only facilitate direct deals, but the company is working on a dealer-purchase platform and adding lenders so that Flagship will be just one of many finance providers on the site, Hewitt said. A “dealer-purchase platform” means CarFinance.com works directly with the dealer to facilitate a loan. 

Unlike other direct lending platforms that give the consumer multiple loan offers, CarFinance.com presents only one: the offer CarFinance determines gives the best value to the consumer. As more lenders join the platform, the company may switch to a dual-offer system.

“Ultimately, there are a lot of things that can confuse the consumer on a multiple-offer arrangement,” Hewitt said. “It’s different in each financial situation. In refinancing, it might be APR and term, which are the deciding factors. In that case, our first presentation would be on the lower rate. But we would also let the consumer know there’s an option available with a longer term that’s going to result in a lower monthly payment.”   

Hewitt declined to name the other lenders on the website, but said that CarFinance.com is able to serve as a full-spectrum lender through its associates.

CarFinance.com’s homepage.

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The Consumer Financial Protection Bureau is trying to “nudge” auto finance innovation, too.

The regulator earlier this week unveiled a new “regulatory sandbox,” known as the Global Financial Innovation Network (GFIN), that is intended to help fintech startups develop new products and services for the financial services — and the initiative has import to auto finance.

CFPB hired Paul Watkins, former chief counsel of the civil litigation division for the Arizona attorney general’s office, to head up GFIN. The effort includes 10 other regulatory bodies from around the world.

In the past, only “brave innovators” would enter the consumer financial services space for fear of the regulatory landscape, said Justin Hosie, partner at Hudson Cook LLP, told Auto Finance News. “If PayPal had first asked compliance lawyers if they could do business, they’d say, ‘No, you’d be violating money transfer laws, etc.,’” he said. “But, then we would never have PayPal, Venmo, and Apply Pay.”

The bureau cited the growth of fintech and innovation trends, such as big data, artificial intelligence, and blockchain, as the reason why it launched GFIN.

“Financial services regulators must re-consider existing ways of working and collaborating, to balance potential benefits of innovation,” according to a CFPB document.

CFPB will also work to develop a system for regulators to assess innovation at financial institutions.

The idea of a regulatory sandbox is not necessarily new. Under Richard Cordray, former CFPB director, some work in this area was done under Project Catalyst — which allowed fintechs to pitch product ideas to regulators and receive a regulatory OK before moving forward. Project Catalyst launched in November 2012.

A challenge with Project Catalyst, however, was that the bureau could rescind an approval it made — “it didn’t carry much credence,” Hosie said. Under Cordray, the bureau issued but one approval through Project Catalyst, Hosie said.

Now, the bureau has established a new Office of Innovation and the work done under Project Catalyst will be transitioned to this new endeavor. GFIN, part of the Office of Innovation, is a “step in the right direction,” Hosie said.

“The idea is simple: there are regulatory ambiguities, and rather than keeping your fingers crossed that you won’t get in trouble — you can get approval,” Hosie said.

Per next steps, CFPB is asking for feedback by October 14 on the document that outlines GFIN’s plans.

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Carvana’s originations of finance receivables increased to $525.8 million during the first six months of 2018, compared with $223.8 million during the same time last year, according to the company’s second-quarter earnings released this week.

That boost in financing tracks with the online dealership’s higher retail sales expectations this year. Sales climbed 111% during the second quarter at Carvana.

Carvana funds loans through a purchase and sales agreement it has with Ally Financial Inc. In late 2017, Ally agreed to fund $2 billion worth of retail contracts through the dealer’s network this year, upping the $600 million commitment the lender made in January 2017.

During the earnings call, the online car dealership revealed that on Tuesday it earned $4 million for facilitating the refinancing of $236 million of Carvana-originated finance receivables it had previously sold.

“The refinancing provides the purchaser with more efficient financing than at the time of their initial purchase, and we are sharing in the value created,” Mark Jenkins, chief financial officer, said on the earnings call. “We believe this transaction demonstrates our ability to better monetize the finance receivables originated on our website.”

Carvana consumers can also finance vehicles through Carvana’s third-party lenders. Carvana sold $308.8 million in principal balances of finance receivables during the first six months of 2018, up from $157.7 million during the same time last year.

In a separate announcement, Carvana revealed its expansion to four new cities in Pennsylvania: Harrisburg, Lancaster, Allentown, and York-Hanover. Meanwhile, it launched in four more cities in Ohio: Akron, Canton, Youngstown, and Toledo. Carvana launched its thirteenth car vending machine in Cleveland, Ohio, late last month, as well.

Launched in 2012, Carvana now sells vehicles in 70 cities nationwide.

Carvana acquires its inventory of roughly 10,000 used vehicles through suppliers like Manheim and purchases from the general public. Carvana’s platform allows consumers to shop, finance, and purchase vehicles online. They can also schedule a seven-day test run before deciding on their final purchases.

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Tesla Model 3 (via Tesla press kit)

Tesla Financial Services reported growth in its leasing portfolio but because of an accounting change, it is showing large declines year over year, according to the company’s second-quarter earnings.

Not adjusting for the accounting change, Tesla reports a 17% year over year increase in its lease portfolio to $4.2 billion outstanding. Yet, accounting for the change in reporting, Tesla’s lease portfolio is down 36% year over year to $2.3 billion.  

Why such the big discrepancy? Tesla has long guaranteed resale value for vehicles leased by third-party lenders, such that after the lease period has ended consumers will get a credit towards their trade in should the vehicle’s value depreciate below a specified percentage. However, beginning January 1, Tesla adjusted how it tracks revenue for these types of leases, causing the portfolio to decline.

Specifically, the accounting change instantly lowered lease balances by $1.8 billion. Therefore, year over year comparisons are not accurate assessments of the captive’s portfolio.

Lease balances are down 1.4% compared with the first quarter and across comparable accounting metrics, but quarterly comparisons are more malleable to seasonal changes.

“We plan to continue expanding our financing offerings, including our lease financing options and the financial sources to support them, and to support the overall financing needs of our customers,” the company noted in the 2Q report. “To the extent that we are unable to arrange such options for our customers on terms that are attractive, our sales, financial results and cash flows could be negatively impacted.”

Tesla Financial Services does not provide leasing for its latest unit the Model 3.

As more Tesla vehicles come off lease, the company’s used sales and financing will become a “significant portion” of the OEM’s business.

“Used car sales, in particular, are growing rapidly and are becoming more profitable,” Tesla wrote in the report. “A vast majority of our customers coming off lease are either obtaining a new Tesla or keeping their existing car, which is well above industry best-in-class.

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Mike Groff, president and chief executive, Toyota Financial Services (right) and his successor Mark Templin (left).

A leadership change at Toyota Financial Services will have long-time executive Mark Templin take the reins as president and chief executive, the captive announced in a press release.

Templin will serve as the successor to Mike Groff, who is set to retire at the end of the month. Templin first joined Toyota in 1990 and has served as chairman of the board of directors of Toyota Motor Credit Corp. since May 2016.

With an insider taking the helm, Templin “brings a global depth of knowledge and experience in both the finance and automotive sides of the business,” Groff said in the release. “He understands how to meet the needs of our dealer partners and our distributor affiliates.”

Groff, who joined Toyota Motor Credit in 1983 as the company’s seventh employee, became president and chief executive in 2013. He will serve as an executive adviser to the captive until November 16.

Under Groff’s leadership, Toyota has increased its total outstandings by 24.7% — rising to $91.3 billion in 2017 compared with $73.2 billion in 2013, according to Big Wheels Auto Finance data. Additionally, Groff oversaw the captive’s headquarters change when it joined Toyota Motor North America and relocated to Plano, Texas in July 2017.  Groff was also responsible for TFS operations in Canada, Mexico, Puerto Rico, Argentina, Brazil, and Venezuela.

Toyota and its finance arm have experienced a transition over the years under the leadership of the OEM’s President, Akio Toyoda, who took the helm in June 2009. A part of Templin’s goals as the captive’s chief executive is to, “be a great partner to the automotive side of the business in achieving Akio Toyoda’s vision of mobility for all,” Templin said. 

The captive has recently undergone other leadership changes. Most recently, Vipin Gupta was appointed as group vice president and chief information officer in April. Additionally, Veronica Roman was tapped as chief compliance officer in May of last year.

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Nicholas Financial Inc. is making headway towards its lending goals as it has worked to modify its underwriting guidelines to improve the quality of contracts it purchases throughout 2018 — reflected by an 18.4% drop in originations, the company announced in its earnings report for the three months ended June 30, 2018.

“If you are going to be a subprime lender – which Nicholas is – then you have to price the risk accordingly,” Doug Marohn, president and chief executive, told Auto Finance News. “We are not shying away from risk. We are simply trying to be more disciplined in how we underwrite that risk and how we price for it.”

The company’s average finance receivables are $296.5 million — a 14.3% decrease from $346.2 million the year prior. The lender’s average loan term also came down to 49 months, from 55 months last year. “Our focus on financing primary transportation to and from work for the subprime borrower continues to contribute to improved metrics in terms of increased yield, smaller amounts financed, and shorter terms,” Marohn said in its earnings report.

Though, with tighter underwriting guidelines and a decreasing portfolio, the lender’s provision for credit losses saw a 44.4% improvement for the three months ended June 30. Credit losses totaled $5.42 million compared with $9.75 million in the three months ended June 30, 2017.

Nicholas Financial still has a “long way to go” and “much more to accomplish,” Marohn said. But the strategy seems to have improved the company’s delinquency rate. Indirect loan delinquencies 30 or more days past due totaled $17.3 million, down from the $21.4 million it recorded as delinquent during the same period last year. Total delinquencies accounted for 9.95% of its indirect portfolio, down from 12.04% the year prior.

Direct auto loans outstanding declined to $7.5 million, from $8.2 million at the same time a year prior. Delinquencies for its direct loans performed better than the indirect portfolio but were still on the rise to 5.33% of the portfolio, up from 5.29% the year prior. However, direct loans only account for approximately 5% of the company’s total receivable portfolio, according to the earnings report.

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Chris Ballinger, CEO of MOBI

Finance companies will fund more contracts and enjoy easier title transfers through the use of blockchain technology, Chris Ballinger, chairman and chief executive of Mobility Open Blockchain Initiative (MOBI), told Auto Finance News.

Blockchain is a digital decentralized public record used to store transaction data across many computers. A lender’s volume can be improved through the use of smart contracts, Ballinger said.

Smart contracts are computer programs that are able to automatically approve borrowers based on predefined credit metrics. While lenders already utilize automated decisioning tools, blockchain makes the transactions more secure and doesn’t require an intermediator. Smart contracts show how blockchain can streamline “cumbersome processes” captives typically deal with, but at a lower cost through a community database, Ballinger said.

However, in order for blockchain to work, a community ecosystem is vital and the industry hasn’t established one, David Luce, chief operating officer, told AFN. The key to creating a strong community is establishing a single blockchain language for captives, dealers, manufacturers, and lenders, Luce said.

MOBI launched in May to jumpstart the community alongside participating companies such as BMW, Ford, General Motors, and Groupe Renault. EV manufacturer Faraday Future and KAR Auction Services joined last week as the most recent additions to the consortium. Ballinger was the former chief financial officer and director of mobility services at the Toyota Research Institute Inc., but left his position with the OEM to found MOBI.

The Research Institute hasn’t joined MOBI’s consortium as it’s seeking collaboration with MIT Media Lab to explore blockchain technology.

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As BMW Group keeps focus on its long-term goal of innovative mobility, the OEM’s financial services unit now holds $147.6 billion in consumer loan contracts on its balance sheet, up 3.5% year over year, according to its second-quarter earnings report. 

BMW Financial Services signed 480,303 new credit financing and leasing contracts with retail customers in the second quarter, an increase of 2.5% year over year. In the U.S., contracts were up 0.8% compared with the previous six-month period ending in December. 

Meanwhile, leasing penetration rates remained flat year over year at 47.4%, while second quarter pre-tax earnings climbed 2.7% to $701 million.

“The financial services segment continued to perform well,” Nicolas Peter, chief financial officer, said on the earnings call Thursday. “Also, our credit loss ratio remains low and residual values for our leasing portfolio have developed as expected.” 

During the earnings call, Harald Krüger, chairman and chief executive, reiterated the OEM’s goals toward expanding its mobility services. In March, BMW Group and Daimler AG announced the merger of its mobility service divisions, which is still pending approval.

“Together, we will take innovative mobility service to a whole new level,” Krüger said on the call.

Daimler Financial’s Car2go service launched a fleet of 400 Mercedes-Benz vehicles in Chicago just last week.

On the electric vehicle side, Krüger also emphasized the OEM’s goals to reach 140,000 electric vehicles delivered to consumers this year. Currently, BMW offers 10 electric or plug-in hybrid models.

“Since the start of this year, we have delivered more than 60,600 electrified vehicles to customers, an increase of over 40% year-on-year,” Krüger said. “We will release the MINI Electric late next year, followed in 2020 by the first fully electric BMW, the iX3.”

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