FORT WORTH, Texas — With a 60% chance that a mild recession will occur by 2020, lenders should start preparing for a downturn, said Cox Automotive Chief Economist Jonathan Smoke.
In a thriving economy, lenders tend to take more risk with loans, which can lead to problems if they don’t tighten underwriting standards in advance of a recession. Planning ahead and calculating for risk when pricing loans will reduce a lender’s chance of going out of business in a recession, Sonia Steinway, president of Outside Financial, an online platform that helps consumers arrange financing, told Auto Finance News.
However, factors such as whether the recession is tied to a specific lending product, for example, or what credit spectrum the lender is in can play a role in how a lender performs during a recession, Steinway said.
“One thing the past recession showed us is you have to always be looking for it,” said Chris Mitcham, vice president of servicing at Security National Automotive Acceptance Co. “Look at what’s happening to us today that can impact us — whether good or bad — and make sure you’re positioned appropriately, because the people who do that are successful.”
A New York federal judge ruled on Thursday that the structure of the Consumer Financial Protection Bureau is unconstitutional. The rationale: it’s an “independent agency with a director that can only be dismissed for wrongdoing,” Justin Hosie, an attorney with Hudson Cook LLP, told Auto Finance News.
The ruling is a part of a decision to dismiss the CFPB from a previous lawsuit that Cresskill, N.J.-based lender RD Legal Funding LLC and founder Roni Dersovitz of scamming 9/11 first respondents and NFL retirees with high-cost loans.
“Because the CFPB’s structure is unconstitutional, it lacks the authority to bring claims under the Consumer Financial Protection Act and is hereby terminated as a party to this action,” Judge Loretta Preska of the U.S. District Court for the Southern District of New York wrote in her case filing.
While the judge ruled in RD Legal’s favor on the CFPB’s constitutionality issue, she did not dismiss the suit altogether. “Accordingly, the defendants’ motion to dismiss the complaint is denied,” she wrote.
As such, the state will continue to pursue its case against RD Legal for “as many victims as possible,” Amy Spitalnick, press secretary for the N.Y. attorney general’s office, said in a statement to Law360.
Still, RD Legal’s counsel, David Willingham of Boies Schiller Flexner LLP, viewed Thursday’s outcome as a win, stating that the CFPB never should have brought this action in the first place. Willingham noted that the defendants are pleased with the ruling, as it limits the ability of the government to overreach this suit.
Meanwhile, at least one trade group agreed with the decision.
“The court’s ruling further proves one person should not have the sole authority over the financial lives of every American consumer,” Consumer Bankers Association told AFN in a statement. “It creates uncertainty, limits opinions, and turns the bureau into a political pendulum, swinging with each new Administration.”
However, if the U.S. Supreme Court ultimately shuts down the CFPB — rather than reform Dodd-Frank to impose a constitutional structure as a lower court had proposed — Hosie said the “big question” that needs an answer — is whether civil penalties imposed by the agency on the industry would need to be returned to the organizations that were fined.
CBA proposes creation of a bipartisan commission to lead the bureau and “ensure a diverse set of views have a seat at the table when important consumer financial policies are being crafted.”
A California federal judge dismissed some of the harshest claims posed in a class-action lawsuit against Wells Fargo & Co. and National General Insurance this week, but ultimately allowed the case to continue on the grounds that the lender’s improper force-placed insurance charges were “unfair.”
Wells Fargo allegedly charged more than 800,000 consumers for force-placed collateral protection insurance they didn’t want and didn’t need, and in April agreed to a $1 billion consent order from the Consumer Financial Protection Bureau and Office of the Comptroller of the Currency.
Yet, the class action lawsuit against the company continues, despite U.S. District Judge Andrew Guilford dismissing charges that the companies conspired to charge consumers more, as well as claims of racketeering activity, and fraudulent concealment.
One allegation did stick though, which is the class actions’ claims that the companies violated California’s Unfair Competition Law.
“As plaintiffs put it, ‘force-placing duplicative, unwanted, and unnecessary [collateral protection insurance] on at least 800,000 consumers’ is unfair,” Guilford said.
Wells Fargo was scheduled to pay the $1 billion consent order fine this week as well as submit a remediation plan for consumers, however, the company has yet to announce the plan.
The consent order noted that Wells Fargo has successfully identified 570,000 consumers who were overcharged for the entire length of the term. Yet, there are an unknown number of consumers who were served duplicative charges for only a portion of the full term.
A report claims the policy sent 274,000 borrowers into delinquency and resulted in 25,000 wrongful repossessions.
Ally Financial Inc. has agreed to settle for $19.7 million a 2014 class action lawsuit alleging the lender overcharged consumers who sought to purchase leased vehicles at the end of term, according to court documents filed in Florida federal court last week.
Borrower Robert Schreiber sued Ally on behalf of the proposed class after alleging that the lender charged him nearly $400 more for the lease-to-own contract that he bought from a third party, according to Law360. He claimed the overpayment constituted a breach of contract and violation of the federal Consumer Leasing Act.
Schreiber sought remediation for fees dating back to 2009, but because Ally did not retain full records dating back that far, the parties reached the $19.7 million figure based on data that was available. The lender did have records of buyers who were charged between $50 to $1,000 more for their car than the price listed on the lease, for an average of $238.
“Ally has reached an agreement to settle the class action lawsuit Schreiber v. Ally, related to dealer-document fees that may have been charged to customers in lease-to-retail purchase transactions,” the company told Auto Finance News in a statement. “Ally continues to believe that its customer experience is best in class, but also believes that settling the case at this time is in the best interests of all parties.”
Early on, Ally successfully brought the case into arbitration where it hoped to settle privately, however, a judge in the Eleventh Circuit overturned that earlier decision.
“This is an exceptional result for the class,” Schreiber said in a statement. “It offers class members benefits approaching or equivalent to a complete trial victory without the risks, costs, and delay of continued litigation, a trial and possibly an appeal.”
Ross Williams, president and chief executive of Hyundai Capital America
Auto Finance News will host President and Chief Executive of Hyundai Capital America Ross Williams at this year’s Auto Finance Summit for a fireside chat.
The event will take place October 24-26 at the Wynn Las Vegas. Click here for the full agenda.
The discussion will delve into Williams’ eight-year career at the captive, emerging trends in the prime auto finance space, and digital innovations in online financing.
Williams joined Hyundai Capital America in 2010 as vice president and department head of commercial credit, then advanced to head of sales and marketing before spending a year in Toronto as president and chief executive of Hyundai Capital Canada. He returned to the U.S. in July 2015 to assume his current role.
Prior to joining Hyundai Capital, Ross held leadership positions at GE Capital and Deutsche Bank. He earned his bachelor’s degree in finance from Michigan State University.
Hyundai Capital America held $31.1 billion in auto outstandings at yearend 2017, up from $30.1 billion the year prior, according to Big Wheels Auto Finance. The captive managed to grow its portfolio despite a drop in originations. HCA originated $14.1 billion last year down, from $16.8 billion in 2016.
On top of funding loans for Hyundai Motor Finance, the captive also operates Kia Motors Finance and Genesis Finance, which was launched under Williams’ leadership in late 2016 to boost lease volume.
It would be “surprising” if smaller OEMs looked to form captive finance arms in the wake of Fiat Chrysler Automobile’s announcement to do so last month, said Jagdeep Dayal, senior vice president and business head of captive finance auto lending at JPMorgan Chase & Co.
FCA has managed to grow to the scale where it believes a captive finance arm would deliver $500 million to $700 million in pretax income for the company. However, manufacturers such as Jaguar Land Rover, Suzuki, and Mazda — which use Chase Auto Finance as a private-label solution — have more limited resources.
“For the large OEMs, it could make sense economically depending on how they want to deploy their capital,” Dayal told Auto Finance News. “But the smaller you are, the harder it is to set up your own captive, and most of them don’t believe it’s an effective use of capital. You’re competing to put your capital against product development, capital investment, and I don’t think the small OEMs have capital like Ford [Motor Co.] to set up their own captive.”
Other manufacturer-bank partnerships include Volvo with Bank of America and Mitsubishi with Ally Financial Inc. The industry still remembers when FCA and General Motors had to drop their financial arms in the wake of the great recession, Dayal added.
“When OEMs have a captive, the cost of funding typically comes from their paper and the asset-backed securitization market,” he said. “A big bank like ours has material cost of funding advantages over their economics. It becomes more stark when you enter a recession, because ABS prices skyrocket and [Chase] is not dependant on ABS for funding.”
As of this writing, the Senate has passed a joint resolution under its Congressional Review Act authority disapproving of the Consumer Financial Protection Bureau’s March 2013 auto lending bulletin that addressed discrimination in indirect auto finance transactions. The House is slated to follow suit, and the president is expected to sign it. The joint resolution, if enacted, will invalidate the bulletin, and prohibit the CFPB from writing a rule substantially similar to the bulletin without new and express authorization from Congress:
With all the consolidation taking place at dealerships across the country, managers are looking for new ways to drive sales and keep customers coming back, and one of the most popular solutions this year has been subscription programs.
“Almost all of the manufacturers we deal with have their own programs they are planning to launch,” Dan Fields, president of Fields Automotive Group, told Auto Finance News. “They are going to offer those products to all their dealers [eventually]. But what’s different with our product is consumers can switch a car any time they want and switch brands any time they want. In a manufacturer program, they are locked in.”
For example, because of the wide range of brands Chicago-based Fields Automotive Group carries across four states, they can offer consumers a BMW 3 Series for the week and a FCA pickup truck or Jeep on the weekend, which would be impossible under either manufacturer’s stated programs. Not to mention, neither of those brands offer a full range of vehicles from sports car to pickup truck.
“For us, it’s not about identifying a new financial model, it’s how do we create meaningful experiences that resonate with our clients and allows us to retain them long term,” said Hesham Elgaghil, vice president of strategic growth and business development for Texas-based Park Place Dealerships. “Ultimately we’re able to retain that customer long-term, whether they leave the subscription program to purchase a vehicle or stay in the subscription program.”
One of the most difficult aspects of launching a program like this is deciding what to do with the vehicles in the fleet that have been used and when to take them out to maximize the residual value. Fields is working now through vehicle forecasts in order to establish the proper fleet.
“The key is to put the proper car in and take it out at the proper time,” he said. “That largely depends on what that residual value is going to be, which differs on make, model, style of vehicle, and even option package.”
But the dealerships do have help in this regard via their technology partners. Fields and Elgaghil have both teamed up with Clutch to provide the consumer interface and identify vehicles that need to be taken out of the fleet.
“We’ve determined that we’ll cycle the bulk of the fleet out once the vehicle hits 9,000 miles,” Elgaghil said. “Additionally, we have a huge audience that would love to purchase a certified pre-owned car and having it under 10,000 miles for our market makes a lot of sense.”
Other technology providers include Mobiliti, which opened shop with Island Auto Group in May for the Staten Island, New York area, and Flexdrive, which expanded its footprint to 23 cities in February.
“We agree with the thesis that over the next five to 10 years there will be a big shift from retail to fleet,” Jesse Hord, chief executive of Albany, NY-based Keeler Motor Car Co., told AFN earlier this year after developing a subscription program with Clutch. “We knew that the OEMs are going to start to experiment with pilots and we wanted to figure it out for ourselves before they design the programs.”
As used-car financing gains popularity and banks shy away from new-car loans, credit unions are jockeying for marketshare, partnering with service providers and teaming with other lenders
to spark auto loan interest.
“[Banks are] making a lot of moves that are making it easy for us,” Chris Whittaker, director of lending services at Oregon Community Credit Union, told Auto Finance News. “You’ve had big players that have pulled out and placed their capital elsewhere, the reduction of new-car sales, and you’re seeing [lenders] scaling back production overall.”
For instance, Wells Fargo Auto posted a 14.3% decline in its auto portfolio last year — to $53.4 billion, its lowest level since 2013. As a result, the bank fell three spots to No. 8 in the Big Wheels Auto Finance Data 2018 ranking of the nation’s top 100 car lenders and lessors. Ally Financial Inc. dropped one spot to No. 2, on the heels of a 0.6% portfolio decline. Another 17 lenders posted portfolio decreases last year, according to Big Wheels, and credit unions have capitalized on those declines.
Credit unions have grown their share of the auto finance market faster than any other segment. In 2017, credit union portfolios grew 15.1%, compared with 12.9% at independent finance companies, 5.9% at captives, and 0.5% at banks, according to Big Wheels. In fact, by institution type, the number of credit unions rose to its highest level — 51 of 100 — while the number of banks dropped to its lowest level — 29 — since 2011.
“We are seeing a year-over-year increase in originations,” Joe Pendergast, vice president of consumer lending at Navy Federal Credit Union, told AFN. “We are going to increase auto originations by probably 11% this year. The last couple of years we have seen double-digit increases.”
One method Navy Federal has used to scout new customers was to form a six-month pilot with CarFax back in January, which allows credit union members to obtain as many as 10 free CarFax reports a month for six months. “Usually it’s $39.99 per report, but they can get it for free,” Pendergast said. Already, nearly 50,000 reports have been pulled, generating 500 loans — some $8.3 million of originations.
America’s First Credit Union posted record volume last year, driven, in part, by a pass-through program that enabled it to buy deeper than its normal credit tier. “While we do not specifically target new or used financing, we have strong relationships in our indirect program that has provided a record year in auto lending,” said Bob Jaffe, indirect lending manager at
the Birmingham, Ala.-based credit union. “This program has provided competitive financing to our community that may not have qualified for our standard program,” he said, declining to name the pass-through partner.
Additional volume has been spurred by a partnership with an “after-hours underwriting source that allows our dealer-partners to receive decisions 24/7,” he said.
Navy Federal credits technology initiatives with boosting growth, specifically citing the credit union’s mobile app. “You can get approved in minutes and sign electronically,” Pendergast said. “Our customers want convenience.” The app was launched in October 2016 and currently accounts for 33% of all auto loan applications completed.
A Shifting Mix
As a group, credit unions have increased originations 25% since the first quarter of 2015, according to Experian’s 2017 State of Credit Unions report. Specifically, credit unions originated 1.9 million loans in the first quarter of 2017, compared with 1.5 million loans two years prior. But with new-car sales volume slipping last year for the first time since 2009, some credit unions are adjusting their loan mix.
“After many years of record-setting auto sales, fewer consumers are heading to dealers to purchase a vehicle, leading to a decline in the need for a loan for their purchase,” said Mark Coburn, senior vice president of lending development at State Employees’ Credit Union in North Carolina (SECU). And while, for some, this preference has reduced new-car financing portfolios, it has also bolstered used-car volume.
At America’s First Credit Union, used-car financing accounted for 49% of the 2017 portfolio, compared with 48% in 2016. On a unit basis, the number of used vehicles financed increased 21%, Jaffe said.
“We will continue to attract used auto financing through our indirect channel and various promotions throughout the year to attract [refinancing] opportunities,” he said.
Consumers are leaning more toward used vehicles because relatively high inventory levels have pushed down pricing, especially relative to new cars. The average new-car price was $35,285 in March, up $703 year over year, according to Kelley Blue Book.
“The more supply, the lower the prices are going to be, and that’s what we are seeing, and our members are taking advantage of that,” Navy’s Pendergast said. “Dealerships are helping with that through CPO programs, free maintenance, and plenty of advantages of buying a used car. I am not going to pay a lot per month, it’s going to be gently used, and there’s roadside assistance.”
Off-lease vehicles are an attractive option for vehicle purchasing, SECU’s Coburn said. There were 3.6 million off-lease vehicles returned last year, up 8.1% from 2016 according to Cox Automotive; this year, that figure is expected to rise another 7.4% to 3.9 million.
“We are starting to see that shift from new to used, and that will continue to play out, we think, in 2018; more people are leasing today because a lot of consumers can’t afford a $50,000 or $60,000 new car,” Pendergast said, adding that Navy Federal members are taking advantage of the dealership offerings that come with used vehicles right now.
Navy Federal Credit Union’s used-car mix increased to 56% of its overall portfolio in April, compared with 46% in the prior-year period.
“Our members primarily finance used vehicles and are looking for ones that are in good condition with low miles,” he said. “Most off-lease vehicles typically meet these requirements.”
Navy is “bullish” this year about U.S. auto sales, Pendergast said, expecting another year close to 17 million new-car sales. “There’s lot of opportunities and choices for our members to find a nice car,” he added.
Still, some credit unions are cautious about actively pushing used-car finance penetration. Oregon Community Credit Union’s portfolio is split between used and new vehicles, with no specific plans to change its strategy.
Meanwhile, Navy plans to let things happen more “organically,” Pendergast said, because there’s a natural course the market is taking. “We want to increase our total vehicle financing in 2018, specifically focusing on new vehicles, as we have seen more of a decline in this type of financing than that of used vehicles,” Coburn said, specifying that SECU’s used-vehicle loan origination fell to 20% from 25% in 2016.
“Our challenge, like that of our fellow lenders, is how to counteract this decline when consumers are not purchasing cars as readily as they were a few years ago.”
Fiat Chrysler Automobiles Group will likely move fast to acquire Santander Consumer USA’s Chrysler Capital portfolio because it will provide an instant revenue stream for the OEM and the ability to retain customer brand loyalty, said Jack Micenko, auto finance analyst at Susquehanna Financial Group.
Micenko estimates the portfolio is worth a conservative $1.2 billion, even though Santander Consumer holds $40 billion in outstandings, about $15 billion of which is related to Chrysler, he told Auto Finance News.
“It’s the least risky part of the portfolio that FCA would acquire under the umbrella of what is Chrysler Capital, but it’s also lower yield, because higher risk is higher yields,” he said. “SC will retain all the subprime business if this deal were to go through, and we’ve heard FCA say, ‘We don’t want to do subprime in the future,’ so presumably some sort of relationship for the subprime assets would continue.”
Because more than two-thirds of the Chrysler Capital portfolio is comprised of leases, Micenko believes FCA will purchase it to “have a better ability to control the collateral, control used residual values into their brands, and retain customers into new leases.”
Of course, the final sale could wind up being higher than the $1.2 billion figure. Micenko assumed a multiple of six times Santander’s earnings to arrive at that number, but several nonbank lenders have fetched eight or nine times earnings.
“Presumably, FCA wants to get something moving pretty quickly,” he said. “At the same time, you don’t want to disrupt the financing of your current flow, particularly the new model year for Wrangler, for example.”
