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Fewer than 10 banks will be required to submit stringent stress test analysis to federal regulators following Congress’ passage of bipartisan legislation designed to rollback Obama-era financial regulation.

The House voted 258-159 to roll back parts of the 2010 Dodd-Frank Act, which will now designate banks with assets above $250 billion as “systemically important financial institutions” (SIFI) up from the $50 billion threshold the bill originally instituted.

Companies such as BB&T Bank, Huntington Bancshares, Fifth Third Bancorp, SunTrust Banks, and 30 of the other 38 largest banks in the country will no longer have to submit the most stringent stress tests to regulators. Institutions such as JPMorgan Chase and Wells Fargo & Co. — which have assets in the trillions — will still have to submit to these tests.

The bill keeps in place many of the provisions former Congressman Barney Frank embedded in the law, such as rules that prevent lenders from off-loading too much risk into securitizations, he said during an interview on CNBC.

“We said you should not be able to make loans to consumers with very shaky credit and then securitize it so that you can make a loan and then not take the risk of nonrepayment,” Frank said. “What smaller banks get here — and they tend to be the banks that know their neighborhood — is they get to make the loans to people with weaker credit than elsewhere if they keep it on their books.”

He went on to say that he agreed that the original $50 billion cap for SIFI designation is too low but would have liked to see it closer to $125 billion. Its compromises like this that allowed the bill to gain bipartisan support from moderate Democrats.

While there is relief for small banks, the bill did not go far enough, said Richard Hunt, president and chief executive of the Consumer Bankers Association.

“I think this is a great first step,” he said in the CNBC interview. “I wish this bill would go a little further. I think every bank should be determined if they are a SIFI based on the activities of their bank and not some arbitrary number.”

Additionally, the industry criticized the bill for not including any restructuring of the Consumer Financial Protection Bureau into a bipartisan commission. The bill is headed to President Donald Trump’s desk where he is expected to sign it into law.

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Wells Fargo CEO Tim Sloan sits down for an interview on Bloomberg TV.

Wells Fargo & Co will ramp up its auto lending volume following about a year and a half of intentionally pulling back from the market, Chief Executive Officer Tim Sloan said in an interview with Bloomberg today.

“We’ve pulled back enough and now we’re going to be growing that business again,” Sloan said of the bank’s auto lending division.

The bank’s auto portfolio dropped by $8.9 billion year over year to $53.3 billion in total outstandings by the end of 2017, according to the Big Wheels Auto Finance report. Wells Fargo Auto reported $49.6 billion in total outstandings during the first quarter — an 18% drop year over year, according to earnings.

Senior Executive Vice President and Chief Financial Officer John Shrewsberry, said the company could “start to increase originations over time,” during the first quarter earnings call, but doesn’t expect portfolio balances to grow until 2019.

The pullback began in late 2016 amid the start of the banks’s various scandals from faked checking accounts to the illegal repossession of active-duty servicemember’s cars.

In April, Wells Fargo was fined $1 billion by the Consumer Financial Protection Bureau in part for automatically charging consumers for insurance they had already purchased from a third party provider. However, consumer remediation is still outstanding as the bank is required to submit to the bureau its proposal to adequately pay back consumers that have been harmed.

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Fifth Third Bancorp announced plans to buy MB Financial for $4.7 billion today, folding the Chicago-based bank’s growing auto portfolio into Fifth Third’s more cautious approach.

The merger is still subject to regulatory approval, but Fifth Third has indicated that it plans to keep a number of MB Financials senior leadership in various roles and noted the similarities in the two bank’s credit profiles.

MB Financial grew it’s relatively small auto portfolio to $692 million during the first quarter — a 20% increase compared with the same period the year prior, according to earnings.

While Fifth Third’s outstandings dwarf those figures — $9 billion in outstandings according to first-quarter earnings — the portfolio’s volume has been on the decline as the company seeks better risk adjusted returns.

“Credit risk management continues to closely monitor the automobile portfolio performance,” the bank noted in its first-quarter earnings report. “The automobile market has exhibited industry-wide gradual loosening of credit standards such as lower FICOs, longer terms, and higher LTVs. Fifth Third has adjusted credit standards [and] focused on improving risk-adjusted returns while maintaining credit risk tolerance.”

Fifth Third has managed to keep net charge-offs in its portfolio flat year over year at $11 million despite delinquencies 90 days or more past due growing to $9 million compared with $6 million during the same period the year prior. However, since instituting its risk-adjusted strategy delinquencies have come down quarter over quarter.  

On the other hand, MB Financial experienced a 59% jump in auto delinquencies year over year to $5.1 million. As a percentage of its total outstandings, delinquencies made up 0.73% of the portfolio in the first quarter compared with 0.55% the same period the year prior.

“Teaming up with Fifth Third allows us to leverage our complementary capabilities for the benefit of our customers and the communities we serve,” Mitchell Feiger, president and chief executive of MB Financial and the new leader of Fifth Third’s Chicago region, said in a press release. “Our commercial expertise and strong credit culture complement the strengths of Fifth Third in large corporate lending, capital markets, wealth management, and the payments business. Both organizations are committed to a successful integration.”

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With Canadian new-vehicle sales rising, more banks and captives may be encouraged to seek funding in the U.S. ABS market to acquire more liquidity, according to a report from S&P.

Auto sales in Canada made up 27% of the countries total retail volume in 2017 and it was mostly spurred by new-vehicles, according to the report. Nearly 81% of auto sales in the country last year were new — supporting a record 2 million vehicles sold.

The growth is due in part to the availability of financing, S&P noted. “The re-emergence of auto captives, which has accelerated the availability of auto
leases, has been driving strong Canadian auto sales over the past few years.”

Meanwhile, the Bank of Nova Scotia (Scotiabank) and Bank of Montreal (BMO), which have both established auto loan ABS programs within the past two years.

“Both programs have been well-received in the U.S. auto ABS market,” according to the report. “They have offered the banks relatively cost-effective funding levels, which may encourage other Canadian banks with established auto loan lending programs to enter the market.”

Several Canadian auto captive finance companies, including those of Ford Motor Co., Daimler/Mercedes-Benz, BMW, Nissan, and General Motors, have issued auto ABS transactions in both the U.S. and Canadian markets in recent years. Additionally, Hyundai Capital America recently added the Canadian market to Chief Risk Officer Marcelo Bruti’s list of responsibilities in a sign of increased interest, Auto Finance News has learned.

However, the market does face headwinds including competitive tax rates and interest rate hikes, according to a report from DBRS.

“Decline in consumer spending and new business investment may worsen as the country’s longstanding competitive advantage in corporate taxes has been reversed following U.S. tax reform, which saw the corporate tax rate drop to 21% from 35%,” according to a recent report from DBRS. “The stress on Canadian consumers from the decline in Canadian competitiveness is likely to be accelerated with recent interest rate hikes (two in 2017 and one in January 2018) as well as new mortgage rules for consumers to consider.”

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Marcelo Brutti, chief risk officer for Hyundai Capital America, does a fireside chat at AFPCS18.

DALLAS —Hyundai Capital America’s Chief Risk Officer Marcelo Brutti detailed the risk analysis that went into the launch of the captive’s electric vehicle subscription program and the adjustments made last month.

“We don’t know what the future looks like, but we know subscriptions could be one of the solutions,” Brutti told attendees at the Auto Finance Perfomance & Compliance Summit. “So we want to get experience out there, we want to see how the market reacts, we want to put it out as a potential product.”

Last month, Hyundai quietly raised prices on the Ioniq Unlimited+ subscription program, which offers an all-in-one monthly price for lease payments, maintenance, and insurance. Unlike other programs, there’s no ability to swap out vehicles. Yet the 36-month lease term required by Ioniq Unlimited+ helps the program to be one of the cheaper subscription options, starting at $275 per month.

The program is only live in California, and the funding, securitization, and strategic risks are still to be evaluated for a larger release, Brutti said.

“You have to identify all of those risks before you actually decide to launch a new product,” he said. “Even after you do all that, you have to decide whether you actually want to do it. What are the implications if you do it? And what are the implications if you don’t do it?”

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DALLAS — Whereas in the past SunTrust Dealer Financial Services would go through a quick sign-up process with a dealership, the lender now takes a more strategic approach when building relationships, First Vice President Cindy Hall told attendees at the Auto Finance Performance and Compliance Summit.

“Obviously, we have conversations with the finance manager, but what we really like is to have a conversation with the general manager and talk about what our expectations are,” Hall said. “How many applications? What [should] be the approval rate? And how many contracts? So we make sure that we set the expectation upfront so we really build a strong relationship.”

Additionally, SunTrust uses AutoCount, an automotive market share report service, to better judge if the dealership is a good fit based on what lenders it works with.

After signing on a new dealer, SunTrust utilizes a staff of dealer relationship managers to reach its network, which consists of around 4,000 dealers. These managers will often be accompanied by new hires so that they can “learn and observe best practices,” Hall added.

You can listen below to more of Cindy Hall’s thoughts on the state of auto finance, such as the credit cycle, how lenders should react, and what SunTrust’s initiatives are for the year.  

This is the first in an ongoing video series from Auto Finance News from our coverage at the Auto Finance Performance and Compliance Summit.

[vimeo 270457804 w=640 h=360]

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JM Family Enterprises Inc. is consolidating its two financial lending brands under a single name by dropping World Omni Financial Corp. from its branding in favor of the title Southeast Toyota Finance, the company told Auto Finance News.

Although the World Omni Financial Corp. name will generally disappear from the company’s public and corporate materials, the name will still appear on Wall Street, according to an initial report from Automotive News.

As of the fourth quarter 2017, World Omni held $9.8 billion outstanding in its portfolio — an 8.3% increase year over year according to S&P’s pre-sale report for the company’s latest securitization from January. The company’s credit performance has “weakened” according to the report, which noted delinquencies as a percentage of the portfolio rose to 2% up from 1.7% the same period the year prior.

Many had considered World Omni to be a broader lender in the space while Southeast Toyota Finance had the perception of just being the captive lending arm. Moving forward the company hopes to meld those two concepts and bring it under the singular Southeast Toyota Finance brand, according to Automotive News.

The company first launched its finance arm as World Omni Financial Corp. back in 1981 and in 1996 added the Southeast Toyota Finance brand to offer personalized support to Toyota dealers in the region. JM Family is celebrating its 50th anniversary this year and is changing it materials and customer care centers to reflect the new branding. The company’s broader operations will not be changed, just the name that consumers and dealer customers see.

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Toyota Financial Services was approved for early termination of a 2016 consent order — which alleged the captive’s dealer compensation model resulted in higher interest rates for minority borrowers — and the lender intends to raise markup caps following the decision, the company told Auto Finance News.

The consent order was lifted May 1, but is contingent on final court approval expected to come down in the company’s favor in the coming weeks, according to a filing with the Securities and Exchange Commission on Tuesday.

For details on this story exclusive to AFN subscribers click here.

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Jim Elliot, assistant regional director for the FTC’s Southwest region, presents at AFPCS18.

Last year, the Federal Trade Commission made a point to focus on deceptive debt collection tactics across all financial products and in 2018 the agency intends to keep up the pressure, Jim Elliott, assistant regional director for the FTC’s Southwest region, said during a presentation at the Auto Finance Performance and Compliance Summit.

“We’ll continue to look for those egregious debt collection practices such as threatening with false arrests and lawsuits,” Elliott said. “We’ll continue our enforcement proceedings and bringing actions against those egregious practitioners.”

Earlier this year, the FTC and Consumer Financial Protection Bureau issued a joint report to Congress detailing each agencies actions in this arena for the prior year. The FTC resolved 10 cases against 42 defendants, obtained more than $64 million in judgments, and banned 13 companies and individuals from engaging in serious violations, he said.

Meanwhile, the CFPB  handled more than 84,000 debt collection complaints, uncovered a number of actions that examiners deemed to be in violation of the debt collection practices act through supervisory examinations, filed briefs in two cases in federal appeals courts, and resolved one enforcement action resulting in consumer relief and payments in a civil penalty.

While specific year-over-year numbers were not given, Elliott told Auto Finance News that the figures were up from 2016.

Central to these cases of deceptive acts and practices is the lender’s liability if a third-party partner is the one accused of violating the law. In those cases, Elliott affirmed the lender is on the hook for those instances and gave the example of an investigation conducted on Uber. The FTC found issue with one of the ride-hailing platform’s third-party providers, and when Uber was unwilling to give over all the information necessary, the regulator was able to snuff out the appropriate numbers and resolve the case, he said.

“We have a variety of ways of finding things out,” Elliott told attendees during a Q&A session. “Our consumer database for example also contains insider information. There are company employees that believe there is something going on … and we receive [complaints] from insides who say, ‘Here’s what’s going on, I think you should look into it.’ And sometimes we do actually look into those complaints.”

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Lawyers at the Auto Finance Performance and Compliance Summit were unified in their advice to not pull back from auto finance compliance amid the perceived easing of regulators because there are active examinations taking place at a hand-full of lenders they represent.

“Lenders should stay the course,” said Kenneth Rojc, managing partner of the automotive finance group at Nisen & Elliott, LLC. “If you do take a riskier avenue then you might be faced with a situation where you’re examined by a federal or state regulator to explain, ‘Why did you ease back on these controls, what did you perceive as different?’”

Any changes would have to be discussed with a lenders legal and compliance team, as well as the regulator themselves for “proactive guidance” on the best ways to wind down, he said. Bottom line, any changes have to be justified.

One of the areas of increasing concern has been ancillary products. Dealerships have been adding these contracts to retail installment contracts more frequently in recent years, especially as lenders cap the number of interest dealerships are allowed to charge consumers above the rate they were approved, Rojc said.

“There has been an incremental compression in rate participation margins … and dealers are trying to make up that income in other areas,” he said. “The most likely product arena is ancillary products.”

He predicts regulators will be more keen on pursuing deceptive practices during the financing process, especially disclosures of service contracts and guaranteed asset protection policies.   

Ally Financial Inc. and Wells Fargo Auto are involved in ongoing investigations into their GAP refund policies, and Wells Fargo just settled it collateral protection insurance case with the CFPB for $1 billion.

“If I’m in a business and I don’t use collateral protection insurance, that doesn’t mean when a consent order comes out that relates to CPI I don’t have to look at it,” said John Redding, partner at Buckley Sandler LLP. “Look at what were the underlying issues and analyze your own business based on those issues to see if you are vulnerable to those kinds of things.”

Just because a dealership places those policies or a vendor runs the refund process, doesn’t mean lenders can sit in the passenger seat and expect everything will turn out fine, Kathleen Ryan, a partner in the consumer financial services practical group at Akerman LLP.

“The days are gone where you can say, ‘that’s a third party and it’s not my responsibility,’” Ryan said. “Anywhere there is an incentive to sell things there is risk and the possibility that a regulator will come in and [feather-and-] tar everyone with a broad brush of deception, which is a very flexible tool in the hands of regulators. … If there is a product they don’t like there is often a way to find chinks in the way it was sold or the way it was serviced that allows [regulators] to get at it.”

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Turn Your Bulk Auto Notes Into Cash