12.21.2015 House Passes Bill Rescinding CFPB Auto Lending Guidance — Senate Action Awaits

As I’ve been discussing in recent blog articles and in a comprehensive whitepaper, the Consumer Financial Protection Bureau (CFPB) issued informal guidance nearly three years ago that gives auto dealerships less discretion in how they mark up interest rates on car loans they obtain for their customers from third-party lenders.

The auto dealership industry has been adamantly opposed to this guidance. Dealerships believe it eliminates their ability to discount credit in the showroom, raises the cost of credit for car buyers, and pushes marginally creditworthy buyers out of the credit market.

Rescinding the CFPB Guidance

Also opposed to the guidance, it appears, is a majority of the members of the House of Representatives. Last month, the House passed H.R. 1737, the “Reforming CFPB Indirect Auto Financing Guidance Act.”

This legislation would rescind the CFPB’s guidance regarding auto loans while also making the CFPB more transparent and accountable when issuing future guidance affecting the auto finance industry. The bill — which passed by a comfortable 332-96 margin, with plenty of votes from both Republicans and Democrats — is now awaiting action by the Senate.

While this type of legislation designed to rein in regulatory overreach is usually supported the loudest by Republications, it was some Democrats who were the most vociferously opposed to the CFPB guidance. For example, Democratic Congressman David Scott from Georgia used the word “deceitful” to describe the CFPB’s guidance. In addition, he called the information the CFPB uses to make decisions about borrowers’ race and ethnicity “shamefully flawed.”

“The CFPB has done the dealers a massive injustice,” Scott said this past summer after the bill passed the House Financial Services committee. “When you get into this area of accusing someone of racial discrimination, that is a serious indictment, and no industry deserves that kind of treatment, certainly not the auto dealers.”

A Little Background

Many auto dealerships use third-party lenders like banks and credit unions for the car loans they offer their customers. The lender sets the interest rate it’s willing to offer the dealership, which can then offer the loan to the customer at this rate or mark it up to earn additional profit.

The CFPB believes that this compensation model leads to discrimination against minorities on the part of some dealerships. Specifically, it says the model presents a “significant risk” of “pricing disparities on the basis of race.” The CFPB’s guidance is designed to force auto finance sources to change their dealership compensation model in such a way that dealerships would no longer be able to mark up the rates they offer to customers.

Since it’s illegal under the Equal Credit Opportunity Act for lenders to ask auto loan applicants to disclose their race or ethnicity, the CFPB literally has to guess which customers are minorities. It does so by using a proxy methodology called the Bayesian Improved Surname Geocoding (or BISG) method that uses last names and addresses to make a best guess as to a borrower’s race or ethnicity.

Unfortunately, BISG has been proven to be highly inaccurate in making these best guesses. One study found that the methodology overestimates the number of African-Americans in a given ZIP code by 41 percent. The CFPB itself has admitted that BISG has an error rate of at least 20 percent.

Cover-up Also Revealed

Worse yet, documents were released last month revealing that CFPB officials knew the information derived from using the BISG proxy method was flawed. However, the agency went after Ally Bank anyway, extracting a nearly $100 million settlement from the auto finance company in 2013 for alleged discrimination against minority borrowers (though Ally admitted no wrongdoing). The documents showed that CFPB staff even discussed how they could keep anyone from finding out how flawed the proxy data was!

Meanwhile, the agency is trying to figure out how to distribute all the settlement money it collected from Ally Bank to all the supposed victims of discrimination. Since it never actually identified any true discrimination victims — but instead just guessed about victimhood based on names and addresses — this is proving to be a bit of a challenge.

We’ll keep you posted on the progress of H.R. 1737 once the Senate takes up the bill, hopefully early next year.

We’re interested in hearing from you. What are your thoughts about the CFPB guidance and H.R. 1737? Send me an email at steven@lendtrade.com.

12.16.2015 Let the Good Times Roll: Auto Loan Balances Top $1 Trillion

The past few years have been “boom times” for the automobile industry — especially coming on the heels of the down years following the recession.

The pace of sales for November was 18.3 million vehicles, the highest level so far this year and the third straight month when the sales pace topped 18 million vehicles. This has never happened in the U.S. before. Many analysts expect 2015 sales to hit 17.4 million — this would match the sales figure for 2000, which was the best year ever for U.S. auto sales.

Now there’s some good news on the automobile financing front: Balances on automobile loans topped the one trillion (with a “t”) dollar mark during the third quarter of this year, according to the most recent TransUnion Industry Insights Report. Specifically, outstanding auto loan balances reached $1.008 trillion last quarter — that’s up 11.1 percent from the third quarter of 2014, or a whopping $101 billion.

Reasons for the Rise

There are lots of potential reasons for the strength in auto sales this year, like low unemployment, low interest rates (at least for now) and growing consumer confidence. In a news release announcing the report, a senior vice president and automotive business leader for TransUnion stated:

“As total auto loan balance rises, we’re seeing controlled and deliberate growth by lenders. Consumers continue to feel confident in their employment or job prospects, and their appetite for new auto loans reflects this confidence.”

The TransUnion report also revealed the following positive signs for the auto financing industry:

  • An additional two million car buyers had access to auto loans during the third quarter in comparison to the second quarter of this year.
  • The average balance on auto loan accounts rose by 2.7 percent between the third quarters of 2014 and 2015 to $14,515.
  • The number of car buyers with an open auto loan account rose by 5 million people between the third quarters of 2014 and 2015 to 75 million borrowers.

Interestingly, while auto loan balances are growing, delinquencies are holding steady — another positive sign for the industry. The percentage of borrowers who are at least 60 days late on their car payment was 1.16 percent in the third quarter of this year, which is the same delinquency rate as the third quarter of last year.

Looking Ahead to Next Year

So what’s in store for the automobile and auto financing industries in 2016? The Fed has finally started its long-awaited campaign to hike interest rates from the near-zero levels they’ve been at for nearly a decade, so this could dampen things a little. The outcome of the Presidential election will also be a big unknown for most of next year that could affect the overall economy. And will gasoline prices continue their slide toward $1 per gallon?

Barring a financial meltdown of some kind, though, I don’t anticipate a significant reversal of these positive numbers in 2016.

We’re interested in hearing from you. What are your observations about the automobile financing industry? Send me an email at steven@lendtrade.com.

12.9.2015 What’s the Key to Borrowers’ Satisfaction With Their Mortgage Lender?

What is more important to mortgage customers when it comes to their level of satisfaction with a lender: Regular communication from the lender about the status of their mortgage application, or a fast loan closing?

Both play a big role in mortgage customers’ level of satisfaction with their lenders, according to the latest J.D. Power Mortgage Originator Satisfaction Survey. For example, customers whose loans closed in 30 days or less gave lenders an average satisfaction score of 858 (based on a 1,000 point scale).

But if their loan closed in between 31 and 60 days, borrowers gave their lender an average score of just 796. And if it took 61 days or longer for their loan to close, the average score given to the lender fell all the way down to 686. “The faster the process on average, the better the experience,” said J.D. Power’s mortgage practice director Craig Martin.

Managing Borrowers’ Expectations

One positive sign for lenders from the survey is the fact that more customers (35 percent) are now saying that the mortgage origination process went faster than expected. Last year, fewer than one-third of borrowers said this.

The survey indicates, however, that lenders can compensate for a slower loan closing by keeping customers informed about the status of their application. “If the lender does a good job of setting expectations and keeping the customer informed through proactive communication, they can keep the level of satisfaction very high,” Martin points out.

Another takeaway from the survey is the role played by technology in helping lenders manage their customers’ expectations when it comes to the closing process and timelines. Scores were higher for lenders with highly functional customer-facing tools, although adoption rates for technology remained the same compared to last year.

And the Winner Is…

For the sixth year in a row, Quicken Loans received the highest customer satisfaction rating (850) in the J.D. Power survey. According to the online lender’s CEO, Quicken Loans uses technology to communicate with customers and set clear expectations. He believes that borrower interest in and use of technology will increase in the future as more tech-savvy Millennials enter the traditional home-buying years.

Fifth Third Bank landed in the number two spot in the survey with a customer satisfaction rating of 812, just one point higher than Bank of America, which was number two last year. A BofA senior VP said that the bank has invested in training and technology specifically designed to improve processing times during the first 15 days of loan origination.

But he stressed that technology is just an enabler — it’s not an outcome. “The greatest technology in the world can't overcome missing a closing date for a buyer selling a home,” he said.

It’s worth pointing out that the J.D. Power survey was completed in August. Therefore, the results don’t reflect the impact that TRID is having on mortgage closings, since TRID didn’t become effective until October.

Anecdotal evidence suggests that so far, TRID has slowed down mortgage closings somewhat, as was expected. This makes it even more important that mortgage lenders communicate clearly with customers about the loan process and set realistic expectations up front.

We’re interested in hearing from you. What are your observations about loan closing turnaround times and customers’ expectations? Send me an email at steven@lendtrade.com.

12.3.2015 Consumer Credit Market Is Stabilizing: What This Means for the Banking Industry

There’s good news on the consumer credit front, according to TransUnion’s most recent Industry Insights Report covering the third quarter of this year. And this, in turn, is good news for the banking industry.

Perhaps most encouraging, mortgage delinquency rates are continuing to decline by double digits. Defined as borrowers who are at least 60 days behind on their mortgage payment, delinquencies fell by almost 30 percent between the third quarters of 2014 and 2015. At 3.36%, the mortgage delinquency rate is now down 65 percent from its peak of 6.94% in early 2010.

A Closer Look

Digging a little deeper into the mortgage numbers:

  • All 50 states saw annual declines in their mortgage delinquency rates. Florida saw the biggest drop: from 6.42% to 3.75%.
  • There was an average mortgage delinquency rate decline of 33 percent among the nation’s top 10 metropolitan statistical areas (MSAs). The declines were the steepest in Miami and San Francisco, which both saw declines exceeding 40 percent.
  • There were no significant differences in the fall in mortgage delinquency rates among age groups — they all fell between 27 percent and 30 percent. Interestingly, younger and older borrowers have the lowest delinquency rates: 1.62% for Millennials and 1.77% for borrowers at least 60 years of age.

Joe Mellman, the head of TransUnion’s mortgage group, said the following about the decline in mortgage delinquencies: “We believe this is due to a combination of factors, including strong performance by recent vintage mortgage loans, improving home prices, and the continued funneling of delinquent accounts through the foreclosure process.” 

More Encouraging Signs

The mortgage market isn’t the only consumer credit market that fared well in the TransUnion report. There were also encouraging signs in the auto loan and credit card markets.

While auto loan balances now top $1 trillion, the pace of growth in average auto loan balances has slowed considerably to just 2.7%. Meanwhile, auto loan delinquencies — which are defined as borrowers who are at least 60 days behind on their car payment — remained flat over the past year at 1.16%.

Subprime borrowers remain the smallest segment, representing 15.3% of auto loan borrowers, but the volume of subprime auto loans ($154 billion) represents the highest share of all auto loans since early 2011. Prime or better auto loan customers account for $670 billion of the auto loan market.

Jason Laky, the automotive business leader for TransUnion, said the following: “As total auto loan balance rises, we’re seeing controlled and deliberate growth lenders. Consumers continue to feel confident in their employment or job prospects, and their appetite for new auto loans reflects this confidence.”

The credit card delinquency rate — which is defined as the rate of borrowers who are at least 90 days behind on their general purpose credit cards — rose from 1.34% to 1.43% over the past year. However, this is almost half what it was in 2009 (2.76%) and it is still within the range where it has been the past few years.

The number of consumers with credit cards increased by 4.3% over the past year to 130.8 million, while total credit card balances grew over the past year by 4.7% to $637 billion.

Paul Siegfried, the credit card business leader for TransUnion, said the following: “The growth in total bankcard balances, combined with stable delinquency levels, indicates consumers are comfortable with and willing to use their credit cards. The current credit card environment also suggests a stabilization in the supply and demand equilibrium for credit.”

Good Times Ahead?

Anytime there is a marked and sustained improvement in consumer credit performance, this tends to bode well for the banking industry. So this most recent Industry Insights Report from TransUnion could be a harbinger of good things to come for lenders in the new year.

We’re interested in hearing from you. What are your observations about consumer credit performance in your area? Send me an email at steven@lendtrade.com.