2.23.2016 Update on Dodd-Frank Rulemaking: High Percentage of Rules Still Haven’t Been Written

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010. Given this, what percentage of the rules do you think have been finalized so far?

The answer: About 70 percent, according to an article recently published on TheHill.com. Or put another way, about one-third of the regulations required by Dodd-Frank still have not been finalized and written — nearly six years after the Act became law.

The Rules by the Numbers

Dodd-Frank contained 390 rulemaking mandates, and 267 rules have been finalized and written so far. More specifically, 93 of 132 banking rules have been written, 63 of 94 SEC rules have been written, 51 of 59 CFTC rules have been written, and 60 of the remaining 105 rule-making requirements have been met. This is according to a quarterly report compiled by Davis Polk & Wardwell LLP.

In TheHill.com’s article, a Treasury Department representative said that almost all of Dodd-Frank’s major rules have been written and are in effect. These include the Volker Rule, new capital requirements for big banks, new mortgage rules and, of course, the creation of the Consumer Financial Protection Bureau.

However, there are still some fairly important Dodd-Frank regulations that haven’t yet been finalized. Among these are rules by the CFPB for payday lenders, by the SEC for derivatives, from financial regulators regarding incentive-based compensation, and from the CFTC capping how much money traders can hold in the market.

The Clock is Ticking

There is a renewed sense of urgency in the current administration to get the remaining Dodd-Frank rules written and implemented before the Presidential election this November. This is because a new administration could reshape the rules in ways that could lead to different outcomes.

Of course, if a Democrat is elected President, very little if anything will be changed in the pending unwritten rules. But if a Republican is elected and the Republicans retain control of Congress, any rules that remain unwritten as of next January could be in serious jeopardy after the inauguration.

With a Republican in the White House, a Republican-controlled Congress could use the Congressional Review Act (CRA) to roll back rules without fear of a Presidential veto. The CRA gives Congress 60 days after a major rule is finalized to issue a resolution of disapproval. Therefore, any new Dodd-Frank rules issued during the last two months of the Obama administration could conceivably be squashed by a Republican Congress and President.

Seeing Red in November

For their part, some banking industry groups are hoping to see red (as in Republican) come this November, given their belief that Dodd-Frank has been particularly burdensome for financial institutions.

Indeed, a recent report issued by the U.S. Government Accountability Office — Dodd-Frank Regulation: Impacts on Community Banks, Credit Unions and Systemically Important Institutions — found that there has been an increased compliance burden on these institutions due to the Act’s rules. This includes increases in staff, training and time allocation for regulatory compliance and updates to compliance systems.

In the article published on TheHill.com, the Credit Union National Association’s chief advocacy officer sarcastically remarked: “If the goal was to lead to a gradual reduction of credit unions in the country as a result of an overwhelming regulatory burden in response to a crisis credit unions didn’t contribute to, then the law was a success.”

We’re interested in hearing from you. What are your observations about the Dodd-Frank Act and its impact on your industry? Send me an email at steven@lendtrade.com.

2.17.2016 Auto Loan and Lease Balances Projected to Rise in 2016

2015 was a banner year for the automobile industry, with sales hitting a new record of 17.5 million. If early projections by TransUnion turn out to be accurate, automobile manufacturers, dealers and lenders will be popping corks again this year.

TransUnion is forecasting that auto loan and lease balances will both rise this year while delinquencies remain low. It predicts that the average auto loan and lease balance will hit $18,509 during the fourth quarter of this year, up from just under $18,000 at the end of last year.

But more impressively, this balance would be more than $3,500 higher than the average auto loan and lease balance of just under $15,000 at the end of 2009 — when the auto industry was reeling from the effects of the Great Recession.

A Healthy Equilibrium

TransUnion attributes the health of the automobile and auto loan industries to a stabilizing economy and steady job growth. TransUnion’s senior vice president and automotive business leader Jason Laky said that there is a “healthy equilibrium” between growing loan balances and low auto loan delinquency rates.

In an interview with Automotive News, Laky pointed out that more consumers now feel confident enough in their personal finances to take out auto loans. At the same time, auto lenders can offer larger loans without putting their portfolios at risk, he said. “As long as the economy is expanding and auto sales are going up, auto balances are going to increase,” said Laky.

One factor in the projected rise in auto loan and lease balances is the fact that there are more people taking out new auto loans than there are people paying off old loans. Also, lenders are expanding their underwriting criteria so more people now qualify for loans than did in the immediate aftermath of the recession.

This includes subprime loans that enable borrows with less-than-stellar credit to obtain auto loans. “We’re seeing continued expansion into nonprime and subprime to bring more borrowers into lending spectrum without adding risk,” said Laky.

While some have voiced concerns about an auto subprime bubble, there are actually fewer subprime auto borrowers now than there were in 2009, according to TransUnion. In the third quarter of 2009, 23.7 percent of auto loans (or 14.8 million borrowers) were subprime, while only 18.7 percent of auto loans (or 13.9 million borrowers) were subprime in the third quarter of 2015.

Interest Rates Remain Low

TransUnion noted that more people are financing their vehicles than paying cash now due to interest rates remaining low. Even if the Fed resumes its rate-hike campaign sometime this year, the increases are likely to be small and thus not impact auto lending very much.

Another trend noted by TransUnion in its projection is the lengthening term of auto loans as many car buyers are stretching their loan terms out further and further. Laky says this can be a smart strategy if the goal is to match the loan term to the buyer’s planned use of the vehicle.

Longer loan terms can also help buyers afford more expensive vehicles since they lower their monthly payments. But if buyers are just trying to lower their monthly payments, “it’s going to take longer to get to positive equity,” Laky said.

Delinquency Rate Stable

On the delinquency side, TransUnion predicts that the 60-day delinquency rate in the fourth quarter of this year will be 1.11 percent — the same as it was at the end of last year. This is down slightly from a delinquency rate of 1.16 percent at the end of 2014.

“We believe we have reached a new normal in auto delinquency and see no immediate cause for concern,” Laky said. He added that so far, “consumers have been able to manage their auto loan obligations in line with expectations.”

Finally, Laky said he believes that more car buyers will be approved for auto loans as lenders incorporate trended data into their analyses. This will enable lenders to “more effectively underwrite previously unscorable consumers,” he said.

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

2.11.2016 New Fannie and Freddie RMBS Aim to Shift Mortgage Default Risk to Private Investors

Nobody wants to see a repeat of the mortgage meltdown that led to the financial crisis of 2008-2009. Now, Fannie Mae and Freddie Mac have taken steps to shield taxpayers from billions of dollars in losses should another mortgage crisis arise by transferring potential mortgage losses to private investors.

Starting this year, Fannie and Freddie are marketing sales of two new types of securities that shift most of the cost of defaults on mortgages they guarantee to the private sector. These insurance-like securities are based indirectly on the value of a pool of underlying mortgages, essentially making them derivatives.


The products — which are called Connecticut Avenue Securities, or CAR (from Fannie Mae) and Structured Agency Credit Risk, or STACR® (from Freddie Mac) — are residential mortgage-backed securities (RMBS). Unlike standard-issue bonds from Fannie and Freddie, which protect investors from default risk, these securities expose private investors to principal risk if the underlying mortgages default.

By shifting much of the mortgage default risk from the government to private investors, the new securities could eventually limit the role of the government in the nation’s mortgage market. Fannie Mae, Freddie Mac and Ginnie Mae guarantee most mortgage loans in the U.S. and they issued 96 percent of all mortgage bonds during the first 10 months of last year.

Some in the mortgage industry believe that these new securities could help kick start RMBS issuance while restoring investors’ appetite for mortgage risk. “Mortgage credit risk” still carries a negative connotation for many investors in the aftermath of the mortgage crisis.

Ramping Up Sales Efforts

The new securities aren’t really new — Fannie Mae introduced CAR in 2013 and Freddie Mac introduced STACR in 2014 — but Fannie and Freddie are ramping up their efforts to market and sell them this year. As of the end of last year, they had sold about $25 billion worth of the securities since 2013 to private investors such as money managers, hedge funds and REITs.

Late last year, the Federal Housing Finance Agency (FHFA) set a goal of transferring most of their risk on mortgages they guarantee back to the private sector, and CAR and STACR are one way for them to do this. Fannie and Freddie hold the safest and riskiest tranches of default risk, allowing private investors to buy tranches in the middle.

So what might this risk look like? In an article published in December, The Wall Street Journal explained that Freddie Mac sold $950 million worth of STACR notes covering $18.4 billion worth of Freddie-backed mortgages last June. In the event of a severe mortgage downturn, those mortgages might suffer losses of 2%, estimates Moody’s Analytics Chief Economist Mark Zandi. Without the protection of the STACR notes, Freddie would be looking at losses of $368 million in this scenario. With the STACR protection, Freddie’s loss would drop to $143 million and private investors would incur the remaining $225 million in losses.

Big Questions Remain

It’s important to remember that these programs are still relatively new and lots of questions remain. For example, how much appetite is there in the market for these securities? Can they be expanded to truly make the government the guarantor of last resort? And what will investors pay for them during times of market stress?

Also, currently there is a severe lack of liquidity, so the securities aren’t easily traded on the open market. Proponents of the securities are hoping that a more mature market develops over the next year, including the release of new indexes based on the securities.

We’re interested in hearing from you. What do you think about these new Fannie Mae and Freddie Mac RMBS? Send me an email at steven@lendtrade.com.

2.3.2016 Hot Consumer Banking Trends in 2016

Two new surveys shed some light on current trends in consumer banking and offer a peek at what the future of consumer banking might look like. Savvy, forward-looking bankers and consumer finance professionals would do well to take note of these survey results.

Branch vs. Mobile and Computer Banking

Not surprisingly, banking consumers are visiting branches less and less, instead choosing to do more of their banking via their mobile devices or computers. According to a survey conducted by Bankrate.com, four out of 10 Americans — or 39 percent to be exact — have not visited a bank or credit union branch in six months or longer. This is up five percentage points from a year earlier.

In addition, only 45 percent of Americans say they’ve visited a branch within the past 30 days to conduct personal financial business. Of those who have visited a branch in the past month, though, 26 percent visited within the past week — so it appears that branch fans aren’t eager to see their branches go away.

In fact, these findings don’t necessarily mean that bank branches will be vanishing in the near future. According to Bankrate’s chief financial analyst Greg McBride, “It's clear that many Americans still utilize a physical branch, though more for financial consultations and account openings than for routine transactions.” Even Millennials are sill visiting bank branches for things like this, McBride notes, which is “a good indication that branches won't end up on the endangered species list any time soon.”

Why Visit a Branch?

So why do some banking consumers still like to visit branches when they can do most transactions remotely? One theory is that as financial anxiety increases, consumers have more comfort conducting transactions in a physical branch. And when they’re less anxious about their finances, they’re more willing to do transactions on a mobile device or computer.

Interestingly, banking consumers who still like to visit branches tend to be more educated and have higher incomes. More than half (54 percent) of consumers who’ve visited a branch in the past 30 days earn at least $75,000 a year, compared to only 40 percent of those who earn less than $30,000 a year.

The Bankrate.com survey also attempted to gauge the financial security of today’s banking consumers via its Financial Security Index. This index fell to 101.1 in December from 103.4 a month earlier. Americans are feeling a little more secure about their jobs, but less secure about their levels of savings and debt, their net worth and their overall financial situation.

Traditional Banks vs. Tech Companies

In a separate survey conducted by Fintonic, some banking consumers (especially younger ones) said they believe technology companies like Apple and Google will replace banks for many people in the future. Many consumers also believe that within the next decade, mobile payments will be more common than cash and credit/debit cards.

One out of seven banking consumers under age 54 believe that Apple and Google could do a better job of performing banking transactions and serving financial customers than traditional banks do. And one out of six think bank tellers will eventually be replaced by robots!

By the way, the prediction that banks will eventually be replaced could be well on its way to fulfillment. The total number of commercial banks and savings institutions in the U.S. today is barely half of what it was two decades ago: there were 6,270 of them in September 2015 compared to 11,971 in 1995, according to the FDIC. And in the bank branches that do remain open, there are fewer employees working to serve customers walking in the door or pulling up to the drive-through window.

We’re interested in hearing from you. What do you think about these consumer banking trends? Send me an email at steven@lendtrade.com.