Lending Curve

Contributing Author:
Brien Joyce
Vice President
EFG Companies

The topic of interest rates is a popular one among lenders, sparked by the quarterly Federal Reserve meetings, and debated by those with contradictory opinions. As a case in point, let’s review the recent comments made by Moody’s Analytics during the Auto Finance News Performance and Compliance Summit. According to Michael Vagan, assistant director and lead auto economist at Moody’s Analytics, “The Federal Reserve waits too long to raise interest rates. They [the Federal Reserve] wait to make sure the economy is strong and inflation is growing – then they increase interest rates. But, what inevitably happens is they wait too long so then they have to act quicker and more aggressively to cool the economy down.”

In March, the Fed raised interest rates a quarter of a point to between 1.5% and 1.75%, and have signaled rates will be hiked two more times before the end of 2018. However, Moody’s believes interest rates will pick up steam much faster, predicting interest rates will be above 3.1% by 2019. The truth is likely somewhere in the middle. Regardless of what eventually comes to pass, forecasting interest rate hikes impacts auto lenders and consumers in the near term.

It’s time to plan

Unless your crystal ball has some magical powers, there is little you can do to actually affect rates. However, you can and should plan for interest rate changes. Develop a series of scenarios and build strategies to respond to each one. While it might seem counterproductive, the time spent on this exercise can mean the difference between a nimble response and being caught flat footed.

Communicate with consumers

Consumers often respond negatively to interest rate hikes. They perceive that their money will not go as far, and they curtail or delay major purchases. It’s important for auto lenders to clearly communicate with consumers about the true effects of various interest rates over the life of a loan. Continue reading →

Contributing Author:
Jason Hash
Training Manager
EFG Companies

The 2013 Consumer Financial Protection Bureau (CFPB) regulation which held financial institutions responsible for potential discriminatory lending practices at dealerships was repealed by the President on Monday. The original 2013 CFPB bulletin was intended to address the potential for racial discrimination at dealerships by encouraging lenders to cap interest rate markup at 150 basis points, as opposed to the industry standard of 250 basis points. This was all based on disparate impact theory, which refers to practices that adversely affect protected classes of individuals, even though employer rules and practices are meant to be neutral. The CFPB used this theory to make the argument that dealer markup practices could result in unintentional discrimination during the credit process, and must therefore be reined in.

During its five-year existence, the directive prompted the implementation of flat fees as well as millions of dollars in fines charged to financial groups in the form of consent decrees. The root of the CFPB guidance took issue with the practice of dealers placing the buyer into a higher-interest deal than the lender had originally approved, and then the dealership collects the difference.

Thanks to some fancy footwork by Senator Pat Toomey (R-Pa.), who asked the Government Accountability Office (GAO) to review the CFPB’s guidance, and Senator Jerry Moran (R-Ks) for putting S.J. 57 onto the floor for a vote, the regulation, and its guidance, has ceased to exist. And, if you ask some, all is now right with the world.

Groups on many sides of the situation took issue with the ruling. Auto industry trade groups argued that the bureau used its guidance to indirectly regulate the activities of dealers, which are mostly exempt from the bureau’s oversight under the Dodd-Frank Act. In addition, they argued that the guidance would ironically have an adverse effect on the groups of people it was trying to protect by limiting a dealer’s ability to secure competitive funding. Banking and financial groups reaffirmed their commitment to fair lending practices, saying they have been regulated for years and were not to blame for dealer actions that may or may not result in unintentional discrimination. Continue reading →

Contributing Author:
Mark Rappaport
President
Simplicity Division
EFG Companies

In 2015, the Consumer Financial Protection Bureau (CFPB) released a study finding that 26 million Americans did not have a credit history, and another 18 million were “unscorable” because their histories were too limited. Since then, policymakers, advocates, and the financial industry have all proposed ways to help people without credit scores, many promoting the use of alternative data.

It’s likely that the CFPB study numbers have increased since the research was commissioned. Historically, many lenders have assumed that consumers with limited or nonexistent credit histories are bad credit risks. However, a LexisNexis study found that nearly two-thirds of these consumers are low-risk and could be considered good and profitable customers for lenders. If alternative sources of data can help correctly gauge these consumers’ risk, auto lenders may be able to generate credit scores that more accurately reflect default rates and therefore expand credit access to this broader population.

Be mindful of regulations

There are many unanswered questions about the use and accuracy of alternative data in general. Data mining to determine credit, employment, or insurance is covered under the Fair Credit Reporting Act. Before you tap into any data providers, make sure they are in compliance with the law. If alternative data is used in credit decisions, the Equal Credit Opportunity Act also applies, and lenders must ensure that there is no disparate impact on protected groups. Continue reading →

Contributing Author:
Brien Joyce
Vice President
EFG Companies

It’s that time of year when many folks are looking forward to high school or college graduation, a new or first time job, or possibly a marriage. Exciting times for sure! These life-changing events are opportunities to establish or improve credit. And, purchasing a vehicle can be one of the intersecting activities during these life changing events. As a lender, you play an integral role, and have an opportunity to build a life-long relationship with new customers.

The first opportunity lenders have to work with new customers is often the teen years. An early savings account can transition into a secured credit card. Once the teen turns 18, they can apply for an unsecured card. But have you considered working with that early driver on a car loan as well? A first car purchase can do wonders for establishing credit. Even if the parents are listed as the primary on the loan, adding a teen can introduce them to the world of credit and begin to establish a credit score. Plus, the parents might appreciate the assist on educating their teen.

College graduation is another life milestone where credit and car loans can intersect. As the young adult embarks on their future, their transportation needs might change. Graduate school or a new job in another city demands a dependable vehicle. In addition to establishing credit with a car loan, this is a great opportunity to educate the young buyer on the value of vehicle service contracts (VSCs) or other protection plans. Be prepared to get down to basics on these options and clearly explain their benefits and value. Your young customer will be very price sensitive – but also concerned about the costs of unexpected repairs. Be sure your team is prepared to provide scenarios that match the young adult’s phase of life. Continue reading →

Lending Curve

Reading the Tea Leaves on Interest Rates

It’s time to plan

Communicate with consumers

Dealer Markup is Back in Play

Boosting Alternative Data Scoring Metrics

Be mindful of regulations

Building Credit During Life’s Changes