Categories
Economy

Breaking Out of the Groundhog Day Cycle

Mark Rappaport President Simplicity Division EFG Companies
Contributing Author:
Mark Rappaport
President
Simplicity Division
EFG Companies

I’m sure you’ve seen the 1993 movie Groundhog Day starring Bill Murray. His weatherman character disparages his assignment to cover the annual groundhog event, only to wake up the next day…and the next day…realizing he is inexplicably reliving the same day over and over again. Filled with cynicism, Murray fails to “flip the script” on his predicament and must suffer the monotony.

A lender client shared a similar sentiment with me concerning the recent rise in defaults, bemoaning how auto loan volume, defaults, and delinquencies all follow the cycle of economic ups and downs. The economy tanks and auto loan volume goes down while defaults and delinquencies go up. The economy is on the upswing and auto loan volume goes up while defaults and delinquencies decrease. It’s the same old story every year.

With a plateau in vehicle sales and elevated auto loan defaults, everyone is wondering if after ten years of an expanding economy, we are on the tipping point to a down economy. But, let’s take a look at the numbers.

The Great Recession was tipped by mortgage defaults, not auto loans. However, the behavior has some similar undertones.  Subprime borrowers are suddenly missing payments within a few months of the vehicle purchase. This reflects the early signs of the subprime mortgage crisis in late 2006 and early 2007.

Continue reading “Breaking Out of the Groundhog Day Cycle”
Categories
Economy

Reading the Tea Leaves on Interest Rates

Brien Joyce Vice President EFG Companies
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 “Reading the Tea Leaves on Interest Rates”
Categories
Compliance

Dealer Markup is Back in Play

Jason Hash
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 “Dealer Markup is Back in Play”