The auto industry received some positive news when the US House passed the Reforming CFPB Indirect Auto Financing Guidance Act in November.
While the legislation still must pass the Senate and be signed into law, it directs the Consumer Financial Protection Bureau to amend how it issues guidance to indirect auto lenders.
Under the pending legislation, the CFPB would have to:
- Provide a public notice and comment period before issuing the guidance in final form.
- Make public all information relied on by the CFPB, while also redacting any information exempt from disclosure under the Freedom of Information Act.
- Consult with the board of governors of the Federal Reserve System, Federal Trade Commission and Department of Justice.
- Study the costs and impacts of the guidance to consumers, as well as women-owned and minority-owned small businesses.
The bill also nullifies the CFPBs Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act bulletin, which instructed lenders to eliminate dealer pricing discretion or constrain dealer pricing discretion by monitoring dealership practices and using controls to force dealerships to adjust their practices.
These developments are small wins for the auto industry. However, while this bill puts restrictions on the CFPB, it does not curtail the bureaus authority. Its also important to note that this bill likely will undergo more revisions before moving through the Senate and reaching President Obamas desk.
Until we see the bill in its final form, we cant determine how it will impact auto lending compliance. In the meantime, dealers must stay vigilant with their compliance initiatives. In no way will the industry return to business as usual. Dealers simply have more time to ensure compliance procedures are buttoned up.
Toward that end, dont take a wait-and-see approach. Take time now to complete your due diligence and ask yourself:
- Do I know how payments are being quoted in my dealership?
- Are my compliance policies written, with clearly defined consequences?
- Do my pay plans support my compliance initiatives?
- How is private information being handled in my dealership to ensure its security?
- How am I working with lenders to ensure compliance?
Compliance doesnt have to be a bad thing. It doesnt have to result in less profit, either. Compliance can bring higher customer satisfaction, which will lead to repeat business and referrals and higher CSI scores.
Its important to maintain the balance between ensuring complete compliance and retaining and building profit margins. That balance lies in the value proposition.
Todays consumers are looking for more than just a car. They want value and they better understand the cost it takes to maintain it. You will enhance your profit margin if you focus on offering compliant consumer protection products that consumers actually want.
Consumer Financial Protection Bureau Takes Action Against Herbies Auto Sales for Unlawful Lending Practices
Washington, DC -(ENEWSPF)January 21, 2016. The Consumer Financial Protection Bureau (CFPB) today took action against Herbies Auto Sales, a buy-here pay-here used car dealer, for abusive financing schemes, hiding auto finance charges and misleading consumers. Herbies will pay $700,000 in restitution to harmed consumers, with a suspended civil penalty of $100,000.
"Buying a car is often one of the most important purchases a consumer makes, so the experience needs to be fair and above-board," said CFPB Director Richard Cordray. "But concealing finance charges and the real cost of credit, as Herbies did here, is unlawful and unacceptable."
Y King S Corp., which does business as Herbies Auto Sales, is located in Greeley, Colo. Herbies operates as a subprime, buy-here, pay-here dealer, which is a dealer that both sells the car and originates the auto loan without selling that loan to a third party. From at least 2012 through May 2014, the company offered financing to about one thousand people each year.
Herbies unlawfully advertised a misleadingly low 9.99 percent annual percentage rate (APR), without disclosing a required warranty, a payment reminder device and other credit costs as finance charges. This ruse helped Herbies convince consumers that they would get the 9.99 percent APR instead of the much higher rate actually charged. Also, Herbies engaged in abusive practices.
Herbies violated the Truth in Lending Act and the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act. Specifically, the company:
- Hid finance charges and advertised a far lower APR than consumers received: Herbies lied to consumers about finance charges and APRs in marketing materials, including on showroom window displays, and in Truth-in-Lending Act disclosures. Hidden finance charges included $1,650 for a required repair warranty and $100 for a required GPS payment reminder device.
- Hid finance charges that stemmed from a refusal to negotiate car prices: Herbies refused to negotiate prices with credit customers, but did negotiate with cash customers. The resulting finance charge should have been included in the disclosed cost of credit.
- Used abusive practices: Herbies' financing scheme lured consumers with misleading advertising and then kept them in the dark about the true cost of financing the cars they were buying. This took advantage of consumers' inability to protect their interests in selecting or using Herbies' financing, among other things.
Under the Consumer Financial Protection Act, the CFPB is authorized to take action against institutions engaged in unfair, deceptive or abusive acts or practices, or that otherwise violate federal consumer financial laws. Under the consent order, Herbies is required to:
- Provide $700,000 in redress to harmed consumers: Herbies must provide $700,000 in restitution for consumers who financed cars with Herbies after January 1, 2012, except those whose accounts were charged off due to default. Herbies must submit a timeline to the Bureau for making restitution to consumers. Herbies is also subject to a civil penalty of $100,000, which is suspended as long as redress is paid.
- Stop deceiving consumers during financing process: Herbies must not misrepresent interest rates, finance charges, or amounts financed, or any other fact material to consumers concerning the financing of any motor vehicle.
- Post automobile prices: Herbies must clearly and prominently post the purchase price on all automobiles for sale when offering auto financing.
- Provide certain financing information in advance: Herbies must give consumers certain information about the financing offer, including the actual APR, price of the car, and all finance charges, and get a signed acknowledgment from consumers that they received the required information before or at the time financing is offered.
The full text of the CFPB's Consent Order is available at: http://files.consumerfinance.gov/f/201601_cfpb_consent-order_y-kings-corp-also-doing-business-as-herbies-auto-sales.pdf
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.
There is no clearer way to say it - the debt market drives the auto market. After robust growth for years driven by easy credit warning signs are emerging.
In a research report today, Morgan Stanleys Adam Jonas asks Is the greatest auto credit cycle finally over? He highlighted 5 key thoughts on auto credit worth considering:
1. 90% of cars are bought on a monthly payment in the US. In addition to a recovery of US auto sales to all time highs of ~17.5mm units last year, the average transaction price of car sales in the US has increased by almost 30% since 2003 to ~$34,000 while at the same time, monthly payments have increased by ~10%.
2. Volume is the usually last thing to fall--its a lagging indicator. Given the growth in capacity to produce, high starting points in margins/cash and large captive finance subs, OEMs tend to make many strong efforts to keep volume moving in an upward direction. A declining trend in US auto volumes would imply that the collective and repeated efforts by the manufacturers to keep volume moving or flat, mainly through price declines, did not work. The implication for industry profitability even in a flat volume environment could mean a substantial decline in earnings forecasts.
3. The CEO of the largest publicly traded auto dealer in the US just... rang a bell. Should we listen to what he is saying? During the Detroit Auto Show, Autonation (NYSE: AN) CEO Mike Jackson expressed concern over the sustainability of the US auto cycle and both consumer and manufacturer behavior, saying: "the fourth quarter industry sales environment was more push versus pull," prompting him to warn of significant margin declines in both new and used volume. Mr. Jackson also expressed concern over production of vehicles outstripping 'real demand.' Mr. Jackson further added: "The auto industry is cyclical... and anyone who says it's not is in denial." We attended 2 industry conferences during the show and were surprised at how little management teams were asked about Autonation's comments.
4. Watch the ABS market. The ABS market is the most nutrient-rich strain of phytoplankton in the credit market on which all higher organisms in the automotive ecosystem feed. We would point out a degree of self-reinforcing circularity in the relationship between new car prices, used car prices and the ABS market. Strong new car prices, helped in part by low monthly payments and cheap fuel prices, helps support the market for used car values, helping to support economic conditions in the ABS market. A strong ABS market in-turn helps financial institutions more confidently lend to consumers, helping to drive higher new prices, supporting higher used car values... you get the idea. The ABS market has been an important source of funding for many auto financing institutions. For example, at Ford Credit, securitized funding as a % of receivables ended the 3rd quarter at 39%. By the end of 2015, Term Asset-Backed Securities are expected to have accounted for approximately 40% of Ford Credit's funding (See main exhibit).
5. What is the CDS market telling us? Since the beginning of 2016 (through Jan 20th), Hertzs (NYSE: HTZ) 5-year CDS has moved from around 335 to 637. Avis BudgetS (NYSE: CAR) 5-year CDS has moved from around 325 to 577. We'd highlight the importance of the securitized market for helping to reduce borrowing costs for not just car rental firms, but also for auto finance companies and leasing companies.
To wit: investors in the market may already be preparing for this with the stocks of auto-giants GM (NYSE: GM) and Ford (NYSE: F) both down 14% year-to-date despite strong fourth quarter and 2015 results.
Zacks Investment Research upgraded shares of Grupo Aval Acciones y Valores SA (NASDAQ:AVAL) from a sell rating to a hold rating in a report issued on Thursday, AnalystRatings.Net reports.
According to Zacks, Grupo Aval Acciones y Valores SA is a financial services group. It provides a comprehensive range of financial services and products ranging from traditional banking services, such as making loans and taking deposits, to pension and severance fund management. The company also provides general purpose loans, foreign exchange services, documentation services, guarantees, auto financing, payroll loans, and credit cards, as well as various deposit and basic treasury products. It provides fiduciary services; merchandise storage and deposit, customs agency, cargo management, and merchandise distribution; brokerage services, fund management, portfolio management, securities management, and capital markets consulting services; and investment banking, treasury, and private banking services. Grupo Aval Acciones Y Valores SA is based in Bogota, Colombia.
Grupo Aval Acciones y Valores SA (NASDAQ:AVAL) opened at 6.41 on Thursday. The companys 50-day moving average is $6.50 and its 200 day moving average is $7.73. The company has a market capitalization of $7.14 billion and a P/E ratio of 15.26. Grupo Aval Acciones y Valores SA has a one year low of $5.59 and a one year high of $10.75.