auto lending abuses: the pitfalls of financing cars

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http://www.responsiblelending.org Auto Lending Abuses: The Pitfalls of Financing Cars Fifth Annual Financial Leadership Conference Washington, DC October 15, 2012

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Auto Lending Abuses: The Pitfalls of Financing Cars. Fifth Annual Financial Leadership Conference Washington, DC October 15, 2012. Car Lending Abuses. Dealer markup/kickback: Dealer has discretion to increase the interest above the rate for which the borrower qualifies - PowerPoint PPT Presentation

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Page 1: Auto Lending Abuses: The Pitfalls of Financing Cars

http://www.responsiblelending.org

Auto Lending Abuses:The Pitfalls of Financing Cars

Fifth Annual Financial Leadership Conference

Washington, DC

October 15, 2012

Page 2: Auto Lending Abuses: The Pitfalls of Financing Cars

http://www.responsiblelending.org 2

Car Lending Abuses

Dealer markup/kickback: Dealer has discretion to increase the interest above the

rate for which the borrower qualifies Dealer pockets part or all of the proceeds from the

increased rate.

Dealer does not inform consumer whether markup occurred or the amount of the markup levied.

Page 3: Auto Lending Abuses: The Pitfalls of Financing Cars

http://www.responsiblelending.org 3

Kickback Volume

New Vehicles

Used Vehicles

Total Vehicles

2009 Total Rate Markup Volume $4.1 Billion $21.7 Billion $25.8 Billion

Average Rate Markup 2009 1.01% 2.91% 2.47%

Average Markup Per Loan 2009 $494 $780 $714

Dealer Gross Profit Per Retail Sale 2009

$1,301 $1,721 $1,461

Sources: Data derived from CNW Marketing Research (sales data for dealer financed purchases, excluding leases), 2010 National Auto Finance Automotive Survey (dealer markup data), and YTD 2009 NADA Average Dealership Profile (gross dealer profit). Average markup figures assume a rate markup occurs on every dealer-financed sale, leading to more conservative averages.

Page 4: Auto Lending Abuses: The Pitfalls of Financing Cars

http://www.responsiblelending.org 4

The “Trust Tax”

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Average Rate Excluding Factory Incentives Average Rate

Trusted dealer to give a good rate or dealer said they were giving the "best" rate

Other borrowers

Note: Difference between groups for both rate significant at 5% level .

Source: CRL-sponsored survey through Macro International’s CARAVAN phone interviews

Page 5: Auto Lending Abuses: The Pitfalls of Financing Cars

http://www.responsiblelending.org 5

Changes in Amount of Kickback

Figures are based on results from regression models using auto ABS securities data. The change in each category is assuming the increase of one standard deviation in the independent variable. Note that the markup increase of each variable does not have a cumulative effect if multiple conditions exist on one loan.

2.23%

2.84%3.04% 3.07%

3.44%

5.04%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Smaller Amount Financed (-$3,300)

Higher % of Used Sales in Portfolio

(+30%)

No Markup Cap Present

Longer Loan Terms

(+4 months)

Lower Borrower FICO Score (-47 points)

Loan Made by Subprime

Finance Co.

Ad

diti

on

al A

PR

Du

e t

o R

ate

Mar

kup

(i

n p

erc

en

tage

po

ints

)

Page 6: Auto Lending Abuses: The Pitfalls of Financing Cars

http://www.responsiblelending.org 6

Odds of Default Rise When Kickback Included in Subprime Loan

Odds ratios based on coefficients from linear regression models using auto ABS securities data. Changes in odds are based on an increase of one standard deviation of rate markup for finance companies (4.55%). Regression model for non-finance companies produced results that were not significant.

33.0%

12.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Change in Odds of 60-DayDelinquency

Change in Odds ofCumulative Loss

Page 7: Auto Lending Abuses: The Pitfalls of Financing Cars

http://www.responsiblelending.org 7

Share of Dealership Profits

Source: F&I Magazine (www.fi-magazine.com/Statistics)

F&I Share of Dealer Profits

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

est

.

Page 8: Auto Lending Abuses: The Pitfalls of Financing Cars

http://www.responsiblelending.org 8

Car Lending Abuses

Yo-yo Scams: Dealer sends consumer home with car before financing

is complete, Consumer is brought back to the dealer with the car, Consumer is told that interest rate will be much higher

than previously thought, When consumer tries to rescind deal, told that trade-in

has been sold and/or down payment is non-refundable. Consumer who does not return the car threatened with

repossession and/or criminal charges (theft).

Page 9: Auto Lending Abuses: The Pitfalls of Financing Cars

http://www.responsiblelending.org 9

Prevalence of Yo-Yo Scams(on average rates 5 percentage points higher)

4.5%

11.1%12.0%

25.0%

0%

5%

10%

15%

20%

25%

30%

Total Population Credit Score Fair or Poor

Income < $40,000 Income $25,000 or less

Note: The difference in frequency between lower income and lower credit score groups and the rest of the population was statistically significant

Source: CRL-sponsored CARAVAN phone survey

Page 10: Auto Lending Abuses: The Pitfalls of Financing Cars

http://www.responsiblelending.org

Tactics Used in Yo-Yo Scams

10Source: CRL Report - Deal or No Deal

Page 11: Auto Lending Abuses: The Pitfalls of Financing Cars

http://www.responsiblelending.org 11

Impact of Financial Reform Law

CFPB will have authority over lenders who purchase auto loan contracts from dealers.

FTC will have rulemaking and enforcement authority over dealers, with regular rulemaking process.

FTC held 3 roundtables on auto lending and sales issues.

CFPB Working Group

Page 12: Auto Lending Abuses: The Pitfalls of Financing Cars

http://www.responsiblelending.org 12

Buyer Tips

Remember that sale, trade-in and financing are separate transactions.

Shop around – you do not have to finance with the dealer. Beware of low or zero interest loan promotions

Don’t use monthly payment as your guide. Take your time – don’t buy or sign that day.

Take finance documents home Never buy that day

Add-on products are not required for financing. Know what you are buying and how much it costs.

Beware of “pay off your trade in no matter what” promotions.