Skip to Main Content
PCBB Banc Investment Daily August 14, 2015
Banc Investment Daily
August 14, 2015

On The Road With The Blue Lady

Americans have always had a love affair with their cars - they are a metaphor for freedom and rebellion. Furthermore, the amount of horsepower often determines the level of satisfaction. According to the US Bureau of Transportation, there is a median of 1.9 vehicles per household, although we find an average of 1.8 drivers in each household. Further, some 90% of the workforce commutes to work by car. Spending so much time in their cars means drivers get really familiar with them as well. Maybe that is why an AP-AOL poll found that 40% of drivers declare their car has a personality all its own. Further, 20% name their cars and some will use heroic personas like the Batmobile or terms of endearment like Nelly and Baby. The powder blue sports coupe cruising on the open road could be called Blue Lady and the big pickup with jacked up wheels could be called Dad's Dreamboat.
The automobile is so embedded in our lifestyle that the CFPB has decided it is time to monitor auto loans more closely. Financial institutions are already supervised, but now non-bank auto finance companies are under review. The CFPB just issued a final ruling which will take effect 60 days after being published that will cover 34 non-bank businesses. The CFPB is determined to look into companies that make, acquire or refinance 10,000 or more auto loans and leases a year, so that covers about 90% of non-bank loans and 7mm borrowers per year.
Certainly, some auto dealers over the years may have abused borrowers with the lure of "buy here, pay here" schemes. Along these lines, one AZ company was recently fined $8mm for making harassing debt collection calls and providing inaccurate credit information to credit reporting agencies. The dealer reportedly specifically targeted subprime borrowers who were happy just to get a loan. Those borrowers' troubles were just beginning though, as high interest rates and unethical repossession strategies followed. When the CFPB investigated, it found 45% of contracts were delinquent. In addition, collection employees were calling borrowers at their places of work multiple times a day and further harassing the references who had backed those customers when they applied for financing. Some cars were even repossessed even while the customer was current on the loan or agreed upon payment arrangements.
After reviewing all of this, the CFPB decided it had to stop. So, from now on non-bank auto finance companies must comply with Federal Consumer Financial laws, the Equal Credit Opportunity Act, Truth in Lending Act, the Consumer Leasing Act and Dodd Frank Act. Also, non-bank businesses must improve their marketing methods and deceptive messages are not acceptable. Loan terms must be easily understood, accurate information must be transmitted to credit reporting agencies and, last but not least consumers will have to be treated fairly when debts are being collected. Non-banks will be obliged to follow the same rules as banks, which will help level the playing field for all participants.
This is all good news for banks who have been doing auto loans the right way all along. Non-bank finance companies will discover that the CFPB means serious business and that also means both the Batmobile and the Blue Lady will not have a cloud of financial uncertainty following them around anymore.