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After the Crunch: A Look at Subprime's Recovery
Automotive News (09/12/11) Mooney, Joan

The subprime market is coming back. Dealerships are finding credit more available this year than during the credit crunch in late 2008 and early 2009. Subprime loans accounted for 40.8 percent of all auto financing in the second quarter of this year, the most growing sector being consumers with credit scores of 550 to 619, according to Experian. However, the current subprime rate, while up from the second-quarter low of 37.2 percent in 2010, is still far below the peak of 46.2 percent in the second quarter of 2007. Several changes have occurred in subprime auto finance since the credit crunch, particularly with regard to the players in the market and the terms of the loans available. Credit is much more available now for subprime customers than right after the crunch as banks consider customers with lower credit scores. The range of subprime buyers’ credit scores has also risen, with most lenders now defining subprime borrowers as those below 620 and labeling customers between 620 and 679, who were traditionally nonprime, as “near prime.” Lenders have also become more cautious and are not advancing as much over vehicle value. They are also more flexible; many lenders are willing to consider individual applicants who might not seem like good candidates at first and also are being less automated when evaluating credit applications. Other changes include captives offering a range of subprime to build brand loyalty and lenders increasing loan terms to make payments lower. According to Melinda Zabritski at Experian Automotive, advances are also more well-managed by the industry so they are not creating a new crop of customers who owe more on their vehicles than the vehicles are worth. Delinquencies and repossessions are also at near-record lows due to lenders doing a good job of vetting the loans they’ve put on the books and the good performance of those loans. Even with the gains in the subprime market, lenders still remain cautious because while there are plenty of subprime customers, whether they will have the confidence to buy a car in this economy is still unclear.

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AFSA Executive Addresses Policymakers on New Regulatory Landscape

On Sept. 13, AFSA Executive Vice President Bill Himpler spoke to an audience of policy professionals, including federal regulatory personnel, about the new regulatory landscape for non-depository financial institutions. Himpler was invited by the Regulatory Taskforce of Women in Housing and Finance, a professional society in Washington, D.C., to give an overview of the Consumer Financial Protection Bureau’s (CFPB) new authority under the Dodd-Frank Act. He used the opportunity to introduce the audience to the consumer credit industry, observing that “finance companies represent the oldest and safest form of consumer credit.”
Himpler related how the marketplace is reacting to the new regulatory regime and offered his insight into what regulation will look like in the near future. He complimented the CFPB for seeking enhanced transparency and simplification in loan disclosures, while also expressing industry concerns about the looming uncertainty surrounding the new “abusive” standard for financial services, which was established by Dodd-Frank. Reviewing the CFPB’s initiative to define “larger participants” for federal supervision, Himpler noted that AFSA has advocated for a reasonable and manageable scope. AFSA encourages coordination among federal and state agencies wherever possible, as substantial regulation of non-depositories already exists at the state level. Finally, he encouraged increased clarity from the CFPB on its enforcement standards.
Himpler closed his remarks by sharing a quote by Muhammad Yunus, an economist and recipient of the 2006 Nobel Peace Prize, “If economists would only recognize the powerful socioeconomic implications of credit, they might recognize the need to promote credit as a human right.”

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AFSA White Paper Examines Military Lending

AFSA published a white paper on Sept. 12 on recent military lending related state and federal legislation. The paper reports that in the current session 121 bills have been considered in 29 states and the U.S. Congress. Ten states (California, Illinois, Maine, Maryland, Minnesota, Nebraska, North Carolina, North Dakota, Rhode Island and Texas) have enacted legislation. The types of bills introduced include foreclosure prevention, modification of tax exemptions, recruitment incentives, Servicemembers Civil Relief Act (SCRA) benefits, child support obligations and military member surviving spouse benefits. AFSA’s white paper also covers court cases relating to service member foreclosures and the FTC roundtables on motor vehicle finance that included panels focused on military consumers.

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AFSA Updates Brochure Providing Overview of the Consumer Finance Industry

Recently, AFSA updated its brochure on the consumer finance industry, a resource primarily intended to give new employees of member companies an overview of the industry, beginning with its conception in 1916. The brochure describes the various market segments that make up the consumer financial services industry, including personal loan and sales finance companies, diversified financial services companies, mortgage lenders, payment card issuers, industrial banks and vehicle finance/leasing companies. Employees can also get a glimpse of the various state and federal statutes and regulations that apply to finance companies—including regulations issued by the Federal Trade Commission and state provisions enforced by state banking departments. The guide gives employees information fundamental to understanding this industry as it changes and expands.
The brochure is available under the membership publications section of the AFSA website.

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Inside the Beltway
CFPB Changes Course with Mortgage Disclosure Consolidation
Reverse Mortgage Daily (09/13/11) Gerace, Alyssa

The Consumer Financial Protection Bureau’s (CFPB) “Know Before You Owe” campaign is going in a somewhat new direction in the fourth round of its proposed mortgage disclosure forms. Rather than comparing two different forms, they are comparing two types of loan products. “We’re shifting gears for a simple reason: Comparing two versions of a form is useful, but in the real world, consumers should be able to use disclosures to compare different loan offers, not different forms,” Patricia McCoy of the CFPB stated on its website. “We want to make sure the disclosure actually helps consumers understand features of competing loan products, from the overall loan amount to estimates of taxes and insurance costs,” she added. Like previous rounds, the CFPB is seeking both consumer and industry feedback on whether the form is missing important information or should be presented differently. These loan comparison forms are also expected to be tested for a week in the Springfield, Mass. area.

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Policymakers Spinning Wheels on Future of Housing Finance System
American Banker (09/13/11) Wack, Kevin

Housing finance reform was once again a hot topic of disagreement when a panel of professors testified at a Senate Banking Committee hearing on Sept. 13. The discussion once again consisted of two sides: those who would like a fully private mortgage market, and those who believe that is unrealistic. Both the top Democrat and top Republican on the committee supported reform of the current system, but left their preferences in broad terms. Chairman Tim Johnson (D-SD) did however express concern that eliminating the government’s role completely could result in unintended consequences. Senator Richard Shelby (R-AL) criticized the system that led to taxpayer-subsidized risk taking at Fannie and Freddie, but did not call for a fully private system. The Obama Administration laid out a series of housing reform principals in February, but also did not give specifics. A related subject that came up was the maximum limit on loans guaranteed by Fannie, Freddie and the Federal Housing Administration, which will decrease unless Congress takes action this month. Both Richard Green and Adam Levitin, professors who support a government role in the mortgage market, did not object to allowing the loan limit to fall on a small scale, a step that would still leave the limit higher than it was in early 2008.

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One-Quarter of US Mortgages Could Get Help
The Wall Street Journal (09/12/11) Orol, Ronald D.

Almost a quarter of U.S borrowers could eventually gain access to lower rates afforded by the Obama administration’s Home Affordable Refinance Program (HARP), according to analysts. Currently, only “underwater” borrowers with a mortgage that is, at most, 25 percent more than their home’s current value are permitted to refinance at lower rates under HARP. However, the Federal Housing Finance Agency (FHFA) stated last week that it is analyzing whether it would allow underwater borrowers who owe even more than that cap to participate in the program, a move that comes after President Obama indicated in a speech that his administration was working with regulators on this issue. According to a June report by RealtyTrac, approximately 25 percent of all U.S. homeowners have home loans that are 20 percent or more underwater and almost half of all U.S. home loans are underwater. While analysts from J.P. Morgan have said that they believe changes to HARP are coming, likely in weeks rather than days, analysts at Keefe, Bruyette & Woods said in a report that the chief impediment to refinancing these very-underwater homes is that they don’t qualify for securitization even with a guarantee by Fannie and Freddie. However, both groups of analysts believe that reps and warrants relief, which would indemnify lenders from “putback” risk when it comes to mortgages refinanced using the HARP program, is likely off the table.

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National and State News
Chicago Tells Mortgage Servicers, Trustees to Maintain Vacant Homes
American Banker (09/08/11) Berry, Kate

Chicago’s city council has published an ordinance that, effective Sept. 18, requires banks, mortgage servicers and institutional investors to assume liability for the upkeep and security of vacant properties within 30 days after they become vacant. The industry has criticized the ordinance for creating a conflict of interest with trespassing laws because it gives banks and mortgage servicers the responsibility of determining whether a property is vacant, even if the borrower is not delinquent or has not been foreclosed upon. While similar ordinances have been passed by cities, none have been as strict as Chicago’s. Chicago’s city council is said to have taken action, in part, in response to a Woodstock Institute report published in January that identified more than 18,000 vacant properties in the city, 12,674 of which had been in the process of foreclosure for more than a year. The report also expressed concerns about blight occurring because servicers have walked away from properties, leaving no party designated to deal with problems that arise. Tom Felter, a vice president of the Woodstock Institute, says the ordinance “levels the playing field between servicers that are taking responsibility and those that are shrinking their stewardship responsibilities and not taking the title.”

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Steady GAP Defies Downturn
Automotive News (09/14/11) Wilson, Amy

Bigger lender advances this year mean more customers are opting for guaranteed asset protection (GAP) insurance. Michael Schwartz, finance director of Galpin Motors Inc., has seen a slight increase in GAP penetration from the drop in 2008 and 2009, to around 35 percent. During the peak of the recession, lenders were limiting advance rates to a minimum of 110 percent of the value of the vehicle, which meant customers “put a lot of money down to get the deal approved, so GAP wasn’t as important to them,” Schwartz added. However, today advance rates have risen as high as 125 percent, which means down payments are lowering and GAP is back up. Others, like Phyllis McCallie, finance director at Kuhn Honda-Volkswagen, found that GAP penetration stayed steady from the recession through today, but also remains as one of the most important products they sell. About half of respondents of an Automotive News survey found GAP penetration rates to be stable through the recession. Tony Wanderon, former head of Allstate Dealer Services, said that GAP penetration appears to be in the mid-to-upper 30s industrywide, which is about the same as in 2008. GAP take rates were also not affected by the soaring used-vehicle values, likely because many buyers were not aware of this change. Consumers seem to be more influenced by other aspects, such as dealer menu structures and incentive plans, according to Gary Fagg, a consulting actuary with CreditRe. Rates may also be stable because of today’s economy. More customers have had experiences with owing more on a purchase – such as a house or vehicle – than it was worth, which makes them more prone to purchase GAP insurance. Retailers have also concentrated on alternative products such as prepaid maintenance or service contracts, as they can apply to more customers.

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Credit Cards: Set to Get a Lot Smarter?
The Christian Science Monitor (09/10/11) Svensson, Perter

The U.S. is the only developed country that still uses debit and credit cards containing black magnetic stripes that must be swiped through retail terminals. Other industrialized nations have switched or are in the process of switching to "smart" chip-based cards. Information stored on magnetic stripes can be copied. As a result, card fraud and prevention measures cost U.S. merchants, banks and consumers billions each year. Smart cards with built-in chips can’t be copied because they hide information that can only be revealed with the right key. The U.S.'s slow adoption of smart cards has started to cause problems for residents traveling abroad. Some European stores and restaurants do not accept magnetic-stripe cards, and the cards don't work in European automated kiosks that sell transit tickets. Some U.S. banks, like Wells Fargo, have started issuing smart cards to customers who travel abroad. Because magnetic stripes are so widespread in the U.S. payment system, banks, payment processors and retailers have not reached consensus on how to transition to smart cards. Stores haven’t installed terminals for smart cards because banks haven’t issue them and banks haven’t issue them for the most part because stores won't accept them. However, Visa announced new policies last month that will provide a reason for U.S. banks to issue smart cards and stores to accept them over the next several years. In 2012, Visa will begin enticing merchants to switch most of their terminals to ones that accept smart cards by not requiring them to have their payment-system security checked every year. Then, in 2015, Visa will shift the liability for a certain kind of fraud from the banks to stores. If a merchant can’t accept a customer’s smart card and has to fall back to using the backup magnetic stripe and that transaction turns out to be fraudulent, the payment processor will be liable, rather than the banks, who are currently liable for this type of fraud. The change will give banks an incentive to market chip-based cards to consumers, since their fraud liability will be reduced when these types of cards are used. Javelin Strategy & Research estimates that transitioning to chip-based cards will cost about $8 billion, mostly for upgrading payment terminals in stores.

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Springleaf CEO Retiring
Evansville Courier & Press (09/14/11) Orr, Susan

Springleaf Financial Services announced that their chief executive officer, Frederick Geissinger, will be retiring on Oct. 1. Geissinger has been Springleaf’s top executive for 16 years, leading them through some major changes, including being acquired by American International Group (AIG), weathering the recent financial crisis, and Fortress Investment Group acquiring 80 percent interest in the company from AIG last fall. Jay Levine, who has more than 25 years of experience in the financial services industry, will be taking his place as president and chief executive officer. Levine most recently served as CEO for RBS Greenwich Capital, and prior to that, was responsible for “building a market for a number of innovative mortgage products that extended housing finance to a broader range of borrowers,” while working at Salomon Brothers, Springleaf said in their statement. Under Levine’s leadership, Springleaf will still maintain its focus on “the needs of the American consumer,” Barry Roberts, Springleaf’s marketing director, stated. “We are still in the same business that we have been in for 90 years; consumer lending and personal finance,” he added.

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September 15, 2011

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