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Distinguishing Subprime Auto from Subprime Mortgage

AFSA has been actively working with journalists and Congressional staff to emphasize the differences between subprime auto and subprime mortgage as well as the positive performance of subprime auto loans.

Vehicle finance loans are structured very differently from mortgages, and do not contain exotic features that contributed to defaults in the mortgage space. While the auto market has subprime customers, there are no subprime products commonly used in vehicle finance. Certainly, vehicle finance loans do not have any of the features that led to problems in subprime mortgage, such as negative amortizing loans, introductory teaser payments, “no-doc” or “low-doc” loans, or a built-in assumption of future refinance.

Vehicle sales have led the uneven U.S. economic recovery and data from multiple sources show that vehicle finance loans performed well during the recent recession and continue to do so. According to a recent Equifax report, “despite record high balances, serious delinquencies on auto loans remain near all-time lows, representing less than 1% of total outstanding balances for the third consecutive month.” The S&P/Experian Consumer Credit Default Indices showed that the auto loan default rate hit a historic low in April 2014, at 0.92 percent. Thirty-day delinquencies are at their lowest level since 2007, while 60-day delinquencies show a slight variance both up and down over the last four years, based on a first quarter trend line from Experian.

Drawing parallels between subprime auto finance loans and mortgages does nothing to help an economic recovery, as the auto sector exhibits growth and strong performance.

Read more about AFSA’s efforts in Automotive News.

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TCPA Should Not Be a Trap

“Congress did not intend to set a trap for those who comply with the law,” AFSA wrote to the Federal Communications Commission (FCC) on Aug. 8. AFSA responded to a petition asking that the FCC rule that companies are not liable when they call a wireless number for which they have prior express consent to call or text, but which has been reassigned to a different subscriber.

The TCPA prohibits autodialed non-emergency calls to wireless numbers without the prior consent of the called party. AFSA agreed with the petitioner that there should be an exception to, or a safe harbor from, liability in these instances provided the caller updates its records and ceases calls to that wireless number within a reasonable time period after being informed that the number has been reassigned from the consenting consumer to another person without the caller having notice or knowledge of the change.

The FCC has received many petitions over the last several months regarding the TCPA. AFSA believes that the FCC is likely to initiate a rulemaking in response to these petitions this fall.

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Inside the Beltway
CFPB Makes Recommendations to Address Workplace Concerns
PoliticoPRO (08/12/14) Lee, MJ

According to a new report produced by the Consumer Financial Protection Bureau (CFPB), its employees identify concerns with a lack of inclusion and diversity at the agency. The report, which came about as a result of widespread criticism of the bureau’s hiring and promotion practices, was released by the CFPB’s Office of Minority and Women Inclusion. The report details nearly 50 “listening sessions” held by the bureau in order to identify issues of concern among employees at the bureau.

The report also identified several recommendations, including creating a forum to address workplace trends at the bureau. Director Cordray, who received the report late last week, said, “I embrace the recommendations in the OMWI report and look forward to the hard work of making sure that all our employees are engaged and informed in helping achieve our mission.”

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CFPB Orders Amerisave to Refund $15 Million to Deceived Customers
Cleveland Plain Dealer (08/12/14) Harris, Sheryl

The Consumer Financial Protection Bureau (CFPB) levied an enforcement action against Amerisave, an online mortgage lender, on August 12. Refunds for affected consumers will make up $14.8 million of the $19.3 million fine. The enforcement action named Amerisave CEO Patrick Markert personally; he was levied a $1.5 million fine after the complaint noted he personally profited from what the bureau called a bait-and-switch scheme within the mortgage lender.

According to the bureau, the company advertised inaccurate interest rates that it had no intention of providing. Customers came through third-party credit sites and were quoted rates for those with credit scores as high as 800 on the FICO scale, even though the consumers indicated that their actual score was far lower. The complaint also said that the consumers were required to pay between $375 and $500 for an appraisal before they could receive a good-faith estimate of the loan charges, violating fair-lending laws. At checkout, consumers were charged a $20 validation fee from Novo Appraisal Company, without being told that it was a part of Amerisave. The bureau will hire a third party to administer the funds to consumers.

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Will CFPB Write Rules on Digital Currencies
American Banker (08/11/14) Witkowski, Rachel

On Aug. 11, the Consumer Financial Protection Bureau (CFPB) issued a warning regarding digital currencies and the effect they could have on consumers’ financial futures. The move prompted many industry watchers to inquire whether the bureau will write rules on Bitcoin and other currencies. The announcement by the bureau stated that currencies can have volatile exchange rates, unclear costs and vulnerabilities to hacking.

Bitcoin advocates responded immediately that they were not concerned about sweeping rules by the CFPB, highlighting existing laws that treat virtual currencies like money transmitters. "I'm not sure the CFPB would go as far as doing any regulation on Bitcoin," said Jerry Brito, a senior research fellow at the Mercatus Center at George Mason University. “The states are already doing the consumer protection piece so the CFPB could look for a gap, if there is a gap."

Several other federal regulators have issued guidance to curtail illegal activity in Bitcoin, and the New York Superintendent of the Department of Financial Services has issued proposed regulations for special Bitcoin licenses. Industry watchers note that the CFPB is likely wading into the contentious debate because the Government Accountability Office was highly critical of their treatment of virtual currencies thus far.

The CFPB also announced that it is accepting complaints on virtual currencies. The bureau often uses the complaint database as the starting point for an enforcement investigation or research for rulemaking.

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National and State News
Is U.S. Auto Lending about to Bubble over?
Moody’s Analytics (08/12/14) deRitis, Christian

The U.S. auto lending industry has recovered swiftly from contractions experienced during the recession, which were far less than other industries. However, the quick expansion of subprime auto financing has raised concerns from some that consumers are overextending themselves and borrowing more than they can pay back. Vigilance is required, but expanding credit with some deterioration in the performance of the loans is likely a symptom of the market returning to normal as opposed to overheating.

The aging of the U.S. fleet of cars and trucks combined with pent-up demand has led to a boom in the U.S. auto industry, which has been a bright spot in an otherwise murky economy. Auto loans and leases have closely matched new car sales. During the recession, consumers backed off purchasing new or used vehicles. However, unlike the mortgage and home equity line of credit businesses, consumers never completely left the market space. As a result of the decline in volume, subprime auto credit exploded on the heels of the recession. Growth rates since then have moderated and matched other similar risk segments.

Outstanding auto balances of near-prime borrowers have experienced growth, but prime borrowers have led the overall increase in auto lending. Those with scores over 700 experienced slight decreases lending activity and are nearly 30 percent above where they were in 2007. Borrowers of all credit profiles are also taking out larger loans, from subprime and no credit, to pristine credit. Consumer confidence and improved balance sheets have permitted consumers to borrow more. Overall, an increase in auto lending volumes and loosening of standards has not led to increases in delinquency and default rates. Payment performance has improved each month since delinquency rates hit a high in 2009.  Charge-off rates have retreated in the last six months after increasing in 2011-12, suggesting a self-correcting market.

In short, regulators and consumers should be mindful, not fearful of the increase in auto lending and the subprime auto space. The market is auto correcting as it overshot its success as the first credit market to come back after the recession.

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FICO Recalibrates Its Credit Scores
The Wall Street Journal (08/07/14) Andriotis, Annamaria

On August 7, the Fair Issac Corporation, more commonly known as FICO, announced that it would recalibrate its credit scores to make it easier for millions of Americans to get loans. The company noted that it would not include a record of a consumer failing to pay a bill if the bill was eventually paid or settled with a collection agency. Additionally, medical bills will be given less weight in the new formulas. Lately, the Consumer Financial Protection Bureau (CFPB) has been pushing lenders to expand borrowing to more consumers without expanding risk. The changes by FICO may boost consumer lending and allow people with lower scores to qualify for more money on a loan or simply get a loan in the first place.

As of July 2014, nearly 64.3 million Americans had medical debt and nearly 41 percent of U.S. adults identify that they have had some trouble paying off student debt. Additionally, 106.5 million have a collection record on their report, but no balance attached to the record. Loosening both areas slightly could allow for freer flow of funds. However, critics note that some people simply cannot handle credit and simply loosening the standards could open a whole new can of worms to people who are ill-prepared.

Currently, collections can stay on credit reports for as long as seven years, despite the borrower paying off the balance. Additionally, consumers can be woefully unaware that their insurer is not paying a certain medical bill, which causes the cost to balloon and negatively impact their report.

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New York Prosecutors Charge Payday Loan Firms with Usury
New York Times (08/11/14) Silver-Greenberg, Jessica

On August 11, a yearlong investigation by New York prosecutors culminated in criminal charges against 12 different payday loan companies, all owned by Carey Vaughn Brown, accusing them of violating the state usury limit. Payday loans are effectively illegal in New York because of the state’s 25 percent interest rate limit. Analysts note that cases that actually use the term usury are quite rare and the New York case, which has ties to almost a dozen other states as the money navigated several different companies, could be a sign of things to come.

In the indictment, prosecutors stated Brown operated a “payday syndicate,” as he owned several companies that controlled every portion of the payday loan process. Brown owned companies that extended credit, processed payments and performed collections. All of the companies were constructed in such a way to obscure ownership and secure profits for owners. To make loans into states that he was legally not able to, Brown acquired MyCashNow.com, located in the West Indies, and incorporated other portions of the business in states such as Nevada, which have favorable regulatory environments.

According to prosecutors, the case outlines how far lenders will go to skirt rate caps in states. New York continues to take aim at the lenders themselves, such as Brown and his companies, but also have targeted the banks that service them. Last August, Benjamin Lawsky, head of the New York Department of Financial Services, sent 35 cease and desist letter to banks around the country asking them to stop doing business with payday lenders that violate usury limits. Brown and his companies received a similar letter in March 2012. Court documents show that the letter “unnerved” executives at the payday companies, but that did not stop them from making loans.

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Tiptree to Acquire Fortegra Financial for $200 Million
The Wall Street Journal (08/12/14) Prior, Anna

Fortegra Financial was acquired by holding company Tiptree Financial in an all-cash deal that values both companies at nearly $200 million, according to an Aug. 12 announcement. Fortegra offers payment-protection products, as well as motor-club memberships and warranty services. Tiptree offers insurance, specialty financing and asset management, along with real estate. The deal includes a 30-day go-shop period where Fortegra can entertain other offers, but the deal has already been approved unanimously by both boards and is expected to close in early 2015. The companies said the total value of the transaction will be about $218 million.

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August 14, 2014

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AFSA Newsbriefs

AFSA Newsbriefs is a weekly executive summary of AFSA initiatives and consumer credit articles. AFSA Newsbriefs is free for members. Send an email to [email protected] to subscribe.

The American Financial Services Association, or AFSA, is the national trade association for the consumer credit industry, protecting access to credit and consumer choice. The association encourages and maintains ethical business practices and supports financial education for consumers of all ages.