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In Home Loans, Subprime Fades as a Dirty Word
New York Times (07/28/14) Dewan, Shaila

Despite the notoriety, whether deserved or not, that subprime loans gained as the cause for the financial crisis, subprime mortgages are remerging as tight lending standards begin to loosen. These loans, which accounted for 15 percent of home loans in 2005-2006, now only account for a small portion of loans and carry interest rates of 8 to 13 percent. Individuals with damaged credit but large sums available for down payments are able to afford and qualify for these loans despite not being able to qualify for more traditional loans. In some cases, subprime loans carry stricter underwriting guidelines than even those offered by the Federal Housing Administration (FHA), which requires just a 3.5 percent down payment; subprime loans often require upwards of 20 percent down.

Analysts, economists and consumer advocates alike have noted that the stricter underwriting standards – such as determining a borrower’s ability to repay and noting all of a borrower’s assets – combined with the higher down payment requirements have done exactly what they  intended: expand access to safe, responsible credit. Only about one half of one percent of home loans are subprime in today’s marketplace, meaning they are not numerous enough to bundle into securities for sale on the open market. This, in turn, means the companies have to keep the loans on the books, which also increases their quality.

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AFSA Questions Usefulness of CFPB Telephone Survey on Arbitration

On June 30, AFSA submitted a letter in response to the Consumer Financial Protection Bureau’s (CFPB) revised telephone survey exploring consumer awareness of and perceptions regarding dispute resolution provisions in credit card agreements. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the CFPB to conduct a study and provide a report to Congress concerning the use of pre-dispute arbitration agreements. In 2013, the CFPB released a proposed telephone survey that would form part of the CFPB’s study. AFSA commented that the proposed survey was unnecessary for the completion of the study, but offered several suggestions to improve the survey, should the CFPB decide to continue. In May 2014, the CFPB released a revised survey. AFSA responded that it appreciates the changes the CFPB has made to the survey. The revised survey is shorter, less complicated, and includes fewer hypothetical questions. However, AFSA emphasized that the survey will not yield useful information.

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Inside the Beltway
Inspector General Criticizes Consumer Bureau Headquarters Renovation
Los Angeles Times (07/02/14) Puzzanghera, Jim

The price tag to renovate the Consumer Financial Protection Bureau’s (CFPB) headquarters near the White House in Washington, D.C., has ballooned to $216 million, prompting members of Congress and, most recently, the inspector general of the bureau to question the plan and necessity of the renovations. In a report released on July 2, the inspector general noted that there was not a “sound business case” for the project because the agency never considered other options. Additionally, bureau officials have been unable to locate documentation of the decision to fully renovate the entire building. The bureau also failed to follow its own guidelines for approving projects.

"We cannot conclude whether a complete analysis would have altered the decision to approve funding for the renovation," said the report by the Federal Reserve's inspector general, which is the official watchdog for the bureau. "However, without this analysis, the value of the [internal review board] process as a funding control is diminished and a sound business case is not available to support the funding of the renovation."

The bureau’s funding comes directly from the Federal Reserve Board of Governors as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Congressional Republicans have been highly critical of the bureau’s lack of accountability and use the renovation plans to support their stance.

In response to the allegations of misconduct, the bureau has said repeatedly that the building is a “government asset that is past its prime and needs to be brought up to current standards.” The cost to renovate in early 2013 was $95 million, which quickly ballooned to $145.1 million and finally to $215.8 million earlier in 2014.

Reps. Jeb Hensarling (R-TX) and Patrick McHenry (R-NC) noted that the renovation would cost $590 per square foot, which would cost more than the construction of buildings such as Trump Tower in New York City, the Burj Khalifa in Dubai and the Bellagio Hotel in Las Vegas. The inspector general’s report did not include this figure, and the General Services Administration, which oversees the renovation, noted that cost would be much less, likely about $250 per square foot.

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National and State News
American Express ‘Take it or Leave it’ Rule Goes on Trial
Bloomberg (07/03/14) Smythe, Christie

According to a civil lawsuit filed by the U.S. government that is set to start on July 7, the rules long set by American Express (AmEx) that forbid businesses from offering discounts to customers for using other cards despite the higher processing fees, violate antitrust law . The charges, which AmEx notes funds the perks that members enjoy, generate up to $50 billion a year. Merchants that want to attract the elite customer that holds an American Express card must abide by the rules in order to accept the cards. AmEx, in response, noted that its processing fees have actually fallen from 2012 to 2013.

The decision could have wide ranging implications for merchants that now are not permitted to communicate to consumers how much it costs to process a certain type of card. AmEx argues that its rules are necessary in order to fight the duopoly of Visa and Mastercard. It also notes that it invests the processing fees it receives into updating its network, protecting merchants from fraudulent activity and continually providing merchants with access to higher quality American Express consumers.

The Justice Department filed its lawsuit against AmEx, Visa and Mastercard in 2010. The latter two companies settled in July 2012, although many large merchants are appealing the judge’s decision.

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Is Auto Lending Becoming Irrational
American Banker (07/01/14) Wack, Kevin

The answer depends on what you look at. Auto financing is certainly booming, seeing a 9.9 percent increase year-over-year and far outpacing other consumer loan products. Auto loans were a sought-after asset class during the great recession, as they continued to perform well despite other products floundering. In order to continue record profits, financial institutions have begun easing some credit standards, including lengthening loan terms, requiring smaller down payments and approving borrowers with lower credit scores. These practices extend credit to more individuals, but also increase the chances the lender will take a loss. Expanding loan terms are at all-time highs, yet the market space is not seeing records in subprime originations, which creates some worry – and some reason to be optimistic.

As competition among auto lenders has intensified in recent years, some have begun offering longer term loans than the standard five years, which historically existed because vehicle depreciate in value so quickly. For both new and used vehicles, 72 month loans are the most common in the marketplace today. When loans have longer terms, they open the possibility that the loan will go sour. Banks and financial institutions are under pressure to continue to expand and satisfy the investors’ demand in the market. This situation has echoes of the housing bubble in the 2000s.

On the flip side, the sector did so well during the financial crisis that investors have confidence in it moving forward. The bottom line is that consumers need automobiles to get to work, school and around town. Despite loosening credit standards, delinquencies have not risen notably in recent months – just 1.4 percent of borrowers were 90 days or more past due from May through July 2013. Moreover, subprime loans are not at all-time highs. In the first quarter of 2014, borrowers in the two lowest bands of creditworthiness made up 14 percent of the market space on originations, compared to 19 percent in 2007. Finally, and most importantly, unlike the housing bubble, significant protections are built into the market space for investors in auto loans that did not exist in the mortgage space.

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New York Introduces Loan Mod Alternative for At-Risk Homeowners
National Mortgage News (07/27/14) Dymi, Amilda

New York has launched Mortgage Assistance Program, which is a loan modification alternative for borrowers who may be close to foreclosure. The loans will enhance the Homeowners Protection Program (HOPP), which already exists, to give legal and financial counseling to distressed homeowners. The attorney general’s office noted that HOPP is extremely helpful to families and, thus far, has helped more than 28,000, but it is not equipped to help those with credit issues. According to the attorney general’s office, families are being denied mortgage modifications because of small, unpaid debts. The loan modifications are meant to assist with this. The plan is based on a pilot program that took place in New York City, which helped many families lower payments.

The state will begin processing applications on September 15 in Long Island, where 11.1 percent of mortgage loans are 90 days or more delinquent.

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Stuart Leaves VW Credit to Become CEO of TD Auto
Automotive News (07/02/14) Nelson, Gabe

Andrew Stuart, who led Volkswagen Credit since January 2012, is leaving the company to become the CEO of TD Auto Finance, effective July 15. Chris Dahlheim, the finance arm’s CFO, will lead VW Credit until a permanent CEO can be named. TD’s auto financing division is the 13th largest in the nation, according to Experian Automotive’s 2013 fourth quarter report.

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Butler Named President of Heights Finance

Stan Butler has been named president of Peoria, Illinois-based Heights Finance Corporation. Butler joined Heights as the controller in 2003 and quickly rose through the ranks. Later the same year, he was named the company’s treasurer. In December 2006, he was promoted to chief financial officer. In April 2010, he was named chief operating officer, a role he will continue to maintain while also serving as president.

In recent years, Butler has led the day-to-day operations of the company while overseeing the implementation of best practices, enhanced sales processes and improved marketing and management practices.

Butler has been involved in AFSA for many years. He has been a member of the AFSA Operations Committee since 2008, and is also a member of AFSA’s Ancillary Product Working Group, and State Government Affairs and Operations & Regulatory Compliance Committees. In April 2014, he joined the AFSA Independents Section Board.

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World Omni Financial Corp. Announces New Marketing VP
F&I Showroom (07/01/14)

On July 1, World Omni Financial Corp. announced that the position of assistant vice president of marketing will be filled by Joanna Sherry. Sherry began her career as a financial analyst with Ford Motor Company and proceeded to hold many senior level positions with CarFax and VW Credit before most recently joining Hyundai Capital America in their Insurance Division. Sherry joins World Omni – a division of JM Family Enterprises Inc. – after relocating from California to South Florida and will be primarily responsible for supporting the marketing efforts of several of World Omni’s business units, including Southeast Toyota Finance, CenterOne Financial Services and DataScan.

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July 3, 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 newsbriefs@afsamail.org 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.