6 Events That Altered Auto Finance in 2017

From changes in consumer buying habits to the resignation of the industry’s top regulator, 2017 was a year of changes in the auto finance space.

The industry had what is shaping up to be another record-breaking year as total loan balances rose above $1.1 trillion in the third quarter, compared with $1 trillion during the same period the year prior, according to Experian’s latest report. However, that’s masking some underlying movement happening below the surface.

Here are six events that altered auto finance in 2017:    

1. Used-Vehicle Depreciation

Perhaps the most persistent trend throughout 2017 has been the threat of used-vehicle depression and what it will mean for recoveries and sales moving forward.

All vehicles are averaging a 13.2% year-over-year depreciation rate according to Black Book’s latest report. While that’s markedly better than the 17% depreciation rate highs the company predicted at the beginning of 2017, the values are still receiving a boost from the loss of inventory the industry experienced after the hurricanes that hit Texas, Florida, and Puerto Rico in the fall.

During the three-month period starting in August, when an estimated 700,000 vehicles were damaged or destroyed during Hurricanes Harvey and Irma, overall used-vehicle retention increased 1.8%, according to Black Book.

However, that effect is not likely to last as a record number of off-lease vehicles continue to enter the market and replace the waning demand for new vehicles, said Brian Landau, senior vice president of TransUnion’s auto business.

As loan terms extend as far as lenders are willing to go, new-vehicle prices continue to rise, and interest rates remain at historical lows, something is going to have to give, Landau told Auto Finance News. Likely, it will be the down payment that has to increase, and when shoppers can’t afford that, they will turn to the excess supply of two- to three-year-old cars.  

2. Wells Fargo’s Scandals 

Wells Fargo Dealer Services had a rough 2017. The company was embroiled in an insurance scandal for most of the year, which resulted in the company paying $80 million in remediation fees to some 500,000 consumers who were wrongly charged for insurance they didn’t need.

But that’s not the end of the investigation. The Office of the Comptroller of the Currency said the amount Wells Fargo paid was “insufficient” to cover the full population of affected consumers, which is expected to reach over 800,000, according to a report leaked by The New York Times.

Lenders will want to see how the investigation plays out before drawing their own conclusions about how to handle scandals of this magnitude moving forward, but there are lessons to be learned.

Wells Fargo admitted that its vendor management systems were not up to standard and has enacted a policy to improve oversight in the future. Lack of third-party oversight is what caused the borrowers to be wrongly charged, the company said. The insurer in question, National General, said it acted properly throughout the process.

Another lesson is to bolster compliance around the Servicemembers Civil Relief Act (SCRA). Wells Fargo was fined $24 million in late 2016 for illegally repossessing servicemembers’ vehicles. In November, the lender was served another $5.4 million fine when it was revealed through the insurance investigation that the number of affected servicemembers was double what the bank initially estimated.  

Amid all of that regulatory action, one of the industry’s top five lenders by portfolio size has been pulling back from auto. Over three quarters in 2017, Wells Fargo’s portfolio has declined by 11.8%, allowing Capital One to gain in marketshare and threaten to overtake Wells Fargo in the top rankings. Credit unions and captives have also taken advantage and gained marketshare.  

3. Richard Cordray’s Resignation

The Consumer Financial Protection Bureau’s first Senate-appointed director, Richard Cordray, has resigned ahead of his regularly scheduled term limit, setting in motion the first major transition of power for the fledgling agency.

Cordray promoted Chief of Staff Leandra English to deputy director prior to his resignation, which was intended to make her acting director until the Trump administration could name a permanent director. However, the White House challenged by naming Mick Mulvaney, director of the Office of Management and Budget, to direct the CFPB under the Federal Vacancies Reform Act. English sued in order to issue a restraining order claiming she is the “rightful acting director,” but the judge ruled in favor of Mulvaney.

Yet, the legal challenge continues as the industry wonders who the new permanent director will be and what changes it will bring. However the legal battles shake out, it will come to define future transitions at the industry’s top regulator.

4. State-Level Enforcement 

As the CFPB is poised to step back with the possibility of a deregulatory director, state attorneys general have stepped up their enforcement.

“Dodd-Frank has enabled states to enforce the federal laws in their state, by virtue of the state attorney general,” Kenneth Rojc, managing partner of Nisen & Elliott LLC’s automotive finance group, told AFN earlier this year. “That could be a potential reaction if there is an easing of the auto finance regulation [from the CFPB].”

The largest enforcement actions this year came from Massachusetts and Mississippi.

Santander Consumer USA entered into a written agreement with the Federal Reserve Bank of Boston on March 21 and agreed to pay $25.9 million to resolve an investigation in two states regarding the financing and securitization of subprime auto loans.

The subprime auto lender Credit Acceptance Corp. disclosed that it has received a subpoena from the Mississippi attorney general for issues with the company’s origination and collection of loans.

5. Santander’s Shakeup

The industry’s largest subprime lender is making changes that could affect the whole auto finance space.

In August, Santander Consumer USA announced that Chief Executive Jason Kulas would step down and immediately be replaced by Scott Powell, CEO of Santander Holdings USA (SHUSA) — the subsidiary of Spanish parent Banco Santander. Powell is maintaining responsibilities in both roles. 

That decision has spurred a number of other changes including the appointment of Juan Carlos Alvarez to the position of chief financial officer, and the lender’s decision to seek greater marketshare in the subprime space.

Additionally, Santander agreed to pay Thomas Dundon — who was the subprime lender’s former CEO, chairman, and one of its founders — more than $700 million in an exit deal, according to a Securities and Exchange Commission filing.

Many of these moves signal the banks intent to “integrating their operations” under Banco Santander, Christopher Donat, managing director of equity research at Sandler O’Neill, told AFN.

6. New Ownership Models 

The industry has witnessed the entry of several new companies and subsidiaries looking to disrupt the traditional models of car ownership.

It started with General Motors Co. introducing its Book by Cadillac program, which allows consumers in New York to have any branded model in Cadillac’s fleet delivered to them in a white-glove concierge service and have it swapped out anytime they want.

From there a slew of OEMs introduced their various models, including Ford Motor Credit Co.’s Canvas subscription service and Lincoln Motors’ program; Care by Volvo; and two programs under the Volkswagen umbrella: Porsche Passport and Audi on Demand.

New companies not affiliated directly with the OEMs have also entered the space. Cox Automotive’s Clutch program is operating out of Atlanta, and Detroit-based Carma offers some more affordable options.