ABA Bank Compliance - September/October 2013

directors of the American Real Estate Society (2008 to 2015). She received her bachelor’s, master’s, and doctorate degrees in economics from Northwestern University. Reach her at mcourchane@crai.com.

Endnotes

1 See CFPB Bulletin 2013-02, “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act,” March 21, 2013 at http://files.consumerfinance.gov/f/201303_ cfpb_march_-Auto-Finance-Bulletin.pdf.

2 Elliott, Marc N. et al., “Using the Census Bureau’s surname list to improve estimates of race/ethnicity and associated disparities,” Health Services Outcomes Research Method 9:69-

83, April 10, 2009.

3 A false positive is defining an applicant as one race, when they are in fact a different race.

A false negative is the failure to identify an applicant who belongs to a group.

4 See CFPB Bulletin 2013-02, “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act,” March 21, 2013, p. 4, available at http://files.consumerfinance. gov/f/201303_cfpb_march_-Auto-Finance-Bulletin.pdf.

5 Ibid.

6 Dealerships with non-recourse agreements are subject to credit and prepayment risk for a
limited period after origination, while dealerships with recourse agreements are subject to
credit and prepayment risk for the life of the contract.

7 Matched pairs are applications from the relevant groups with similar attributes but different underwriting outcomes.

8 See CFPB Bulletin 2013-02, “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act,” March 21, 2013, p. 1, available at http://files.consumerfinance. gov/f/201303_cfpb_march_-Auto-Finance-Bulletin.pdf.

9 See CFPB Bulletin 2013-02, “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act,” March 21, 2013, at http://files.consumerfinance.gov/f/201303_ cfpb_march_-Auto-Finance-Bulletin.pdf.

10 Ibid.

11 These rates can be measured by applying these proxy methods to the bank’s HMDA filing where race and ethnicity are known.

12 Dealerships with non-recourse agreements are subject to credit and prepayment risk for a limited period after origination, while dealerships with recourse agreements are subject to credit and prepayment risk for the life of the contract.

13 Consumer Financial Protection Bureau, Supervisory Highlights: Fall 2012, October 31, 2012, at http://www.consumerfinance.gov/reports/supervisory-highlights-fall-2012.

COMPARISONS of indirect au- tomotive financing to wholesale mortgage lending must recognize that franchised automobile dealerships are not brokers. 1 A mortgage broker’s relationship with the home buyer is limited to the arrangement of financing, and it usually ends at the closing table. The dealership’s relationship with the vehicle buyer can be multi-faceted. The dealership stocks an inventory of new and used vehicles for sale, combines multiple products in each vehicle purchase, may purchase the customer’s used vehicle, and provides warranty and repair work after the sale.

Collectively, the new vehicle inventory of dealerships in the U.S. included approximately 3. 1 million vehicles as of Jan. 1,

2013, which is roughly a two-month supply. 2

Industry statistics suggest that approximately 50 percent of new-vehicle customers trade in a vehicle as part of the transaction.

Additionally, dealerships sold 17. 1 million used vehicles in 2012.3 JD Powers Associates estimates that approximately 79 percent of new-vehicle financing is arranged through the dealership. 4 In addition to arranging customer financing, dealerships’ finance and insurance (F&I) departments sell consumers warranty and insurance products and service contracts. Some dealership groups report the average transaction includes

1. 4 F&I products. 5 For example,
group 1, a publically traded com-
pany that owns automobile dealerships,
recently reported nearly 40 percent of its
new-vehicle sales included an extended
service contract, and 22 percent of such
sales included Guaranteed Auto Protection
(GAP) insurance. 6 As a result, automotive
dealerships, unlike mortgage brokers, have
multiple potential revenue streams associ-
ated with each vehicle transaction and incur
significant hard- and soft-dollar costs in the
operations of the business.

Dealerships employed (on average) 55 people and maintained an employee payroll of almost $51.6 billion in 2012.7 State law and manufacturer franchise agreements commonly require a dealership to have the capability to service vehicles. Dealerships make investments in facilities, tools, and computers to service these vehicles. In 2012, dealerships maintained a $5.3 billion inventory of vehicle replacement parts. 8 Additionally, franchise agreements commonly require dealerships to maintain certain levels of capitalization, sales penetration, profitability, and facility investment. As a result, dealerships require a significant amount of capital to fund physical facilities, inventory, payroll, and working capital. This differs significantly from a typical wholesale channel mortgage broker.

The fundamental role of the automobile
dealership creates a challenge for a bank,
which attempts to isolate and analyze a single
component of the transaction, the financing,
from the other components of the transaction.

As the CEO of Asbury Automotive Group recently commented when asked about the possibility of shrinking dealer reserves, “It’s like a balloon, if you push on it on one side, it bulges out on the other side.” 9 This is the market in which the bank’s indirect automotive finance product competes. Any fair lending analysis of the indirect automotive finance product must consider the role of the dealership and the structure of these transactions.

Endnotes

1 See “Automotive Finance–Will dealership finance reserve go the way of mortgage yield spread premiums?”, March 2013, at: http://www.crai.com/Publications/listingdetails. aspx?id=16084&pubtype=All%20Type.

2 Automotive News, January 24, 2013, p. 36.

3 NADA DATA 2013, p. 11, http://www.nada.org/ Publications/NADADATA/2013/.

4 Delvin Davis and Joshua M. Frank, “Under the Hood: Auto Loan Interest Rate Hikes Inflate Consumer Costs and Loan Losses,” Center for Responsible Lending, April 19, 2011.