Weekly Wrap: An all-in interest rate cap looms, inclusive lending in the spotlight

Regulatory changes have long been expected with the administration change in Washington, D.C. As the dust beings to settle on the transition, new priorities for Democrats on Capitol Hill are becoming evident — specifically a federal all-in interest rate cap . But how likely is such a bill to pass both the U.S. House of Representatives and the Senate , and what might the auto finance industry have to do to combat a regulation that could push some subprime consumers out of the market ? In this episode of the Weekly Wrap, Amanda Harris, JJ Hornblass and Joey Pizzolato discuss the implications of an all-in rate cap, as well as Tricolor Auto Acceptance ’s new software as a service venture that looks to bring its AI-powered underwriting model for thin- and no-file borrowers to the larger auto finance industry. Subscribe to The Roadmap Podcast on iTunes , Spotify , or download the episode. Auto Finance Innovation Summit, the premier event for technology in auto finance, returns March 16-17, 2021, as a virtual experience. The virtual experience will offer the quality networking and education of past events, all through an online platform. To learn more about the 2021 event and register, visit www.AutoFinanceInnovation.com . Video Transcript: Editor’s note: This transcript has been generated by software and is being presented as is. Some transcription errors may remain . JJ Hornblass 00:01 Hi everyone. This is JJ Hornblass and welcome to the roadmap from auto finance news since 1996, the leading news provider for the automotive lending and leasing industry. This is our weekly wrap for what's happening in the industry from March 1 2021. Before we begin, we want to thank our auto finance news advertisers, and there are many today, alpha dealer track, defy market scan point predictive state national stroke and stroke and navan and Westlake financial for their continuing support. So thank you to our advertisers. And I am pleased to welcome Joey Pizzolato and Amanda Harris from the auto finance news team. Hello to both you. And first let's start with some general economic news with a recent wave of selling has pushed the 10 year Treasury yield to its highest level since the pandemic began, which is a sign of heightening expectations for economic improvement. doses of Johnson and Johnson's newly authorized COVID-19 vaccine are expected to reach us providers this week. A boom in electric car buying helped Europe overtake China as the world's largest Evie market, the continents share of global new electric car sales nearly doubled to 43%. Last year, while China and the US lost market share. government subsidies played a major role. And finally, Jane Frazier takes over as CEO of Citi group today with two major goals one simplifying the bank and to making regulators happy. Speaking of regulators, there is a regulation or regulatory initiative that has been that has started in the auto finance space, or I should say it extends to the auto finance space. And that is the federal all in rate cap, which would put a red cap on all credit for consumers all consumer credit at 36%. And that would be for particular, within particular credit bands. So what are some of the more of some of the additional details around this all in red cap? How far away? Are we from this? All in rate cap? And the How likely is it that the auto finance sector can successfully replicate its success in South South Dakota, excluding auto loans from y'all and recap?Joey Pizzolato 03:26 Sure, I'll jump in and take that one. So if y'all remember, a couple, maybe like January when state legislators starting to start to pass the baton to the newly elected group, Illinois and passed and 36% all in rate cap that included auto loans and use the military Lending Act calculation for that all in rate cap. M and basically like, like you kind of touched on what it what it means is that consumers cannot take out a loan that exceeds 36% of interest throughout the life of the loan. So you know, if you were to take, say, a five year auto loan, you would have to cap that it, you know, I'm not really very good at math, but somewhere in the like, you know, four to 5% range, right? to kind of stay under that which which really puts a large burden on smaller kind of medium to your finance ears, especially in the subprime space. And it also additionally puts a lot of pressure on dealers selling their ancillary products, because as we all know, those those products are financed, they push up the interest on the vehicles because they are tied in to finance. Now. The talk now with with the new Biden administration, is that we should expect an all in rate cap bill on the federal level. Now this is something that the federal government has has, for a long time not really kind of dip their toes in, they've kind of kept a little Pretty big lead way around this. So the expectation, according to some legal professionals at apsic conference last quarter, or last week, was that we will see an all in right count, whether or not that has any legs sort of is up in the air, right, like Democrats have been very vocal about their support for an all in rent camp. However, there are some more moderate democrats that find that thing, this blanket kind of regulation is troublesome, and nearly all Republicans on the Hill are vocally in opposition to this. So whether or not, you know, the bill passes, remember, we do have kind of a 5050 split on the Senate, so things can move, but without the support of the entire democrat Democratic Party in the Senate, it could have a hard time. Now at the same time, you know, we all know that national legislation, really kind of sometimes, or either national legislation that fails, kind of can trickle down to the States. And there are other states that have been, you know, interested in an all in recap whether or not it's possible for so that could give give some of these states a little bit more confidence, I guess, to to pursue that legislation on their own. So it is a big question mark, but definitely something that the industry wants to take note of, because if it were to pass, you know, put put as a rider on another bill, which is also a possibility, you know, it would have real implications for the auto finance space.JJ Hornblass 06:44 For the implications seem like it would just simply lop off a huge portion of the market.Joey Pizzolato 06:54 The long and short from like, from where I'm sitting? I think it does, I mean, obviously, they're there with any kind of regulation or law, I don't want to say a loophole, but you know, there are creative ways in which to kind of, not get around it, I don't want to say that, but you know, what I'm saying, like, there are creative ways to find a solution to to a larger problem. So it's, it's really hard to say, but I do think as it stands now, um, you know, all in recaps are really detrimental to, you know, lower tier credit segments, and smaller, smaller lenders that, that really need to need to implement those higher interest rates in order to offset that risk that they have for borrowing to those customers. JJ Hornblass 07:41 So how do they? How would you see the industry maneuvering through an all and re cap? So for example, I've been, I would think that aftermarket products will have to get their own credit facility. Joey Pizzolato 07:57 Now, that would be my first thought, right. You know, you look at other industries, you have point of sale financing. You know, you can you could split it off, like you said, so that that would be the I think the first move would be to, to fight to still allow financing for those ancillary products and protection products. But just to structure the loan in a different way, so that it wouldn't wouldn't push up those those interest rates. JJ Hornblass 08:24 Right. And, but, I mean, still, you know, you have a certain portion of the subprime market that would simply not be able to get credit. Joey Pizzolato 08:37 Yeah, I mean, at five, I just kind of quickly did the math 612 1824 30, um, you know, on a six year loan, you could have no more than a 6% interest rate, JJ Hornblass 08:48 and right, so, unless you like, cut the duration of loans up. So you'd have, you know, two, maybe three year loans to allow for the appropriate, you know, risk. Risk. Joey Pizzolato 09:05 parameters. Yeah, absolutely. But then you run into, you know, maybe not in, like the US market, when Well, I don't, I don't know now, because they're the US, US vehicle values are still really high. But then you run into, you know, payment issues where your payments through the roof and affordability was was one of the biggest pain points to the industry, you know, way before the pandemic. So then we're, we're back in that territory. So it's really, maybe maybe they extend loan terms to keep those payments down. But then again, we run into a similar problem where you have borrowers that are upside down for, you know, a good portion of their loan. JJ Hornblass 09:47 What was the lobbying approach that was taken in South Dakota? Joey Pizzolato 09:54 So I'm not sure on the details on that, but from like, the nitty gritty details, but from from what I have Understand, South Dakota pass an all in rate cap. That was for installment lending, of course, you know, auto loans are part of that installment, like group, but, um, so it was passed and then afsa went back and they worked with lenders in the industry and they lobbied against, lobbied against it and actually got auto excluded from that kind of all in recap now, right now one thing to note is a lot of these recaps use the MLA calculation structure to kind of calculate that all in red cap, but auto loans, if you look at MLA, on its own, are not part of the military Lending Act, like they're not regulated in the same way. Other loans are where, you know, you do have this kind of 36% all in cap for personal loans or whatever you may have AutoZone a part of that. So, so there is a very kind of this, the Illinois legislation in particular, and potentially federal one lives in this kind of gray area, where, you know, it's it's using the military lending app, military Lending Act doesn't apply to auto So then, you know, I can see that having a hard time once it's contested, you know, in kind of a courtroom setting. JJ Hornblass 11:23 Okay. Um, another development in the industry is the was the new software as a service venture launched by Tricolore and that service called trickle our financial aims to leverage the current credit scoring data that they have developed for what are known as what's known as the invisible credit score market. What is the invisible credit score market? And what is Tricolore financial? Really offering to other lenders? Amanda Harris 12:11 So I'll jump in on that one. So to answer your first question, would be kind of considered the invisible or the unscalable customer, or really customers, particularly they they really, you know, tailor to the Hispanic buyer, people who don't really have a lot of credit history, they may not have a FIFO score, you know, they may just not have a lot in their background to help, you know, traditional lenders kind of go that traditional route of looking at that go score and some other parameters just to know what what kind of terms to give that particular buyer. So it really creates a problem, because then, you know, you're either one not going to give them a loan, because if you don't have that kind of information that you would traditionally use to determine that, see, they're not going to do it, or you're going to do it, we're going to give them maybe a higher interest rate, then, then we're in reality they would deserve because there is actually a history there. And so what this kind of SaaS model does is uses about 14 years of tricolours history with these kind of consumers to really give you like data and trends, basically, that alternative credit data that we've been kind of talking about for a while that lenders are kind of starting to leverage more, to give them an opportunity to make that decision, and to make it more fair and offer more, you know, direct loan terms and more fair loan terms to these kind of consumers who don't really have the traditional credit history. So that's why they're considered like unforeseeable or, you know, hidden kind of JJ Hornblass 13:50 it. I mean, this is a 45 million people are Americans are in this market, according to the CFPB. But based on what you're saying, Amanda, it would seem that that Tricolore is not helping or providing data on all 45 million, that they have some portion, is there a sense for either? What type of consumers have those 45 million kind of fall within their basket? Or, you know, how many of them do kind of fall into the, the the SAS ventures? baileywick. Yeah, so Amanda Harris 14:37 the good thing about this particular, you know, venture of theirs is they've made a big point to say, you know, this is kind of something that, you know, multiple types of financial providers and businesses can use, so it kind of does expand a little bit about, you know, from what tricolour would normally do, and it's more of a tool. So really, I mean, most businesses Would cater to any kind of credit, an invisible type customer should be able to use this data to at least figure out how to make these type of decisions. But when it comes to who tricolour really works with, it's the you know, Hispanic borrowers, mainly those customers who, you know, maybe coming over here without any kind of real history, they don't have that particular traditional FICO score. So it's those kind of consumer. So I don't know the exact number, but it would be a fairly decent portion of those, you know, about 40 million, like you said, in the United States, but the tool should be able to help more businesses and more financial institutions cater to these type of consumers. So I think that's kind of the goal. JJ Hornblass 15:45 How does how does the tool work, Amanda. Amanda Harris 15:49 So they were still kind of figuring a lot of the details out. So this just launched, and they just named their president. So of course, her, you know, strategy's kind of in the works still. But essentially, what it does is it uses that 14 years of data kind of compiles all of that. And then they use kind of artificial intelligence, to really sort through that, and basically have like a formula, from what I understand that you can use to determine where that particular consumer should fall, and what their risk really is, their likelihood of paying back a loan based on different parameters other than just the traditional FICO score. So their history of paying, you know, their history, paying on time, their other credit history that they would look at. And trickler has been working with these consumers for you know, over a decade. So they have that information. And that data to say this is what we've seen in the past with similar consumers. Here's a trends that we've seen, here's kind of who, how we kind of see what their risk level is outside of the normal traditional data. So JJ Hornblass 16:57 it's kind of like, so this is kind of like an underwriting tool. So you would if let's say, Joey was applying for a loan with you, Amanda, you would enter Joey's information into the tricolour financial underwriting application. And and then it would make an underwriting decision from that. Am I understanding that, right? Amanda Harris 17:22 That's how I understood it. Yes. So this is a software that they can use that will run all that for them. And I'm sure there's, there's proprietary technology, obviously, in there with AI and certain algorithms, obviously, we're not, we won't have that information that's not publicly released. But that's basically what I what I assume we how it works, it just helps them make that decision more accurately and more fairly for these consumers. JJ Hornblass 17:47 So I wonder what happens when there's an you know, a borrower that's coming down through tricolour financial that Tricolore auto acceptance is also seeking to finance and how that might work? Joey Pizzolato 18:04 So that's, that's really, that's a really interesting question. I wonder if if they would actually run into, like a issue with that, because, you know, if you look at tricolours kind of lending model, they're there. They're kind of like a 5050, they're more direct to consumer, right? So they have, they have a ton of their own retail stores, in Texas, and in California, and I believe that they're in the, they've already expanded or expanded to, like one other state, kind of in the middle of middle North area of, I think, Vegas or Nevada. Don't quote me on that, but I'm pretty sure that's right. Um, you know, the customer goes in, and then you know, they buy the car and try color finances. So try color doesn't really have like an indirect footprint, like you would say, I don't know, let me just pull up subprime lender a, just not to call anybody out, right? Some prime lender a, you know, if, if I'm subprime lender a, and I want, you know, to take on tricolours technology, I would probably, you know, use that through my indirect channels, right, rather than say, you know, run into try color later. Um, you know, I do want to jump back real quick to your question, Jamie about how, how much of that population tricolours able to touch, um, and if you, if you look at their numbers, they've originated just over kind of a billion dollars in loans total, which is, which is a great number, but in like, the grand scheme of things 19:36 pretty small. Joey Pizzolato 19:37 And if you look at their footprint, obviously, like they have a huge presence in Texas, a huge presence in California, both states with a very large Hispanic population. However, you know, that's also again, you know, pretty localized. So I would imagine that, you know, they, they don't touch but a fraction of you know, those 45 billion, you know, on borrowed. So, so really, you know, one thing that Daniel choose talks about a lot when I talk to him is how did they get this out of here. So I think that this, you know, software as a service is really the kind of the next logical step in there kind of like business model and, you know, their their goal to kind of, you know, get this financing out there. So, a long way to go for sure. Right. Okay, 20:27 good. JJ Hornblass 20:29 So what's on tap for our coverage over the next week or so? Joey Pizzolato 20:37 Well, um, you know, we did have a couple stragglers from earnings season. So carvana released, I believe, after after market closed on Thursday. So we'll we'll we'll have that today. Take a look at room as well see how that ecommerce is going. I believe that that also was released either Friday or Thursday after aftermarket clothes. And then we've got some other things kind of in our back pocket that we've been waiting to share with with all our readers, including, you know, some magazine content from from the February issue. JJ Hornblass 21:14 And we have the auto finance Innovation Summit that is fast approaching. Yeah, so if Yeah, so if you haven't registered for that, you should do so at auto finance, innovation, calm. And of course, visit us at auto finance news dotnet and our Twitter and LinkedIn feeds. Please don't forget to join us next time for our episodes of the roadmap. It was great to have you. We'll see you again soon.

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Weekly Wrap: An all-in interest rate cap looms, inclusive lending in the spotlight

Tricolor’s new SaaS venture makes available its AI-powered underwriting model

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Five questions with … Chase Auto Chief Executive Peter Muriungi

Carvana enjoys Q4 hike in finance GPU, origination volume

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