Auto Finance Council Debuts Industry Code of Ethics

In a first-ever move to codify best practices for the auto finance industry, the Auto Finance Council, a new group of lending and leasing executives that advocate on behalf of the entire industry, have published the Auto Finance Code of Business Conduct and Ethics.

The Code of Ethics is meant to serve as a baseline for companies in the auto finance sector that identifies the proper way an auto finance venture should act. The code consists of five sections: Customer and Client Relations, Compliance, Financial Reporting, Conduct of Employees, and Serving Our Community. Vetted by lawyers at Hudson Cook LLP and McGlinchey Stafford PLLC, the “aspirational” code serves as a guide for industry participants, not as a mandate. It can be used as is, or customized to a particular lender’s operation and objectives.

“Our goal with this document was to create a first meaningful codification of the principles of practice and ethics that the industry deems right and just,” said JJ Hornblass, executive editor and publisher of Auto Finance News and chairman of the Auto Finance Council. “It is not so much that this code in and of itself is perfect, but rather that the industry can point to it and say, ‘We have made an important first step to insure that the industry’s practices are of the highest standard.’”

The code is accessible for download here: AFC Code of Ethics.doc

The code was the first initiative completed by the Auto Finance Council, which was formed last fall by Auto Finance News publisher Royal Media Group. The AFC’s goal is to share information and best practices to help shape and improve the industry and its regulatory environment. In periodic meetings and conference calls, the council facilitates interaction, communication, and benchmarking among industry leaders. The AFC’s 11 company members represent about one third of the auto finance market, or $254 billion of outstandings. Membership is by invitation only.

Another project in the works is an analysis of the risk weighting of auto assets. The goal is to see whether an argument could be made to lower risk weightings on auto loans based on performance. The AFC is currently developing a position paper that will detail auto loan performance relative to other asset classes. Though it is uncertain that a position paper would change the way auto assets are treated, the consensus among council members is that a paper that gets to the heart of auto loan performance should position lenders for cheaper capital and be perceived as a positive step for consumers. Auditor Grant Thornton LLP, the AFC’s advisor on accounting and finance matters, is spearheading the initiative.

In a June 17 teleconference, Grant Thornton Director Howard Adamski presented preliminary findings on its research. To start, Adamski and two colleagues gathered auto loan and mortgage data from Standard & Poor’s and Experian, dating back to 2004. Analysis of the data pointed to an inflection point in 2007, where auto loans start to outperform first mortgages. Though the S&P data lacked performance by creditor type, prime to subprime, Grant Thornton was able to parse the data by borrower type. Loss rates generally trended as would be expected — a run-up in cumulative net losses for auto, but not nearly as much deterioration as in the mortgage sector.

The next step in the process is to determine whether there is enough data to support the position. To get a better sense for that, Grant Thornton plans to bore into some of the auto data and gather additional information about rating agency credit risk standards.

While Grant Thornton hammers away at the position paper, the AFC has started a dialogue with the Federal Reserve Board. In late March, some council members briefed 16 Fed officials on the availability of credit and the outlook for auto finance. The meeting’s goal was to share financiers’ perspectives with the Fed in the hopes of fostering a greater degree of interaction over the long term, especially as the agency hones its focus on fair lending practices.

The Auto Finance Council consists of senior executives from companies including AmeriCredit Corp., Bank of America Corp., BMW Financial Services, Fifth Third Bank, Hyundai Capital America, Nissan Motor Acceptance Corp., San Antonio Federal Credit Union, Wells Fargo & Co., and World Omni Financial Corp.

In addition to Grant Thornton, the AFC has three advisory companies: Hudson Cook for legal issues, Ford Motor Credit Co. on economic issues, and Capgemini on technology and operations issues. The Auto Finance Council is located at www.autofinancecouncil.org.

Download the code here: AFC Code of Ethics.doc