Mortgages were outnumbered by auto loans last quarter, according to new data from the Federal Reserve Bank of New York.
There were 80.6 million mortgages held in the second quarter, and 84 million auto loans. Auto loans totaled $814 billion, a 2.5% or $20 billion increase from 1Q13, and the largest increase of any other loan segment last quarter.
Though not quite as aged as those baby boomers we wrote about last week, most of 2Q’s auto loans were held by car buyers in the 30-to-49 age bracket. That is a pre-recession trend. The only age group financing more loans today than before the credit crisis are 60-and-older boomers.
As we’ve covered recently, younger car buyers between 18 and 25 are borrowing much less than their older counterparts, most likely because of the skyrocketing student loan debt. Despite reaching the level of their average originations from before recession, 18- to 25-year-olds generate less than 1 million new loans each quarter.
There are many factors that will come to the surface in the very near future concerning loan origination in compliance to the new “Dodd Frank Act, and the Consumer Protection Act”. We need to consider how these changes will affect small to mid size banks and auto loan lenders. The larger banks and lenders can afford to cover the development, modification and changes to their software systems themselves, however smaller banks and lenders will find it stressful and delaying if they decide to stay in this market at all. Therefore it could potentially cause financing auto loans challenging.
To solve this problem you will see new software programs developed to help lenders and dealers implement and comply with these new regulations during the loan origination process. In fact my company E-net Financial Services, Inc. (E-net) has spent over 5 years in developing a software process to help banks and lenders improve the online loan origination process through auto dealers. Because of the new developments we are at work to make small modification to that system so that banks, lenders and dealers can comply with these new rules and regulations. Were ninety percent confident we have designed our system to meet these new rules and regulations and can adjust the system as new information is made available as to the requirement.
The important thing is to be able to offer banks, and lenders a system interface with their dealers in which the dealer can easily add the system to their F&I process. This method will not change the overall loan origination system at the lenders and therefore will not cost them any development cost to comply to these new rules and regulations.
I think this type of regulatory and compliance thinking started years ago when on December 13, 2006, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of Comptroller of the Currency, Office of Thrift Supervision, and National Credit Union Administration (NCUA) issued an Interagency Policy Statement on the adequacy of the “Allowance for Loan and Lease Losses” (ALLL). This mandate was to all lending institutions requiring them to justify loan quality during the initial loan origination process.
Now we find this process being extended down to what government feels is the real source of the initial loan origination. I saw this coming and started the development of E-net’s Automated Lender Selection System, (ALSS). Below are a few of the ways we help the banks, lenders and dealers interface with each other and comply to the new regulations:
Targeted Solutions to Reduce Risk
• Risk Management Solutions
E-net Automated Lender Selection (ALSS) process scores each Customers loan application risks to each lender’s individual risk criteria model(s) of those lenders that are associated with the dealer, prior to presenting the loan application to the Customer for lender selection. The Customer then has the opportunity to select which of the lender’s a dealers is associated with to submit their loan application. From that point on they are allowed direct communications with the lender of their choice while they are setting in the Dealers finance office during the loan approval process.
• Anti-predatory/High-cost Laws
E-net provides a lender the means to verify that every loan in production they receive from a Customer via the dealership, complies with all applicable anti-predatory lending laws. The lender can communicate with the Customer directly while reviewing all the information the dealer has collected. The lender can pull their own credit bureau report and resubmit all that information to E-nets ALSS lender loan decision process. If the Customer and Lender agree to the terms of the loan all the data can immediately be uploaded to the lender for final verification using their core system, Non-compliance could leave a lender liable for statutory and punitive damages plus license non-renewal. The lender could even be personally liable for civil penalties.
• Fair Lending Solutions
For a lender to understand their exposure to fair lending risk and how to mitigate that risk with a continuous process review, analysis and reporting process requires monitoring of each loan application received from a customer from whatever source for violations. If a lender doesn’t have a comprehensive fair-lending program in place, they are risking serious consequences.
E-net provides the lender access to the customer, their personal information, credit report and lenders risk rate evaluation during the lenders first contact with the customer. There after information of this contact data and access there to, is automatically stored electronically for a period of not less than seven years and if the loan is accepted by the lender the loan package data is immediately uploaded to the lender.
Not having this process could create potential pitfalls include pre-decision pricing, error correction, post-closing loan problems, funding decisions, problem dealerships and compliance monitoring. Managing these risks requires continuous review, analysis and reporting by the lender who must have access to such data. Failure can lead to penalties, fines and irreparable damage to a lenders reputation.
• Operational Risk Management Solutions (ORM)
Operational Risk Management (ORM) is defined as the management of loss resulting from inadequate or failed processes, people, and systems concerning external events. Changes in the regulatory and control environment within the financial industry, including Basel II and Sarbanes-Oxley, are focused on moving the assessment and management of risk from the center of the institution out to the operating units and teams on the front line of business. E-nets ALSS process was designed to allow the lender through their nearest office or operating units to have the ability to originate loans, directly from the customer while they are at the dealership.
• E-net Integrates Lenders Risk Model Criteria into the ALSS process
The integration of each lenders risk model criteria into E-nets ALSS process will reduce the cost of compliance, reputational risk and potential fines by each participating lender, because they will receive applications from Customers from multiple sources that meet or exceeds their risk models. This method also eliminates looking at hundreds of application the lender would have absolutely no possibility of approving. This convergence of compliance and operational risk management information into E-net SaaS system allows the lender to increase their effectiveness of compliance and risk management activities. They can implement their process on an enterprise-wide scale to maximize ROI and create standardization and consistency. Each lender provides their risk models criteria for each jurisdiction they operate in, and that criteria is stored on E-nets secured computers. Lenders will have secure access to their exclusive risk models criteria, which is secured and fully accessible by the lender for modification and changes at their convenience.
• State Lending Legislation
With more than 30 states having enacted anti-predatory lending legislation, many lenders have already devoted significant time and resources to monitoring and complying with each state’s legislation. In addition to the regulatory and reputational risks associated with making high cost loans, nonperformance foreclosure or repossession concerns in the secondary market have increased lenders due diligence responsibility. Lenders and investors are now looking closely at each state’s regulatory requirements for usury and fee limits. Any overages on these limits may result in a loss in portfolio value. Lenders can supply that information and criteria to E-nets ALSS process and know that each loan application they receive from all their different jurisdictions and sources are controlled and monitored automatically.
E-net’s ALSS software provides auto dealers with access to multiple lenders for quicker financing and funding for their Customers, while protecting the dealership from violating the new laws, rules and regulations.
Increase productivity while lowering compliance costs
Now a lender can have a neutral third-party deliver to them a fully customized loan package in any of their tier levels that will help protect the lender from predatory lending risk. E-net’s ALSS process reviews every loan against a lender’s risk models at the source to make sure that all loans are compliant to the lenders funding guidelines before the loan is signed by the customer. And because it’s fully automated, ALSS program increases productivity and lowers lender compliance costs while eliminating “Spot Deliveries” at the dealership.
Bill Fowler