Proposed rule could require 10% down payment on auto loans

"DCCARGEEK" (dccargeek)
12/19/2013 at 09:30 • Filed to: Government, Policy, automotive financing

Over the past two years the government has been working on a proposed rule to change credit risk retention requirements. A part of that overhaul includes sweeping changes to automotive loans, changes that are leaving many commenters asking: do regulators have any idea how people actually buy cars today?

On April 29, 2011 the Comptroller of the Currency (OCC) posted a proposed rule to implement Section 941 ( Regulation of Credit Risk Retention ) of the Dodd-Frank Wall Street Reform Act.

Before we venture down this complex road of financial securities I have one confession to make; my understanding of finance consists of my wife sending me my monthly car part allowance.

The goal of this rule is to establish new risk standards to prevent asset backed securities from being built on poorly written loans. In other words – prevent the financial calamity that broke America.

What does this have to do with vehicles?

Like houses, cars are often purchased on credit which means they're ripe for securitization. The business of auto loans is a very lucrative one and there was a time when many automakers relied on profits from financing to support manufacturing. This is why you see manufacture incentives that say "Rebate applies if financed by ENTER CAPTIVE LENDER."

To issue the most loans possible financial institutions look to securitization as way to 'sell' loans to free up new credit to issue more loans. This rule really only impacts lenders who depend on asset backed securities. Unfortunately I wasn't able to find out which auto lenders rely on securitization. The comments tend to indicate the impact is rather large so we'll assume most originators of commercial automotive loans rely on securities.

I don't want to get into the details of how securities work, ratings, expected spreads, etc., nor do I want this to evolve into an auto vs. mortgage risk debate. For one I would be way out of my league trying to sound intelligent on this complicated subject. Secondly, that isn't the point of this post.

A large portion of this rule is focused on mortgages, but auto loans are also included under the section titled, "D. Qualifying Automobile Loans (QAL)."

Here are the main points from the first go around of this rule:

1. The Borrower's monthly debt-to-income (DTI) ratio must be no more than 36 percent.

2. The Originators has to verify and document the borrower's income and all outstanding debts to include; rent/mortgage, property taxes, insurance, debt payments (credit cards), debts not in repayment (deferred student loans, interest-only loans); and any required monthly alimony, child support, or court-ordered payments.

3. Auto loans can only have a fixed interest rate and cannot exceed 5 years, with the first payment due within 45 days of the closing date. For a used vehicle, the loan agreement must provide that the term of the loan, plus the difference between the current model year and the vehicle's model year, cannot exceed 5 years.

4. At the time of the closing of the automobile loan, the borrower tendered a minimum down payment from the borrower's personal funds + trade-in allowance that is sufficient to pay the full cost of vehicle title, tax, and registration fees, as well as any dealer-imposed fees, and 20 percent of the purchase price of the automobile.

In summary, most of America would be unable to qualify for an auto loan.

Not too worry – this rulemaking garnered a whopping 406 comments. Posted below are excerpts from some of the comments on the automotive loan provisions. This isn't a comprehensive list, but it gives you some idea of the concerns.

Hertz:

"We respectfully request that the Regulators exempt rental car from the risk retention rules to be promulgated under Section 150 of the Exchange Act."

American Securitization Forum:

"We believe that in preparing the qualifying auto loan definition, the Joint Regulators made a fundamental error in attempting to analogize to the residential mortgage asset class. This inappropriate paralleling is evident in the focus on debt and income verifications at origination, which have traditionally not been required for even the highest quality motor vehicle originations, a required 20% down payment (comprised of cash and/or vehicle trade-in value) in a market where advance rates above 100% are commonplace"

National Automobile Dealers Association:

"NADA supports the view of the motor vehicle sponsors that the proposed risk retention options would unnecessarily impose additional layers of risk retention that could have "a number of significant, negative impacts," including an increase in dealers' floorplanning costs and in consumers' costs to purchase and lease vehicles from motor vehicle dealers."

Comments are in! Now what?

Based on the comments provided, the Agencies huddled and issued a revised rule on September 20, 2013 (OCC-2013-0010-0001).

205 comments were received before the (second) rule closed on October 30, 2013.

In summary the Agency responded by saying:

1. Money-in (income) vs. money-out (bills) is the best crystal ball into default (risk). "The agencies do not believe that a credit score alone is sufficient underwriting for a conservative automobile loan with a low risk of default."

2. Vehicle leases will not be included as they fall into a different category of securitization.

3. 20% down requirement was changed to 10% while the 60 month term expanded to 72.

Noteworthy comments on re-issued rule:

CarMax:

"CarMax like other auto lenders, relies on statements made on a customer's credit application and on credit bureau reports in conducting our underwriting process. If we were required to demand independent income verification of our customers, we would disrupt our existing sales processes, put substantial burdens on our customers, and find ourselves at a competitive disadvantage behind lenders who do not rely on the securitization markets for funding and would not need to perform any income verification."

!!! UNKNOWN CONTENT TYPE !!!

"..minimum down payment is not necessary if the other criteria related to creditworthiness are required. We do not require a down payment for many of our customers with excellent credit, as these customers have displayed behaviors and history that show their willingness and ability to repay their obligations. Many of these customers, those who should be the very focus of the definition, would be disqualified solely because of the down payment requirement."

SIFMA, FSR, ABA & ABASA:

"The criteria proposed for the definition of "qualifying automobile loan" are impractical and inconsistent with industry practice. This exemption would be useless, as virtually no loans made today would qualify. The proposed standards, which are more suited to unsecured installment loans, rely on information not available to prime and super prime automobile lenders. The cash down payment requirement is particularly out of step with the market, as is the lack of permitted reliance on credit scoring. The criteria should be expanded to include leases on the structural side, and motorcycles on the asset side.

Conclusion:

While much of this rule pertains to the quality and risk as it relates to the creation of asset-backed commercial paper, these rules could have a rather large impact on the how consumer's finance their new and used vehicles.

If CarMax is correct in stating "many" of their customers wouldn't be able to afford a 10% down payment and these rules were to be implemented as they currently stand, it could have a devastating impact on an industry that relies so heavily on ZERO DOWN credit offers.

Associated Links:

Original Rule (April 29, 2011): !!!error: Indecipherable SUB-paragraph formatting!!!

New Rule (September 20, 2013): !!!error: Indecipherable SUB-paragraph formatting!!!

DISCUSSION (100)

FJ80WaitinForaLSV8 > DCCARGEEK
12/19/2013 at 09:37

Juan, is this up on your DC auto geek website (I couldn't find it)? I would like to send it around to some colleagues however, oppo isn't the best thing to link to.

quarterlifecrisis > DCCARGEEK
12/19/2013 at 09:45

Well...that certainly wouldn't go over well. My summarized take on that is that it isn't good for anyone, except those that are so horrible with their finances that they can't control themselves. I bought a 7 year old car on a 60 month loan. Why? Because I could, looking at interest rates, expected depreciation of the vehicle, expected length of ownership, and a payment I was comfortable with. Well, that, and I didn't have the money burning a hole in my pocket. Something about dipping into retirement to buy a car that's going to depreciate didn't seem smart.

But as that was initially proposed, or even with modifications, you would likely see used car lots unable to move inventory because of unqualified buyers due to the age of vehicle + loan payoff stipulations. And new car dealers would suffer equally, but maybe not to the same extent, because of the absence of the age stipulations.

Something that I've always found interesting is seeing people that I know make a TON less than me (money isn't everything blah blah blah) drive around in significantly more expensive vehicles. My assumption is they live in shitholes, or don't pay rent, or don't put anything in their retirement or...hell I dunno. These are the same people that have the most obscene vacation plans and run up the craziest bar tabs known to small towns.

/rant.

For Sweden > DCCARGEEK
12/19/2013 at 09:49

Thanks Obama

Tom McParland > DCCARGEEK
12/19/2013 at 09:52

Excellent reporting Juan. This type of thing will effect my customers so I am curious to see how this plays out. IMO just another example of gov't trying to regulate bad decision making.

DCCARGEEK > FJ80WaitinForaLSV8
12/19/2013 at 09:53

I just published it. It's in a slightly longer form to include the text verbatim from the rule http://dcautogeek.com/?p=4759

PS: thanks for sharing!

DCCARGEEK > Tom McParland
12/19/2013 at 09:54

It has been an interesting thing to watch and has for the most part taken place very quietly.

The Dummy Gummy > DCCARGEEK
12/19/2013 at 09:55

I think the down payment is good and really most of the original legislation should have stuck. It is time people took responsibility for how they spend money. A car is a depreciating asset. It isn't like a home where it appreciates, unless you buy a rare care and then money really isn't in question at this point.

That being said, since we are the nation of debt a 5-10% down payment would be more realistic.

Tom McParland > DCCARGEEK
12/19/2013 at 09:57

It's good to know we have someone on watch for things that most of us would consider mundane policy stuff....because sometimes something really impact-full happens and then it is too late. Thanks for getting the word out.

Jayhawk Jake > DCCARGEEK
12/19/2013 at 09:58

Why can't people just be responsible?

Seriously, a law controlling what people can and cannot do with their money is dumb. Plenty of people buy a car with less than 10% down payment and don't have a debt problem.

I'd maybe support this if it had some credit score based qualifier or something. If you have a history of terrible financial decisions, then maybe you shouldn't be allowed to make more of them. But if you have great credit and no history of bankruptcy or similar you should be able to do whatever you want.

Party-vi > DCCARGEEK
12/19/2013 at 09:58

" For a used vehicle, the loan agreement must provide that the term of the loan, plus the difference between the current model year and the vehicle's model year, cannot exceed 5 years. "

Question. What does this mean for buyers of used cars? If the used car in question is over 5 years old will dealerships still be able to provide financing, or will they have to tell the buyer to secure a personal loan on their own?

DCCARGEEK > Party-vi
12/19/2013 at 10:04

Very good question. I asked my wife this last night to see if she (an accountant) has any ideas.

Her response: So much for your future CTS-V wagon.

DCCARGEEK > Tom McParland
12/19/2013 at 10:07

The scary part is the 36% DTI. I'd love to see how many people have a 36% or lower debt-to-income ratio.

Also, can you imagine how long it will take for a dealer to verify and document all a buyer's debt obligations?

Party-vi > DCCARGEEK
12/19/2013 at 10:08

Balls.

Oh well. Guess I'll have to pay cash for my toys...

efme > DCCARGEEK
12/19/2013 at 10:10

Though they changed it to 6 years, this is very interesting for used cars. If this actually happens, used luxury cars will tank in value. Basically if you wanted to buy a 2011 in 2014, you could only qualify for a 3 year loan (2014-2011 = 3 + 3 yr loan = 6). MANY used German cars are well into $40+k for low mileage examples. That price point obviously puts a lot more people in the market for that car compared to their original asking price of $60+k. The problem is that they could probably afford a $40k loan for 5 years (ignoring the down payment rule), they might be priced out if they're restricted to a 3 year loan. 5 years would be $688/month vs 3 yrs $1133/month. That is almost double the amount!

For a used vehicle, the loan agreement must provide that the term of the loan, plus the difference between the current model year and the vehicle's model year, cannot exceed 5 years.

Side note: on the note of credit checks and Debt-to-Income ratio, last time I applied for a loan, I applied for it online.... I recall just stating how much I made. Got the loan approval within 10 minutes and went to pick it up. that was alarmingly way too easy.

FJ80WaitinForaLSV8 > DCCARGEEK
12/19/2013 at 10:11

You bet. Keep up the good work. Have you thought about doing a deep dive into the EIA stats? Shepardson did a pretty good summary article on it yesterday.

http://www.detroitnews.com/article/201312…

Tom McParland > DCCARGEEK
12/19/2013 at 10:11

Yeah that is a bit nuts...I wonder what the real numbers are on auto-loan defaults?

oldirtybootz > DCCARGEEK
12/19/2013 at 10:12

I bought the Focus and Dart with nothing down and I pay all of my bills on time or early every single month.

StevenG > Tom McParland
12/19/2013 at 10:12

Which someone has to do.

When we are willing to bail out banks.

StevenG > Jayhawk Jake
12/19/2013 at 10:15

If you can't come up with 10%, you probably have a debt problem. We are not talking about that much money here. Who can afford a $31,000 car (avg new car price 2012), but can't come up with $3100? The people who really can't afford that car is who.

We have to do this because we refuse to let banks fail. If you write loans to deadbeats you should go out of buisness not have uncle sugar pay your bills.

DCCARGEEK > FJ80WaitinForaLSV8
12/19/2013 at 10:15

I saw that. I'll look into the data to see what I might be able to flush out.

Also EPA released their 'trend' report with the marketing nugget 'most efficient automaker' title which has zero value for regulatory reasons.

Interlocks are of interest to me. BMW has a seatbelt one they are considering. As for the drunk interlock, we have to remember (and I need to pull the data) that half of alcohol-related fatalities are first time offenders.

RamblinRover Luxury-Yacht > efme
12/19/2013 at 10:16

Precisely this. That rules provision is 100% farce.

islanderxj > DCCARGEEK
12/19/2013 at 10:17

Considering auto loans were much more stable during the recession than anything else, why should the industry be punished? Unfortunately longer terms and lower percentage down payments are more or less the rule these days because car prices are going up while incomes are stagnant. Add to that the fact that quality used car prices have skyrocketed becuase so many used cars were taken off the market, and the industry is simply doing what it has to do to move cars.

quarterlifecrisis > Tom McParland
12/19/2013 at 10:17

Your last sentence basically sums up what I took a few paragraphs to state when I replied to this. If people are going to make bad decisions...let them. But also let them be accountable and responsible for themselves if their bad decisions blow up in their face.

DCCARGEEK > islanderxj
12/19/2013 at 10:18

This post really hits the nail on the head. Well stated.

James May is my spirit animal > For Sweden
12/19/2013 at 10:18

Well, he had to take all of the old cars away first with the Cash for Clunkers "stimulus package."

Now new vehicles are appearing to become "unattainable by conventional means" by a large segment of consumers.

StevenG > DCCARGEEK
12/19/2013 at 10:19

Would not most people?

Recurring debt / Monthly income. It scares me that you assume otherwise. Stop spending money you don't have?

It would take a few minutes to verify. Credit checks are quick and easy these days. I had this stuff checked when I bought a house

runningisforslackasses > Jayhawk Jake
12/19/2013 at 10:19

Our last 3 cars have been 0 down (minus the trade in whatever it was but usually minimal due to age of the car or balance on the old loan)) and 0% APR. Sure I could put down 3k on a car but why with that APR?

BLOZUP > DCCARGEEK
12/19/2013 at 10:20

The Borrower's monthly debt-to-income (DTI) ratio must be at least 36 percent.

Shouldn't that be, "must be no more than 36 percent?" Or, am I thinking about this the wrong way?

DCCARGEEK > StevenG
12/19/2013 at 10:21

Your total monthly debt to include mortgage, property taxes, credit cards, other cars and student loans makes up less than 36% of your monthly take home salary? If so, well done!

Skynet > DCCARGEEK
12/19/2013 at 10:21

This is insane. How about people buy terms on whatever terms they can negotiate and lenders make loans based on their own judgment (and then not bail them out if they go south)?

J. Walter Weatherman > DCCARGEEK
12/19/2013 at 10:21

Wait, isn't the proposed rule saying that loans that don't meet these criteria just can't be securitized? That would mean there could still be car loans that don't conform, lenders just couldn't look to the securities market for their source of capital on those loans. Surely that would have an impact on car loans (probably slightly higher interest rates for people that don't put 10% down) but it wouldn't do away with those loans all together.

StevenG > DCCARGEEK
12/19/2013 at 10:22

Sub 20%, probably be 25% next year. Planning on replacing another car.

How would you ever save any money, or upgrade your home if you were spending more than 25% of your income on debts alone? How would you keep 6 months of post tax income in your savings? I get the distinct feeling people are not planning well.

I understand school loans, mine are paid for but I get that, I get property tax and mortgage, but credit cards are supposed to be paid in full each month. Their utility is in that they give a month of free money, theft protection, rewards and if absolutely needed you can spend money you don't have for car repairs or another critical need and take two months to pay it. If you are paying interest to a credit card company on a regular basis you have a spending problem. That should not impact your debt to income unless you are doing something wrong.

Blze001 > efme
12/19/2013 at 10:23

When applied for the loan for my truck, they only asked for a pay stub and looked at my credit score. Also, I am very much okay with the price of some luxury cars dropping *Starts browsing CTS-V Wagon ads*

Qiviut > The Dummy Gummy
12/19/2013 at 10:24

And lets not forget that the home as an appreciating asset is a peculiarity to North America and Europe. In many other countries - Japan, Korea, India to name a few, homes depreciate over their lifetime to be worth essentially nothing after 30 or so years (right when you have finished paying for them) and you are left with the value of the land.

You see this here with trailers and mobile homes depreciating (further screwing poor people) and bubble economies like Las Vegas where houses are listed as "2010 model". Presumably because they are built so poorly they will just fall down as you sign the last mortgage check.

Cixelsyd > DCCARGEEK
12/19/2013 at 10:24

As I read it, this legislation doesn't ban no down payment loans at all. Nor does it ban loans on older used cars.

All it really says is that loans that don't meet the criteria specified, it can't be bundled up with a bunch of other loans and sold off as an asset backed security on the secondary market.

Will that have some sort of effect on the availability of the underlying loans themselves? Perhaps. I would guess they may be a little harder to come by, but given the intense competition between automakers and among finance companies, I guarantee the no down payment loan isn't going away.

DCCARGEEK > J. Walter Weatherman
12/19/2013 at 10:24

That's right. I tried to find what percentage of lenders don't offer securities, but I couldn't find the data. Be happy to include it if you know where to get it

wabbastang > Party-vi
12/19/2013 at 10:24

That was one of the first things that came to mind also. I would agree you're right in thinking that this more or less sets the enforcement term of these policies; that's to say it is regulated within the first 5 years of a car's life but after that it's really just up to the bank/finance institution/dealer

Drew > DCCARGEEK
12/19/2013 at 10:25

inconvenient truth

People are stupid with money. The last decade in housing is a prime example. don't even get me started on Education loans and credit card debt.

Rules must be in place to protect people from themselves and protect others from stupid people.

Who do you think pays when loans are defaulted on???

If someone need 100% financing then you CANNOT afford it!!!

I think many people have forgotten what credit used to be like a couple of decades ago. No one got zero down at 2% for a million months.

Let the flames begin, but know in the end you will just have to pay for the things you want and you cannot have them yesterday

J. Walter Weatherman > Party-vi
12/19/2013 at 10:25

You would still be able to get financing. The lenders could still make loans on used cars, they just couldn't securitize the loans (package the loans and sell them on the securities market, in order to raise funds to make more loans) that don't meet the 5 year rule. That probably means a higher interest rate for those loans, but they would still be available.

PogosRevenge > Jayhawk Jake
12/19/2013 at 10:25

The other part of responsibility is on the lender. When I was approving paper at a bank there was no way I would or could approve someone for a 72 month car note without a substantial down payment and/or spotless credit reports and scores. That's been a few years ago and now it seems banks don't seem to care as much if the debtor defaults. Banks need to regulate themselves. It's like they need to re-read a copy of "risk management for dummies".

wabbastang > islanderxj
12/19/2013 at 10:26

Exactly...and in a business where the lending is nearly 100% secured as well.

Josh > DCCARGEEK
12/19/2013 at 10:27

I used to do a lot of home finance including home equity loans and mortgage finance. This would be absolutely terrible for the industry. Mind you, some predatory lending would theoretically be curbed by this action. On the other hand, the red tape, underwriting and paperwork process that would come with this could handily turn purchasing a car into a 1+ month ordeal. Stipulations, verifications, letters of gift fund certification, etc. It would be an absolute nightmare for your average consumer with a 700+ credit score who isn't buying a S-Class and lying about his "100k of other income".

Cixelsyd > J. Walter Weatherman
12/19/2013 at 10:27

That is exactly what it means. You and I had the same thought. The article is a bit overblown in its assertion that "most of America would be unable to qualify for an auto loan." That conclusion simply isn't supported by the evidence offered here.

Party-vi > J. Walter Weatherman
12/19/2013 at 10:27

Ah I see, so these guidelines are for loans eligible to be securitized.

Tom McParland > StevenG
12/19/2013 at 10:28

Again just like the housing crisis, this is a two way street. You have consumers that cant' do math and banks that don't care and just want the loan. But what I really want to know is how prevalent are auto-loan defaults and what impact do they have on the industry?

The Dummy Gummy > Qiviut
12/19/2013 at 10:29

Wow that is insane. I honestly didn't know that about Japan/Korea. I also didn't know that Vegas was built poorly I just thought it was crumbling due to the influx of people wanting to move and then the market crashed.

The more you know (star-rainbow).

Thanks!

Viking03 > StevenG
12/19/2013 at 10:29

I would agree that most people don't plan well. However, that is not the governments job to make sure I am planning well. It's my own damn decision. I have excellent credit and make a very good salary, but I have a lot of investments out there and a lot of rotating debt. I hate government trying to protect me from myself. I like to change cars regularly and generally don't put much down. You can call it wasting money, I would agree with you to some extent, but it should still be my decision.

Jayhawk Jake > runningisforslackasses
12/19/2013 at 10:29

Exactly. I've had minimal amounts down and really low APR on the two cars I've bought. Would I be better off if I put a bigger downpayment? Absolutely, but I don't need to. I should be allowed to make that decision, I shouldn't be forced to make a certain down payment because other people can't make smart decisions.

llamaguy > DCCARGEEK
12/19/2013 at 10:30

I guess now that the auto industry is just starting to get back together, it's time to kick it in the balls...

m.stallion > DCCARGEEK
12/19/2013 at 10:30

obviously this is stupid. a private lender/bank/credit union should have the right to determine it's risk factors when offering terms.

on the other hand, if said lending institute has been saved from the axe by the govt due to poor lending practices, then sure, those institutes are now instruments of the government and can be subject to new regulations.

Jayhawk Jake > StevenG
12/19/2013 at 10:31

Not everyone is in the same economic situation though. It may not be a question of affording the downpayment, but if you have good enough credit and can get a good loan without fronting a 10% down payment, why not take it?

MrEvil > DCCARGEEK
12/19/2013 at 10:31

I wonder if this would apply to institutions that don't securitize their (relatively) small loans. For example, would a credit union be bound by these rules if they weren't packaging their auto loans up and selling them off as tradable securities?

I know there's been some efforts on the part of the to-big-to-fail banks to knock some of the wind out of those upstart credit unions. How dare they offer financial products and services to people without the goal of making a profit?

StevenG > Viking03
12/19/2013 at 10:31

It sure as hell is when my tax money goes to bail them out.

I hate folks like you looking for a handout when shit goes south. I will tell you what, you agree to kill yourself if you ever end up out of money and we can all agree to let you do what you like. Otherwise those are the breaks.

TheCraigy > DCCARGEEK
12/19/2013 at 10:31

There will be ways around this.

The banks and lenders handing out the money need to be made to keep their loans and hold their own risk that they have created. If a bank takes on risk and isn't allowed to sell the risk away, they then would have an incentive to make sure they don't issue bad loans.

epicshooter > Drew
12/19/2013 at 10:32

Not a flame at all but when free money is offered a wise individual will take advantage of it. When I see 0% or 1% financing I will take advantage of it rather than write a check for 10,20 or $30k. Why hand over my money that is making me a decent amount invested versus taking free money at 0% for as much as I possibly can. It is not that I cannot afford it- I just take advantage of my perfect credit and assets to secure better financing. Then when the monthly burden becomes too annoying I pay off the loan. How is this bad?

StevenG > Jayhawk Jake
12/19/2013 at 10:32

Because it makes it easy to walk away from the loan if you don't have much into it.

This is why people who do that with homes have to pay PMI.

StevenG > Tom McParland
12/19/2013 at 10:33

Just like that one, people who like me are responsible get to pay both for both of those dumbasses.

That is why this regulation exists.

DCCARGEEK > BLOZUP
12/19/2013 at 10:33

Haha. Yes. You are correct. I've fixed it.

Limp Home Mode > DCCARGEEK
12/19/2013 at 10:34

Oh I see this working out just fine. Like Juan stated "NOTHING DOWN", "NO CREDIT, NO PROBLEM" and anything with the word "ZERO" in it gets asses through the door buying cars. Personally I like it because it would finally hold people responsible for once (can we try a similar tactic on Capitol Hill?) But also what would happen to the stated CarMaxes, Autowests & Paul Blancos? They feed on people poor decision making, buying cars they cannot afford.

Cixelsyd > efme
12/19/2013 at 10:34

That provision has nothing to do with whether you qualify for a certain loan. A dealer or finance company is still free to give you any term they want to. It just means that they can't then turn around and sell the loan on the securities market if it is considered non-conforming under those rules. It basically is designed to prevent the whole "sub-prime" fiasco that happened in housing where a bunch of bad loans were packaged up and stamped as a good credit risk and sold off to investors.

SouthboundPachyderm > Jayhawk Jake
12/19/2013 at 10:35

As near as I can tell, this rule isn't there to regulate auto loans, per se. If the loan originator wants to hold the loan on their books, they don't have to follow these rules. It's only if the originator wants to then get the loans off their books and sell them on the securities market like they did with mortgages. This is really about regulating what kind of loans are allowed to be floating around the financial markets to prevent the kind of bundling shenanigans that went on with mortgages rather than protecting consumers or lenders from themselves.

keithlinco > DCCARGEEK
12/19/2013 at 10:36

I work as a consultant in the banking industry so I see day to day what the so called "consumer protection laws" do to banks and consumers. All they do is hurt the consumer and increase costs for the lenders. Those costs will undoubtedly be passed on to the consumer.

This law will simply stop people from buying vehicles. It will limit the amount credit available to the consumer. It will hurt the automakers. Sales of new vehicles will fall dramatically.

Auto loans are not the problem. Default rates on auto loans are very low, even for subprime borrowers. And the interest rates reflect the credit risk. The longer terms are not bad either (72-84 months). I wouldn't use them, but studies show that an auto loan is usually (like 75%+ of the time) paid off in around 3 years. People sell/ trade in their cars.

What needs to change are the securitization practices and ratings. How some wizard can take 1,000 shitty loans, stack them all together, and then get it rated "AAA" is a joke. Just label the security "shitty auto loans" and people will know what actually backs the security. Same applies to mortgages, and any other asset backed security. Rate them properly and there won't be any problem.

Oh, I know the problem, investors probably wouldn't invest in a D rated security made of shitty auto loans. So that would force lenders to extend credit to better qualified borrowers whose loans could be securitized. Then the securities would be safer and investors would buy them. Hey look what I did- by changing the bullshit rating system for the securities (requiring the truth) I developed a market based system to improve the quality of the auto loans. Wasn't that the original goal anyway?

adam-mpls > DCCARGEEK
12/19/2013 at 10:36

"For a used vehicle, the loan agreement must provide that the term of the loan, plus the difference between the current model year and the vehicle's model year, cannot exceed 5 years."

This is really the only part of the law that gets me. I buy cheapish older cars for my daily driver and they are always older than 5 years. If I wanted to, I could easily pay cash for them, but I prefer to take a loan to keep more of my nut on hand in case of a disaster and to help build/maintain a good credit rating. This one feels a like a bit of a gimme in the law for the automakers and keeps up with the trend that seems to be dis-incentivising used cars which helps prop up the auto industry while screwing folks like me who don't care to spend a ton on daily transport (which allows me to spend more on my autocross car). But being that cheapskates like me don't really generate money for anyone involved in this issue, I know my opinion really matters very little.

Personally, I am 100% OK with having loans require 10% or 20% down. If you can't save up $3,400 (about 20% for a decent new economy car), you shouldn't be financing a car for 60 or 72 months. I recognize the whole "regulating of poor decisions" thing is not super popular, but being a bleeding heart liberal, I see it being equally (or more so) being a protection from over eager sales staff looking to make a commission or monthly quota from getting someone into a car who may not be able to really afford the car.

Cixelsyd > MrEvil
12/19/2013 at 10:36

Short answer: No. Credit unions would be free to offer whatever loans they wanted to. This only applies to securitization.

959Hoonage > Tom McParland
12/19/2013 at 10:36

Actually its pretty uninformed.

The concept of a Qualified Auto Loan only applies to the extent that the sponsor of the securitization (Ally, Ford Credit, etc.) don't want to retain risk in the deal. More often than not, they are going to retain that risk any way because they can't sell the bottom tranches (aka the most risky slices) so they have no need to avoid the risk rentention mandated by Dodd-Frank.

Gmonster > Cixelsyd
12/19/2013 at 10:38

No. Aside from local credit unions almost every lender securitizes debt. This would be major. And goodbye cpo bmw and Audi.

Also everyone stop fucking saying "securities".

GasMan > DCCARGEEK
12/19/2013 at 10:38

These are fantastic guidelines for the consumer. If you are buying a car with no money down or 6 year financing you are upside down the minute you sign the deal. That is a bad idea.

These rules should not become law. Why? Because freedom.

DCCARGEEK > keithlinco
12/19/2013 at 10:39

WHAT THIS GUY SAID!!! x1,000!

Had this conversation with my friend who works in the exchange world. He agreed. Tackling the consumer side is nothing short of idiotic.

runningisforslackasses > SouthboundPachyderm
12/19/2013 at 10:39

If that's true then good for them. Packaging crap and passing it off as gold is as shady as it gets.

Sweet screenname too!. Primus sucks

StevenG > runningisforslackasses
12/19/2013 at 10:40

You would not, but guess what to get that arrangement you would have to be able to get that kind of cash.

spacepiggie > islanderxj
12/19/2013 at 10:41

Plus the fact that it's a lot easier to seize the collateral on an auto loan in default than it is to foreclose on a house, and it's easier to move the asset to a market where it can be sold. There is clearly no risk of the auto loan market causing significant harm to the overall economy.

If they just need to put some standards in place for the securities market, seems like it would be better to break car loans out into 2 or 3 risk categories, and allow them to be bundled that way. The top category can have the 20% down very low risk loans, and the bottom category can have the buy-here-pay-here loans, and the interest rates will sort themselves out.

erikgrad > DCCARGEEK
12/19/2013 at 10:41

Carpocalypse II , coming to theater near you

StevenG > Jayhawk Jake
12/19/2013 at 10:41

You can still do no down payment. Those loans just can be securitized, meaning the rates will be higher.

959Hoonage > DCCARGEEK
12/19/2013 at 10:41

Virtually every big name auto lender securitizies auto loans. All of the capitve auto lenders (Ford Credit, Ally, VW Credit, etc) and most big banks securitize auto loans. What most people who aren't in the industry fail to grasp is that: (a) without securitization, getting a car loan would be much more expensive and cumbersome and (b) Auto Paper, as we call it, is a very stable known commodity and most pension funds and bond funds hold this in thier portfolio.

If you are interested as to who the biggest issuers of Auto Paper are, you need to look at the "League Tables". Bloomberg puts them out I think, and it will tell you how much has been issued and by whom.

StevenG > SouthboundPachyderm
12/19/2013 at 10:41

Yup, and that is what they did with home loans a few years ago.

sgtyukon > DCCARGEEK
12/19/2013 at 10:43

Saying that the proposed regulations are inconsistent with current industry practice probably won't impress regulators. I'm thinking their approach is that current industry practice is not okay or they wouldn't be proposing new regulations.

Some people should be required to post a down payment. New cars typically depreciate more than ten percent when they drive off the lot, so 10 percent is probably not enough for the high-risk loans. On the other hand, low-risk loans should be permitted for the full value of the car. I have always either financed the whole amount or paid cash, but I am aware of the risk and do keep a car fully insured if I owe money on it. Plus, I've paid off every car loan I've ever had in full before the last payment was due and there are lots of people like me.

Finally, if I'm reading this right, doesn't it say you can't finance a used car more than five years old? Cash for clunkers drove the price of used cars through the roof. So, that would really shoot the used car business in the foot.

Cixelsyd > Party-vi
12/19/2013 at 10:44

Yes. The article went too far in its conclusions. It's an important issue, but it won't destroy the credit market for autos.

StevenG > PogosRevenge
12/19/2013 at 10:44

Why not take crazy risks if you can sell the loan as securities?

They pass the risk on to someone else, and get the ratings agencies to lie about the ratings on the paper. This is what caused the mortgage crisis.

2legit2quit > epicshooter
12/19/2013 at 10:44

+1 epcishooter.

Why the hell would I want to pay $10,000+ up front front a 0-2% car loan. It makes no sense whatsoever.

cardriverx > StevenG
12/19/2013 at 10:45

If I can get a low Apr loan, then I would much rather invest that $3100. By using it as a down payment, its gone. If I have a low Apr loan and invest what would have been a down payment, I can actually make money. That's why I would put 0 down at least.

Viking03 > StevenG
12/19/2013 at 10:46

I completely agree that tax money shouldn't be used to bail them out. Sorry I won't kill myself, but I don't take hand outs either. (By the way I have 2 years salary in investments and savings, time value of money means that sometimes financing makes more sense than cash.) Just because there is something wrong with the system, doesn't mean we should create another piece of shitty legislation to cover the first shitty part. Make people accountable for their decisions, don't make sweeping legislation that penalizes the people who have a history of using the system correctly.

timgray > DCCARGEEK
12/19/2013 at 10:46

Awesome. This will drive down the prices of Used cards drastically, hopefully back to pre Obama levels.

lowflyin > DCCARGEEK
12/19/2013 at 10:46

3 years ago, I applied for an auto loan on a then 20 year old NSX. I was requesting $22K for a nice example with lower mileage. No surprise, it was declined. ...but I was able to secure a loan for a 2 year old Miata and ended up finding a nice early S2000 with 23K on the odo.

To me, that doesn't make sense. If one were to look at the current pricing, a now 23 y/o NSX is pricing in the mid-20's to low-30's, so it appreciated. A now 5 year old NC Miata depreciated to roughly 2/3 of the used asking price, and the S2K I did buy is down ~25% from what I paid. I tried discussing it with the loan officer's manager, but he had no interest in my logic.

959Hoonage > Party-vi
12/19/2013 at 10:47

It means that the interest rate you get on a non-QAL might be slightly higher. Although, in practice I don't think that will happen (all things being equal).

tsmit > DCCARGEEK
12/19/2013 at 10:47

"cannot exceed 5 years." ..... umm yeah you can go fuck yourself for that one buddy.

959Hoonage > DCCARGEEK
12/19/2013 at 10:48

She's messing with you. It just means you might get an APR that is .25% more or something negliable given that short tenor of auto loans.

Cixelsyd > sgtyukon
12/19/2013 at 10:48

!!! UNKNOWN CONTENT TYPE !!!

No. It just means a loan on a used car more than five years old can't be sold off later as a security. It can still be offered, the lender just has to keep it on their books until the loan is paid off, rather than packaging it up with a bunch of others and re-selling it to investors.

runningisforslackasses > DCCARGEEK
12/19/2013 at 10:49

Just use your CC to get 10% cash and take that to the dealership

StevenG > cardriverx
12/19/2013 at 10:49

Yes, you would. You could still come up with that money though.

This just means your loan could not be sold into a security. Which considering the ease with which you could walk away is good. So this means your interest rate will have to go up to counteract the loss of value of this kind of paper that cannot be sold as a security. This means you will have to compare that to the money you could make on an investment. This means the market has more information in it.

Before the market relied on the rating agencies that flat out lied.

thebigbossyboss > DCCARGEEK
12/19/2013 at 10:49

Good work Juan. Basic economics dictates that this will take money out of the economy, because less credit is being created.

Tj Wenger > DCCARGEEK
12/19/2013 at 10:49

my understanding of finance consists of my wife sending me my monthly car part allowance.

Thank you for admitting this out loud. You are not alone! My wife does the same thing for me. Its not because I don't care. Its because she better at it than I am. I'm the labor in the house projects, she's supervisor and financing. Its just how it works!

Party-vi > 959Hoonage
12/19/2013 at 10:49

My last loan was 9.75% for 2 years (stupid-small loan).

959Hoonage > J. Walter Weatherman
12/19/2013 at 10:50

No, it does not mean that those loans can not be securitized. It means that the sponsor of a securitization that does not consist of entirely QAL's must retain risk in the deal. This is something that most sponsors already do because the market for riskier tranches of a securitization isn't very good.

StevenG > Viking03
12/19/2013 at 10:51

I was obviously being hyperbolic. Since I am not OK with tossing kids into the street when their parents are broke, I hope in that situation you would take a handout. This also means I have not problem with this kind of regulation. It does exactly that, it makes people accountable. It means if you take no money down loans you can't sell them off to unsuspecting investors. In the past they did that by having the rating agencies lie.

GTXgp > efme
12/19/2013 at 10:51

I read the used car language to mean that you "must provide the term of the loan" AND that the car can't be over 5 years old. Not that the loan must not exceed 5 years from the in-service date of the car when new.

959Hoonage > Party-vi
12/19/2013 at 10:52

your credit or the car you bought must have been terrible.

JohnConnorforealthistime > Tom McParland
12/19/2013 at 10:52

So you're admitting that most people you sell to can't afford what they're buying and are making bad decisions?

Jayhawk Jake > SouthboundPachyderm
12/19/2013 at 10:54

That makes more sense. This is why people like me shouldn't be allowed to have a knee jerk opinion

Cixelsyd > keithlinco
12/19/2013 at 10:54

That's basically what this regulation accomplishes though.

It says: Hey lenders, you can make all the shitty loans you want, but if you do, those shitty loans can't be securitized.

Basically, it prevents the selling of D rated securities, no matter how the rating industry would rate them. It accomplishes basically the same goal as your system, but doesn't require any ongoing monitoring of the ratings bureaus to ensure they are actually telling the truth.

ReforMatt > DCCARGEEK
12/19/2013 at 10:55

"3. Auto loans can only have a fixed interest rate and cannot exceed 5 years, with the first payment due within 45 days of the closing date. For a used vehicle, the loan agreement must provide that the term of the loan, plus the difference between the current model year and the vehicle's model year, cannot exceed 5 years."

This is simply going to decimate used car prices, which if you ask me, need to be put in check anyway. but think about it. 3 year old camry - about 15k ish. guy can finance that but only on 2 years. thats a 650 dollar per month payment at 5% interest. thats so much more than that same person could buy a new one for. what is going to happen when people are simply not buying used cars? well the value will tank. in return your trade in value will tank, which in turn gives you less to spend on your new car and therefore new car prices (or quality or features or whatever) will have to adjust to this. this is a huge fundamental change in the system.