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Saving For a Space Ship

Exemption for auto lenders has led to a dangerous bubble  

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 Where Dodd-Frank Didn't Go Far Enough  

exemption for auto lenders has led to a dangerous bubble  

https://www.bloomberg.com/view/articles/2017-08-10/where-dodd-frank-didn-t-go-far-enough   https://carcreditcrunch.blogspot.co.uk/2017/08/where-dodd-frank-didnt-go-far-enough.html

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...Back in 2010, when Congress adopted rules designed to limit the lending excesses that contributed to the 2008 financial crisis, auto dealers managed to carve out an exemption for themselves. As a result, their behavior since then offers a sort of counterfactual: How might lenders have acted if Dodd-Frank had never happened?

The evidence isn’t pretty. Subprime auto credit has boomed since mid-2010, exhibiting all the hallmarks of the mortgage bubble. Dealers are putting people into cars and loans they can’t afford, because there’s money to be made by bumping up balances and interest rates. Banks are buying the loans with little concern for borrowers’ ability to pay, because they can package them into securities for sale to investors desperate for yield. Fraud is rampant.

Although the amounts involved are much smaller than with subprime mortgages, the irresponsible lending will have consequences. Impossible interest payments are ending in repossession and driving families deeper into poverty. Artificial demand has set automakers up for a fall that may already be underway, with sales down about 8 percent in July from their most recent peak in December. Losses could ultimately destabilize markets, cutting off credit to worthy borrowers.

On the bright side, the episode has highlighted the usefulness of at least one part of Dodd-Frank: Section 942, which requires issuers to disclose the contents of asset-backed securities. Thanks to the added transparency, analysts and journalists have been able to do a better job of raising red flags -- noting, for example, how Santander Consumer USA Holdings, one of the biggest subprime auto lenders, verified income on just 8 percent of the loans packaged into a $1 billion bond offering.

The exemption for auto dealers, though, has rendered regulators largely unable to respond. The Consumer Financial Protection Bureau, the watchdog agency set up by Dodd-Frank, has tried to act indirectly by leaning on financial institutions that provide credit to the dealers, and by cracking down on specific abuses at smaller, self-financing dealers. But this has done little to improve lending practices more broadly....

 

Edited by Saving For a Space Ship

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When Provident Financial warned on profits.

The smaller Moneybarn car finance business -- a sector of acute concern to those worried about a possible consumer credit bubble -- delivered significant growth in new business volumes of 15% and adjusted profit before tax up 24.3% to £16.9m, while annualised return on assets was only down very slightly at 12.8%. There was a 90% increase in impairments however.

So a 90% increase in impairments.Moneybarn lends to people who struggle anywhere else to get a car loan so you would expect high defaults and part of the business plan.Provi know how to work this market.

However what about all the car lease firms?.I doubt their margins have a built in cushion for defaults like the Provi does.

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On 12/08/2017 at 8:06 AM, Saving For a Space Ship said:

Quote: 

noting, for example, how Santander Consumer USA Holdings, one of the biggest subprime auto lenders, verified income on just 8 percent of the loans packaged into a $1 billion bond offering.

 

Unreal. The financial world really is some sort of Twilight Zone.

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51 minutes ago, dpg50000 said:

Quote: 

noting, for example, how Santander Consumer USA Holdings, one of the biggest subprime auto lenders, verified income on just 8 percent of the loans packaged into a $1 billion bond offering.

 

Unreal. The financial world really is some sort of Twilight Zone.

If I have understood this snippet correctly (probably not!), then I think (as you say) that it is crazy, but for a more subtle reason than just that it violates the idea that everything should be checked.

These are very large aggregates of loans that have been made. If I wanted to price the risk on that aggregate, then I could do that with a great deal of confidence by taking a random sample, provided the sample is large enough. For a big pool of loans, sampling 8% of them, and checking the loan quality in detail, may very well be sufficient to estimate the quality of the whole lot.

Where (I think) the craziness will come in, is that the sampling method has to be random: the chap putting together the pool of loans for securitization has to pick loans in an unbiased manner, at that point in time, and then dig into each one in that sample to verify (or not) whatever should be verified. What I fear has happened is that the loan originators have failed to make checks on all but 8% of the loans, and that that 8% is not randomly chosen, but just the ones that they suspect will look good.

Top line: if done properly, this could be OK, but I have zero confidence that it has been, due to the lack of motivation to be correct and unbiased at every stage. The statistical argument above will probably be used to provide a veneer of respectability when (as now) the figures are questioned.

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