Tighter credit, CFPB shift seen as reasons for optimism in 2017

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Tracey: The industry tends to overreact and overcompensate and the consumer suffers as obtaining credit becomes more difficult.

LAS VEGAS — Looking to 2017, Jack Tracey, executive director of the National Automotive Finance Association, a nonprime lender trade group, sees two reasons for optimism. First, the Consumer Financial Protection Bureau’s initial thrust of activity is likely to become rulemaking, rather than enforcement. Second, funding is getting tighter for lenders who specialize in the nonprime space, and that’s a positive development.

CFPB

The CFPB’s emphasis, until now, on enforcement has had several undesirable consequences, Tracey said during a panel at the National Remarketing Conference held here this month in conjunction with the National Auto Auction Association’s annual convention.

In response to an enforcement action, “the industry tends to overreact and overcompensate,” he said, “and the consumer suffers” as obtaining credit becomes more difficult.

“The auto dealer, as well as the financing source, wants to look at the consumer and optimize the experience for them,” he said. That’s difficult when the threat of enforcement actions looms.

A shift to rulemaking implies a shift in approach, Tracey said, toward “working with the industry on standards.” That inherently implies a greater willingness to understanding how the industry works, he added.

Funding, risks

“When funding gets tighter, people go back to doing what they do best,” Tracey said.

“In an aggressive market,” a lender that specializes in one tier of borrower “tends to step down to buy paper,” Tracey said. Prime buyers take some subprime loans, and subprime specialists dip into deep subprime.

When lenders move into lower tiers, their level of risk goes up, as does the chance of a bubble developing. Reverting to their areas of expertise is better for all concerned, Tracey implied.

As nonprime lenders find it more difficult to fund their portfolio of loans, though, the ripple effect could lead to where F&I managers have to work harder to find lenders who will finance a subprime customer.

Credit outlook

Others at the conference agreed that funding is getting tighter, but not enough to hurt auto sales.

Asked what economic indicator to watch in 2017, Cox Automotive Chief Economist Tom Webb pointed to credit.

“The key to this market has always been the availability of credit. So far, we haven’t seen any major factors that would indicate a significant turning point for the availability of credit in the near term,” Webb said.

“The availability of financing” in 2017, he added, “becomes a little less generous, but that has to happen. We can’t get any more lenient than we’ve been. There could be some increase in the severity of loss, but not much increase in the frequency of loss. The auto industry in particular has been doing good job. We’ve been aggressive, but not reckless.”

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Tighter credit, CFPB shift seen as reasons for optimism in 2017