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Auto lending gives and takes from bottom lines in 2013

Generating fees through car loans helps pad earnings for their originators, and the business boom has been buoyed by an improving market for securities backed by that type of loan.

A surge in auto lending helped revitalize car sales and provided a boon the financial institutions offering them in 2013, but there are headaches that come with originations. 

Banks both large and small reported that while auto loan originations rose significantly in the fourth quarter of 2013, overall earnings often suffered as a consequence of legal fees costs and regulatory compliance. Auto loans meant increased revenue, but also more scrutiny for the financial institutions brokering them, according to a recent New York Times report.

Attracting more eyes 
The U.S. Consumer Financial Protection Bureau expanded its oversight to include the auto loan industry in 2013, and the effects were swift and sharp. Lenders have already begun seeing their bottom lines affected by the CFPB's increased attention, which was already present in a variety of forms thanks to a range of mandates associated with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2011. Smaller banks and credit unions have not been immune to the scrutiny, either, as much of the CFPB's oversight is all-encompassing, applying uniformly to any servicers of auto loans regardless of size, stature or resources.

J.P. Morgan Chase Co., one of the leading auto lenders, reported that its car loan originations increased by 16 percent during the fourth quarter of 2013. Gross earnings, however, declined 7.3 percent, primarily because of ongoing legal costs, a good chunk of which are associated with CFPB compliance. A sharp decline in mortgage refinancing rates also hurt Chase's year-end figures, the Times reported.

Wells Fargo Co., also reported significant gains in auto lending, with originations totaling $6.8 billion for the fourth quarter, a figure that represented a 26 percent year-over-year increase. Conversely, Wells Fargo raked in just $1.6 billion from mortgage banking - approximately half of what it earned from mortgage products during the same period of 2012.

The steady rise in auto loan originations has been years in the making, topping out at $100 billion during the third quarter of 2013, according to data from the Federal Bank of New York. Generating fees through car loans helps pad earnings for their originators, and the business boom has been buoyed by an improving market for securities backed by that type of loan.

The trade-off 
The boost in business has not come without a price, mostly in the form of more attention from federal regulators. Among other issues, the CFPB and Justice Department have expressed concerns that many dealerships have been guilty of discriminatory practices when offering car loans to minority customers.

Dealerships generally are not required to disclose the percentage markup they receive on loan interest, and the often misleading tactic of employing floating fees - as opposed to flat ones - has been a particularly profitable one. In general, consumer advocates have alleged that minority borrowers consistently pay more in interest and over the life of their loan terms than white applicants with similar credit profiles.

"In some cases, these disparities are significant," said Rohit Chopra, acting assistant director for installment lending with the CFPB, noting also that the bureau had found gaps of anywhere from "10 to 30 basis points at some financial institutions."

While Chase and Wells Fargo have yet to be found of any wrongdoing within the auto lending industry, specifically, Ally Bank was the subject of a CFPB investigation earlier in 2013 for failing to address accusations of discriminatory lending practices. One of the leading auto loan originators in the country, Ally paid $98 million in December to settle charges stemming from the bureau's investigation. CFPB Director Richard Cordray did not mince words at the time in emphasizing the regulatory body's focus, which would and has continued to take aim at the auto lending industry.

"We made it clear that we will take action to address discrimination in any form," Cordray said in a statement after the Ally settlement was disclosed.

The bureau has issued warnings on multiple occasions to indirect lenders that they are subject to fair lending laws and must comply accordingly. Particularly in the wake of the financial crisis, third-party lending has become increasingly popular. Most Americans need to finance an automobile purchase and banks and credit unions stand to make profits from the origination of such loans. Dealerships, meanwhile, can sell the loans to banks as third parties and charge considerable, undisclosed interest that lead to profits on their end, making the arrangement something of a win-win-win for all involved.

The downside, of course, is in the scrutiny the trend has been met with, due in equal parts to the eyebrow-raising levels of earnings for banks and the whispers that lending standards are less than equal for different borrowers at certain dealerships. Consequently, big banks like Chase and Wells Fargo, mid-sized institutions like Ally that have tapped into the auto lending cash cow and even smaller credit unions are all being placed under the rather broad regulatory microscope.