Fraud, Policy Shifts, and EV Financing: What’s Next for Auto Lenders?

0:04 Hey everyone, Matt Snow again here from Upstart live from CBA in Orlando, Florida, with Fabian Terry and Mike gilbert there from the Auto Committee. Thanks for joining me, guys, Thank you for having us. Yes, absolutely, Why don't we get started by maybe some personal introductions. Where you're working today? Absolutely so, Fabian Sierry So. I work for Bank of America. I lead the Auto Consumer and Small Business organization. I've been with the bank for seventeen years now and various capacities and specifically for the CBA. I'm the chair of the Auto Committee, and I'm peaced to be here. Great. Thank you. So. Mike Gilberton, co chair with Fabian and the Auto Committee, currently an associated bank, been there since startup for their indirect Auto September twenty one. Prior to that, twenty eight years at Key Bank, and then an illustrious start in this business at GMAC if you can call that name. Yeah, So happy to be here.

1:01 Great, Well, thanks guys. I know you know sometimes we've talked with past gasts about getting into banking. Was that a childhood dream or like, how did you get into the banking world? Actually, my my background is actually in the auto space, so as not even working for fold back in Europe, gotcha, spent ten years with them various capacities, and then I droned the banking industry when I moved to the US. That was over seventeen years ago, and then more it was, say like. Four years ago. I've been I've been eating but the auto division at the bank. So it's kind of like full circle of all my head. Exactly nice. How about you, Mike, Yes. Right out of college, hired a GMAC So it's all I've ever known, all I've ever done, and all I've ever loved.

1:42 So yeah, great, and that's probably what's brought you both to the committee. So maybe first, you know, describe a little bit about the committee's role, how you ended up there, and it's important importance within the CBA. Do you want to go? So yeah, I mean it's if you're interested and you want to engage, which obviously the two of us here we were definitely interested. It's a passion something we love. And then we're engaged you would like to participate, like a dig into things like to just be a member of the committee. And then obviously the more vocal we are, the more you want to kind of not take charge, but just take some ownership. You kind of elevate to these two positions where you've you've got extra responsibilities and duties.

2:24 But it's fun. It's not work right, so's it's a joy. It's a pleasure to work with and partner with twenty five other auto lenders. We're competitors, but we're respectful, we're friends. So it's a great group that we're part of. It's a great group of PIO. What Mike was saying, I think we just had the opportunity to be working. We've community members that are very passionate and knowledgeable. We all want the same thing. We want to serve our customers. We know and understand THEOTWO industry, and so we have the portunity on a monthly business to be meeting as a committee cover everything from regulatory to you know, new industry trends. Obviously, with the involvement of the the CBA, we're able to get connectivity through having like different you know, players vendors coming and talking to us about the challenges, what they're seeing, and more importantly, how can we keep moving the industry forward. And so as as the share and the co chair Mike and I had the opportunity to be you know, interacting with all the bankers and regardless of the size of the banks, we we kind of like we have a common agenda and we're trying to do the.

3:34 Best for our customers. Yeah. Great, it must be something you enjoy if you're giving up four hours of a weekend to come and chat about these things and meetings together and multiple sessions throughout. What are some of the common maybe concerns of members today are addressing. Yeah, regulatory has been front end center for the last couple of years, so we spent a lot of time talking about you know, regulatory agencies and and and what it means for the industry from the dealer side as well as from the consumer impact on the banks. We talk about just some of the you know, gap refunds, insurance refund to a lot of the topics that the CFPB had on their agenda. Those are the type of topics that we discuss as as you know with the with the rest of the of the bank partners the rest will be more centric around fraud. I would say it has been kind of like maybe a topic that has been growing. Unfortunately, spent a lot of time talking about what it means, what we're saying, and how we can combat fraud and so again leveraging partners and solution.

4:43 Across the industry to try to advise that issue. And the last one, Mike, I think it's just more like industry trains what we're saying from like more the topic that drives the market forward. So electric vehicle was was one topic that we spend a lot of time covering in our committee. Anything else that you can think. About, yeah, I mean it's all it's front and center, it's top of mine in real time. So Fabian and I do a good job. I'll give us both credit. As soon as something comes out. It's the State of New York Attorney General came out with, you know, trying to form a CFPB. That was out to the members within thirty minutes when that was released. So that's just one example. As soon as something hits, we put it out for everyone, and then when we get together either in person or once a month on our team's call, we revisit it, We talk about it, try to drill into more than Okay, anybody can read the article, right, so what does it really? What's it mean? What's it mean?

5:37 And how do we take what it means and put it in practice? How do we act on it? Not act on it? I mean decho a little bit about what Faban mentioned right, regulatory CFPB. You know, we all know we've dealt with supervisory highlights. It wasn't the rule of how you should have followed things some people believe. But nonetheless, you know, where does the CFPB sit now? What does it mean for us? How are we digesting that? What will happen? You know, you try to crystal ball it. If the CFPB isn't in its current state, are the states going to come out? What would those look like? If you have a national lender, right, and the national lender now has to deal with twenty versions of a CFPB, what's that look like? Is it easier just to deal with one versus twenty? So these are things we talked about, Like I said yesterday, Fraudy mentioned, but it's what we kind of deep dive into. We don't share trade secrets, but yeah, best practices and it's good to just hear real time what other folks see around all those topics, and there's a lot of them.

6:40 Yeah, I was going to say that's probably now more than ever an important role for the committee with the pace of change, the uncertainty the state level you mentioned is another dimension. Just trying to share the awareness, let alone best practices like just get any information out there would be important. Absolutely, how do you stay on top of those things or get the information? Yeah, I mean think about so again I will on the regulatory side, just we obviously stay very close to to what's happening, not only at the CBA, but we. Also leverage other trade organization after. NDA to kind of like again just to get get get the information. In the end of our members, it's it's that it's about communication and transparency. So regulatory is definitely one one one topic. But just to answer your question, also think about just also the all the digital transformation that is happening in the other space. But that is also something that that week over I talk about just the importance of bringing a third party coming to.

7:43 Talk to us. Was our experts in the field are trying to kind of have those digital tools that help solving. Some of those issues and gaps. Some Yesterday, the conversation. During the the CBA event a committee that we were we were running, we talk about throw that length and we talk about you know, all the f NI products and and and the charges and how to stay on top of it. There's a lot of activities going to that space. There's players there, the planes that are trying to solve it. So bringing was was was players in front of the committee. Having open conversation where you have pretty much representation of the entire landing community is extremely helpful. So that's that's that's that's that's what the community hope proc.

8:26 Are you seeing innovation in any one specific space? Is fraud something that people are focused on now? Is it the experience of the dealership? Is it in the financing? Like where where are you seeing like the most innovation bubble up lately? So we it's I will say it's crossed the boat, so we But it happened at different stages. So a couple of years back. We've seen maybe transformation from a digital standpoint happening at the application level, so where clients were looking for like digital ways of kind of like going through the process. Then econtracting came forward on the indirectly on the direct side.

9:06 Then then new tools came through. We're talking about fraud documentation capabilities where clients or dealership will be providing uploading the dogs directly to avoid the back and for so in other words, technology come in our space in different waves at different time. But so some of the. Inefficiencies that have been existing for years, and it's been it's been it's been kind of like actually very very high opening to for us to kind of like push push the agenda and see how with all the progress that we've made as an industry for the last couple of years, the last piece more more ready to kind of like the collateral you know, you were talking about financing.

9:47 So it's it's very interesting kind of like we've seen with the entrance of electric vehicles, we've seen also kind of like the model being challenged. So now we're starting hearing from like a pure financing of the vehicle. You're talking about charging station financing, you're talking about. Just subscription model. Right now, you're talking about manufacturers coming and thinking through how do I separate the financing of the vehicle or the financing of the battery. A lot of things how happening in about space and it's in constant movement, so we're staying on top of fot those trends as well. Gotcha. How about from the end consumer standpoint, like when you're thinking about you know, customers the bank with associated what are the things they're thinking about. Do they appreciate like the level of complexity Fabian's talking about, or how do they think about, you know, buying a car today and coming to a bank for financing or that you know through the dealer.

10:36 Are they are they aware. Of the changes at this time? Yeah? I think most customers aren't. I mean, they read what you can find out there in the press, but they really don't know the intricacies behind the details that we do. And they just they want to show up at a car dealership point of sale. They want to get there, pick out the car the options they want, and leave with it timely and then make their payments and move on. They really really don't know kind of what Fabing had just framed up right, which is kind of I call it the timeline of Originally somebody went and applied for a loan, The lender looked at application data, and you pull the credit report. Then you had a credit report that had a fight Go score on it, and you built the custom score, so then you had a bankruptcy score that you could use. Then you have a fraud score that you could use. Then you have artificial intelligence that came in and started to look in all kinds of this other data that you could layer in on top of those just kind of core scores to get to how do you make it? You know, how do you make your decision? Then he mentioned collateral you get into Okay, we just financed the car. Then it was the core four back end, right, tirro and wheel, prepaid maintenance gap, and a service contract. Now I can sit here, We'll run out of time and list all the things you can also add on top of that.

11:50 So it just gets more complex. The more complex it gets, the more folks try to analyze it from a regulatory standpoint, all the moving parts. It's it's evolved, some of it, some of it good, some of it may be a little fuzzy. But there's a need in the industry when you think about this digitalization at different stage, we're realizing that in order for the industry to provide better client experience and to be more efficient general speaking, there's vire's a need to uniform the way we collect data, the way that data is transmitted from one provider to another. And that's that's most likely why anticipate kind of like maybe the next move to be from like going from call it the paper to the electronic now trying to to to to find a common.

12:39 Way to pass the data. So the data that comes from the dealership will will will be making our way to us lenders in in in a similar fashion, I won't have like, you know, ten different ways of like entering a field and creating proper issues in the back end. And the same goes on from like origination to service into collection. And do you think that's a reaction to open banking and that rules are more more on the innovation side and just trying to. More on the innovation side. Just simple the cycle of technology going through just again it's the messy adoption trying to find efficiency in VAT. Once you get the client going through that, now it's the entire industry trying to look at the ways to kind of like you know, better and more efficient ways to kind of like from you.

13:24 So I'll come in just so one of the fraud So the fraudsters, they're smart, they're not stupid, right, So I'd like to say they're smarter than me, so I got to be I'll think in the room with them. But yeah, they take the auto automation right, and we want to be eighty ninety percent automation right, be efficient, et cetera. And sometimes that comes at a cost because if you're automating things, you're auto approving things, you're not stopping things. So the fraudsters prey on that and use that to their advantage. So you you've kind of always got away your auto decisioning is an example, but I want to dial that back a little bit to catch some of this fraud. But then again, if you're slowing down good deals to catch the one bad one. So it's a definite struggle. We talked about that yesterday as well.

14:05 Is there is there a formula to that or how do people think about that? Generally, for every you know, ten loans you approve, it's okay to have you know, one bad one, Like. I don't think as a formula specifically. Obviously, depending on your credit risk appetite and the size of your lending organization. There's a lot of efficiencies that comes with, you know, the automation and the tools that we just mentioned here and that creates you know, literally you know, direct effect on your bottom line. Now, like Max said, it's a it's a ratio, it's a formula. But each financial institution will have to solve for themselves. You know, due to your size, you might be okay letting one or two bad loans coming through. If you're a little smaller at one or two bad loans, you want to catch earlier.

14:51 And so so again, it's just like it's your risk. Appetites is the way you generate. It will be very different from one institution to another. Yeah, and I won't Yeah, I'll give you one example, so perfect example. Economies of scale in size. We talked about this yesterday. So if you apply for a loan, we auto approve you, so everybody auto approves you. If you go across the street you're shopping, some places will not auto prove you. You'll dupe. It's a duplicate app We look at, okay, is this customer trying to bust out why they're trying to finance two cars? Well he's just looking at this camera here and a camera cos yeah, we'll buy him. We manually approve them. A lot of folks will just automatically reapprove you again and again and again. They won't stop that process. So what could happen? You accept the risk you could finance ten cars eight cars bust out, and that happens. You can finance eight cars for you and you're going to put them all on Turo and lease them out. So the economy of scale that we would lose by not doing that is we have to manually stop and say, okay, here's eighty deals where the customer was trading in the car. They're legit, but look at the ones we caught through a little fuzzy.

15:52 The other side is a lender may say it's acceptable risk. We're not going to stop that automation for the couple that we might get burned on. So it's a it's a trade off as long as you understand that, yeah, I think that's that's probably the most important thing, and then you just solve for it and say do it this way or do it the other way? Is it? Is it more of that type of fraud or what are people more worried about? You know, especially with some of the AI tools, you think about deep fake and like how do you automate or even if you wanted to phone call somebody or you know, try to even manually intervene in a limited way. Are fraudsters more advanced in some of those or is it just a lot of you know, more first first party fraud. First party fraud, I think is what we're seeing the most again just for for your audience. Those those are you know, effect social security numbers behind a real person and and and that that individual is used to kind of like you know, go through application of of loans, and that's what we're seeing. But to your comment, I think this is the most important. Is that is getting more and more sophisticated, requiring every one of you know, the members at CBA to pay and keep.

17:04 On investing invet space. So this is where we rely on tools, best practices, share off information as well, try to combat troat. It's becoming faster to your point with the if you're totally aering AI on top of this, yes, it can be created very fast. Yeah. And is it only something that can really be prevented by every lender, every dealer, like at each point of entry or is there any centralized way to stop some of this that everyone can benefit from. So you can do a consortium and there's there's third parties. I won't name them right, there's several that they do a consortium that as soon as I catch fraud, I reported the consortium so that if somebody gets an app the next second, they'll know, so you can go to the consortium route third party providers. But what unfortunately, or I guess fortunately for us, Unfortunately for dealers dealers, by virtue of our dealer agreement, if we catch fraud on the back end, it's unfortunate. But they kind of a check.

18:00 They have tricks and devices through their insurance company. But really they're really the ones that that identity fraud, the fake ID, the fake driver's license, the meal somebody hired somebody to come in. I'm right here in Florida has I think it's the biggest one so far. Over three hundred cars through that fraud ring. And of course they were all delivered through dealers. All the dealers are technically on the hook, but you know, so they're partners of ours. We try to catch stuff to at our end, but ultimately they're as far as red flag rules, you're familiar with those, you know, they're bounded by those, just like a bank is. Well, maybe enough on the scary topics like what are the things you guys are excited about in this space, like what are the things you see innovation again that maybe benefits consumers, dealers, lenders that are coming up.

18:47 Yeah, I mean one of the best, the biggest challenges that we had, I will stop you about just to go on the bright side of innovation. But a BTV has been like a key concern for the last couple of years. Obviously, we've seen you know, price plus COVID, we've seen parts of vehicles on the use on you going high created some challenges right environment being where it was, So I think going forward you kind of look look at that picture and hope for an opportunity for those clients to refinance. It's been also very lease heavy again just to address the affordability component. So I think you're going to see that mix between lee's and purchase kind of like rebalance itself. For lenders. It provide opportunities as well to kind of like you know, keep those clients within within their portfolios, so you know, you know, you can refinance to lise, buy out, and and again provide provide the solution for for your clients.

19:39 So I think we have. We have a lot of bridays in front of us. I will just what I get excited about is just like really kind of like when you think about the auto experience that Mike was mentioning all the way off from other as lenders. Either you you you only in the end direct side and you work for your dealer network, or you have also what we call client direct where you provide financing solution for your clients. We were has a lot of opportunities in the space to kind of like revisit that client experience, find a pinpoints, address them through through automation, through new tools that will make that that experience better altogether. And we want to continue that partnership with our dealers at the same time as a find find financial institutions. We are here to provide like the best client experience whatsoever. So we're here to provide financing solutions and and and create that seamless integration with the dealers.

20:40 Mike, Yeah, I mean, I mean we're we've I think the auto industry everyone's poised well, throw out recession threat, throw out a terriff. I mean we can't control that stuff. I think the industry, the auto industry the finance industry. We've put ourselves in a great position controlling what we can right CFPB, we responded to them. We're in a good position. We've worked with them, we partnered with them, the OCC we partner with them, FTC, you name it right, We're ready and we can't control other things around us. But I think that there's good news out there. I mean, I'll give you one example of Watch the data you get on you know, write sixty day delinquency. Read the news it's all time high. Well, it's an all time high, only only in six twenty or less, only in subprime.

21:30 Prime is actually performing better. So first you read it the sky's falling, No peel it back the space that a lot of folks play in, and the answer depends to them what space you play. So if you're playing in that subprime space, you're not feeling good. Yeah right, But if you if you play outside of it, you're in a good position. Portfolio is performing well. Unfortunately, consumer confidence is slipping a little bit. Unemployment's good, but if competence isn't there. But once again, these are things we can't control. We can only control. An app just came through the door from from a dealer partner of ours, right, a good dealer, and we try to do the best we can with that app yeah and go forward.

22:14 Yeah, totally. And it seems in at least American culture, like the car is such a part of the you know, the experience of the car. Everyone remembers their first car, and uh, you know, they just keep getting more expensive, as you mentioned with evs and the components. So I think financing, as far as I can see, is going to be a component of that. But do you see any of that changing in terms of how people think of vehicles or use them, or would that change any different creativity in financing other than again. I think I think I mentioned it earlier. Just the EV's brought brought a new new way of kind of flack approaching the v's nice that will be different than the combustion engine, but we've been we've seen for many years. So the the the increase in demand in subscription model which we've seen you know, in other part of like what consumers are using, will most likely make its way to to the auto industry at one point.

23:07 And so. Flex flex flexible leasing nub of products will also kind of like be increasing. I think I think we'll see and you think about just like autonomous vehicles, type of new type of technology also that most likely will do like. Sharing of totally changed the landscape. I will say that we're still hears away from from from that type of trends. But but again, the one of the positive things that happened with the TV players the manufacturers that came is that they not only came came up with new vehicles and we had to address some of those challenges. But when you go beyond the charging station and and now it's just bringings like a new way of like thinking about the financing I mentioned earlier, like how.

24:00 Do you separate the battery to the vehicle in itself? And do you like. We've seen in other part of in other countries where literally clients will go to you know, service center, go and swept the battery on the vehicles and just like roll out like ten minutes later. It's it's it's will come. It's a matter of whene. Yeah, well, I think we're probably about out of time. I could ask you to make predictions on tariffs or regulations, but maybe we'll say that for another time. Maybe I don't know what is there a dream car or a favorite car you've had, like being in a space for a while, like if you can have any car, is there one on your list or maybe a favorite car you've owned in the past.

24:48 I would have to go, I will have to go, Evy, And I had the opportunity to drive a couple of times the Lucy the Hair which was you know, was the car the year back in twenty twenty two. Uh yeah, true, true, truly, truly a wonderful car. And so that's that's one of the busy equivalent I rove for the last couple of years. So my best one was a seventy nine Corvette and it was stolen in Westboro, Massachusetts. It paid for my wedding and down payment on my house. So I I cried when I lost the car, but it was it was it was a good return. That seems like a good story behind that I'm at it's a true story too cool. Well, thank you both, Thank you so much time. Thank you for having you. Thank you