Bank auto lenders, who spent a good part of 1994 worrying about pricing pressures and thin margins, face a host of other concerns this year: growing competition, technological change, legal and regulatory problems, and a potential sales slump.

Weak auto sales in February raise the possibility that this year may disappoint after the blistering pace set last year, when 15.4 million cars and light trucks were sold in the United States, producing total automotive financing volume of $325.5 billion.

"There's concern right now that the auto sales predicted for 1995 are not going to materialize," said Anthony Langan, vice president and credit executive with Chase Automotive Finance in New York.

"Dealers are telling us that sales aren't as robust as they expected, that the run-up in interest rates has started to affect consumer perceptions, and that consumers aren't flocking to the showrooms the way they expected."

Auto manufacturers sold 1,103,280 passenger cars and light trucks last month, down 4.1% from a year earlier. That translates into 14.8 million vehicles on an annualized basis.

On the other hand, the February 1994 annualized pace of 15.4 million cars and light trucks was unusually strong, so it may not offer a good point of comparison.

Another mixed signal: January sales reached a 15 million annualized pace, which was better than February but still less than recent forecasts by automaker economists that called for 16.2 million to 15.6 million units this year.

"It could be it's the beginning of the downside of the cycle, but time will tell," said Bill Baggett, senior vice president and group executive for sales finance with Wachovia Corp.

Rising interest rates, along with worries about an economic slowdown, could be influencing consumer behavior. The Federal Reserve Board has raised short-term interest rates seven times since February 1994.

As a result, the average rate on a four-year car loan has increased to 9.8% from 7.9% a year ago, according to Bank Rate Monitor.

The pricing pressure on lenders also increased during the period, but slightly. The current spread between a four-year car loan and five-year certificate of deposit is 305 basis points, compared with 315 basis points last March.

Auto lenders fund their loans in various ways, but the five-year CD is a commonly used proxy for overall funding costs.

Mr. Baggett and other auto lenders report that their own loan volume is still good. One factor that keeps their spirits up is the knowledge that the average age of a U.S. car is about seven years, an all-time high. In addition, the peak selling season, March to September, has just begun.

"There's got to be a pent-up demand in the market right now," says Tom Lazenby, group executive for consumer financial services with Bank South Corp. in Atlanta. "Probably by April or mid-May, we should have a pretty good barometer about what kind of year it's going to be."

Mr. Lazenby adds a cautionary note on interest rates, however. Further increases from the Fed could drive up the cost of long-term funding for lenders, which would affect the market, he says.

One area that is hot right now is leasing, which represents one-fourth of the entire auto lending market. Unfortunately for banks, that's also the area where captive finance companies of the major auto makers are strongest, with a 70% to 80% share.

Banks such as Philadelphia-based CoreStates Financial Corp. have witnessed dramatic growth in their leasing portfolios in recent years, but they still have difficulty competing with the attractive rates offered by the captives.

"We're looking for good investments in leases," says Joe Courtney, an assistant vice president with CoreStates Dealer Services Corp. "We're not in the 'iron' business, like some of our brethren at the captives."

Within the traditional indirect auto lending market, regional banks face stiffer competition from the big national players, such as BankAmerica Corp. and NationsBank Corp. The regionals complain about the big guys muscling into their territory.

"There are more competitors in our market from out-of-market, with lower prices, than there ever have been before," says Wachovia's Mr. Baggett. According to people in the business, the number of "real" competitors in North Carolina has increased sixfold in the past few years, he says.

New technology explains much of this phenomenon. All it takes is an automated, centralized underwriting facility, phone and fax lines, and a few experienced sales reps, for a lender to conduct business across the country without opening branch offices.

San Francisco-based BankAmerica, for example, is spending $25 million on a high-tech regional loan processing center in Las Vegas that will handle loans from dealers in nine states.

Chase Manhattan Corp. is typical of the trend. In order to service national accounts for Volvo, Acura, and Saab, Chase now operates in all 50 states.

"We get tremendous economies of scale being so large," says Mr. Langan. "We could literally have one salesman in a region and be able to handle several hundred dealerships without having to invest in bricks and mortar."

Some regional banks, such as Wachovia, have responded to the challenge by centralizing their own operations. Wachovia, based in Winston-Salem, N.C., consolidated 27 contract-buying branches in three states into two centers last year and quadrupled from 12 to over 50 the average number of loan decisions made each day by one credit officer.

Wachovia is also in the midst of installing a new automated sales finance application processing system that will totally automate the contract buying part of its auto business. Mr. Baggett says the next step will be to allow the dealers to transmit applications directly using "paperless" technology.

"It's just a matter of time, and we're talking to vendors now," he says.

Other regional banks are not yet sold on centralization. Surveys at NBD Bancorp in Detroit find some resistance at the dealer level. "When you talk about doing business with a location not in your local market, there's an immediate response that means they're not going to get good service," says Gary Giddings, vice president in charge of auto lending at NBD.

One issue that may provoke substantial discussion at auto lending conferences this year is collateral protection insurance. During the past five years, major lenders have had to shell out enormous sums in settlements related to CPI, which is also known as "force-placed insurance."

CPI is a product that banks routinely apply to the loan of a customer whose own insurance has lapsed in order to protect their collateral, which is the vehicle. Plaintiffs' attorneys have sued lenders on the grounds that the insurance is not properly disclosed to the borrower.

Among major bank settlements in the past five years, Barnett Banks Inc. coughed up $19 million, First Interstate Bancorp $16 million, and Mellon Bank Corp. $6.5 million. The danger of not settling was driven home in January when a jury in Laurel, Miss., found Jackson-based Trustmark Corp. liable for $38 million in punitive damages.

CPI is still such a sensitive topic that few lenders are willing to discuss it publicly. Most major banks have radically altered their CPI policies to escape the litigation threat.

"I'd be lying to say everybody in the industry doesn't think about it," says Bank South's Mr. Lazenby.

One regulatory problem looming on the horizon has to do with leasing disclosure. New York recently passed a law requiring lenders to disclose more information on leasing contracts. Other states are considering similar moves.

The problem is that most lease contracts don't disclose much more than the monthly payments and perhaps the purchase option. Attorneys general in some states have argued that the lessee needs to know more about residual values, for example, in order to make an informed purchase decision.

"There will be a forms burden probably for the next two or three years in trying to keep up with all these changes in leasing laws," says Chase Manhattan's Mr. Langan. "In the past, we had a benefit that a bank could offer one lease and have that one lease be accepted in every state.

"But with the changes in the leasing acts, we may have five" or more leases.

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