A Look Ahead…

I recently re-discovered an interesting article written by Kaulkin Ginsberg and published in November 2017 in InsideArm entitled ‘What Will Happen: 2018 and Beyond in the ARM Industry’. The theme of which was a look forward with cautious optimism and controlled eagerness.  It is with this article in mind that I provide my look forward for 2020 in the Asset Receivables Management industry..

In terms of government regulation for the ARM industry, the anticipated changes on the regulatory front from the Trump administration have materialized somewhat, while sanity in the form of a better understanding of the rules and regulations remains a work in process.

For example, under the Trump administration there have been several modifications to Dodd-Frank, many of which ease some of the financial industry regulations.  The Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as Dodd-Frank, was passed in 2010 in the wake of the 2008 financial crisis. The Obama-era law aimed to prevent another financial meltdown. The Act increased regulation of the financial industry with the intent of better protecting customers of the financial industry. Lawmakers recently made several changes to the law. Anyone who participates in the financial sector, whether as an investor, a banking customer or a 401(k)-plan participant, should know what Dodd-Frank did and how the recent changes may impact them.

Some of the most important changes include: Making fewer banks subject to the strictest federal oversight. After bipartisan legislation passed in 2018, fewer than 10 banks must deal with the strictest regulations created by Dodd-Frank. This makes it easier for small banks and community lending institutions to operate. Perhaps most importantly, many small and medium banks won’t have to do stress tests to see if they could make it through a severe downturn. Exempting some loan companies from certain requirements for disclosure established by the Home Mortgage Disclosure Act. The critics of Dodd-Frank argue that by limiting the risks a financial firm can take, it also limits the growth potential of these institutions and lowers the overall liquidity of the market. Those in opposition rightly believe that added regulation hampers smaller market participants.

In addition to Dodd-Frank, the ARM industry continues to be impacted as the current administration continues to redefine the CFPB’s authority of banks and non-bank financial institutions. The CFPB aims to make consumer financial markets work for consumers, responsible providers, and the economy as a whole.  In January 2020, regulators including the CFPB, Federal Reserve Board, NCUA, OCC, FDIC, FTC, and FCC, each published a final rule in the Federal Register adjusting the maximum civil money penalty (CMP) amounts under their respective jurisdictions, to account for inflation. Each year, pursuant to the Federal Civil Penalties Adjustment Act Improvements Act of 2015, federal agencies adjust their maximum CMPs by using an inflation multiplier provided by the Office of Management and Budget (OMB). The OMB’s inflation multiplier for 2020 is 1.01764.

U.S. banks expect to tighten lending standards this year, reflecting concerns over loan performance, particularly in the consumer sector. The Federal Reserve’s quarterly survey of senior loan officers found that significant net shares of banks expect performance to deteriorate in 2020 for both credit card and auto loans to nonprime borrowers. As a result, 18% of banks said they expected to tighten credit-card lending standards, and 11% said they expected to tighten them for auto loans. These key performance indicators are a harbinger for the ARM industry as tightening typically leads to borrower delinquency and default. Over the next several years, the economy is expected to grow more slowly while unemployment is expected to remain low, as will inflation.

Another indicator that typically impacts the ARM industry comes in the form of interest rates. The Federal Open Market Committee has maintained the current fed funds rate at a range between 1.5% and 1.75% as of its Dec. 11, 2019 meeting and does not expect to increase this interest rate until 2021. Also, The Fed appears to be more concerned about promoting growth than about preventing inflation. In fact, it doesn’t see inflation as a threat anytime in the next three years. The fed funds rate controls short-term interest rates. These include banks’ prime rate, the Libor, most adjustable-rate loans, and credit card rates. Borrowers protect themselves from rate increases by selecting fixed-rate loans, but the lure of lower rate variable interest loans leaves many borrowers exposed to future changes in Fed policy.

As with all other industries and sectors, the ARM industry has the propensity to be impacted by continued climate change.  Of course, The Federal Reserve is concerned about how climate change is affecting the economy. Research from the Richmond Fed estimates that climate change will reduce U.S. economic growth by 30% over the next century. The Fed is also requiring banks to plan for the economic impact of increased extreme weather. For example, it has requested banks in the southeastern U.S. create risk management plans for hurricanes. It should come as no surprise that damage from natural disasters, such as hurricanes, floods, and wildfires are expected to increase in the years to come.

All in – It appears that the ARM industry is stable and more so poised for growth. Certainty in the area of rules and regulations coupled with a growing need for the checks and balances that the ARM industry provides bode well for 2020 and beyond. My recommendation to borrowers is to be conservative in terms of borrowing and aggressive in the form of savings and investment. Low unemployment coupled with low interest rates and a strong economy provide an excellent opportunity to build household financial stability.

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