Core Concepts and Principles Flashcards

In indirect auto lending, who originates the retail installment contract with the consumer?

Answer: The dealer

In indirect lending the dealer writes the retail installment contract and then assigns it to a finance company.

What does it mean when a retail installment contract is 'assigned' to a finance company?

Answer: The finance company becomes the creditor entitled to collect payments

Assignment transfers the dealer's rights under the contract, making the finance company the party entitled to payments.

Under a portfolio-style dealer program, what is a 'dealer holdback'?

Answer: Collections retained beyond the advance that may later be paid to the dealer

Holdback refers to future collections that may be paid to the dealer once the advance and servicing fees are recovered.

Which factor most directly increases the credit risk of a subprime auto contract?

Answer: A higher loan-to-value ratio

A higher loan-to-value ratio leaves less equity cushion if the vehicle is repossessed and sold.

What is the primary purpose of a vehicle's lien being recorded on its title?

Answer: To establish the lender's security interest in the collateral

Recording the lienholder on the title perfects the lender's security interest in the vehicle.

Which federal law requires disclosure of the APR and finance charge on a consumer auto contract?

Answer: Truth in Lending Act

TILA (Regulation Z) requires clear disclosure of APR, finance charge, amount financed, and total of payments.

Why do subprime auto finance companies typically price contracts at higher rates than prime lenders?

Answer: To offset higher expected default and loss rates

Higher rates compensate for the greater probability of default and loss among borrowers with weaker credit.