Other car manufacturers eventually followed suit, and today, every major auto manufacturer has its own "captive" finance company. (Around the same time, the Federal Reserve warned banks against financing "automobiles that are used for pleasure.") So GM launched its own financing company, the General Motors Acceptance Corporation (GMAC), to enable dealers to stock more inventory and consumers to buy more cars. The solution was credit, but banks were leery of making loans for a relatively new invention they didn't know how to value. The innovation of the assembly line a half-dozen years earlier by Henry Ford had made it cheaper and easier to build cars, but that meant GM needed its dealers to buy in bulk - and the dealers needed people to buy more cars. In 1919, General Motors (GM) had a problem. Still, even if the auto finance industry were poised for a fall, the effects on the financial system could be limited - although the auto industry itself might take a hit. In addition, an increasing share of those loans have been securitized and spread through the financial system, much like mortgages before the housing bust. While it's not obvious whether the increase in subprime auto lending is a significant departure from past cycles, it has raised eyebrows coming so soon after the mortgage crisis - especially as delinquencies have begun to rise. Lael Brainard pointed to subprime auto lending as an area of concern in a May 2017 speech her concerns were repeated - and amplified - the next month in a speech by then-Gov. In the fall of 2016, for example, the Office of the Comptroller of the Currency warned that auto lending risk was increasing and that some banks did not have sufficient risk management policies in place. Regulators and policymakers also have expressed unease. "Are Car Loans Driving Us Towards the Next Financial Crash?" asked another. "Auto Loan Fraud Soars in a Parallel to the Housing Bubble,"proclaimed one headline. To many observers, Santander's alleged lending practices look alarmingly similar to those that contributed to the housing boom and bust a decade ago, lending weight to broader concerns that rising delinquencies indicate an auto lending "bubble" is about to burst. In March 2017, Santander agreed to a $26 million settlement that includes $19 million in relief to more than 2,000 borrowers. At least, that's the version of events described in an action brought by the attorneys general of Massachusetts and Delaware against Santander Consumer USA, a subsidiary of the Spanish bank Banco Santander that specializes in auto financing. The lender knew the applications were fraudulent and the borrowers were likely to default, but it didn't care because it could package the loans into securities and sell them off to investors. Those transactions shall be accounted for as secured borrowings, in which either cash or securities that the holder is permitted by contract or custom to sell or repledge received as collateral are considered the amount borrowed, the securities loaned are considered pledged as collateral against the cash borrowed and reclassified as set forth in paragraph 860-30-25-5(a), and any rebate paid to the transferee of securities is interest on the cash the transferor is considered to have borrowed.The car dealers deliberately inflated borrowers' incomes - sometimes without the borrowers' knowledge - to ensure the loan applications would be approved and they'd make the sale. Paragraph 860-10-40-24 states that an agreement that both entitles and obligates the transferor to repurchase or redeem transferred financial assets from the transferee maintains the transferor’s effective control over those assets as described in paragraph 860-10-40-5(c)(1), if all of the conditions in paragraph 860-10-40-24 are met. Many securities lending transactions are accompanied by an agreement that both entitles and obligates the transferor to repurchase or redeem the transferred financial assets before their maturity. Transfers and servicing of financial assets Revenue from contracts with customers (ASC 606) Loans and investments (post ASU 2016-13 and ASC 326) Investments in debt and equity securities (pre ASU 2016-13) Insurance contracts for insurance entities (pre ASU 2018-12) Insurance contracts for insurance entities (post ASU 2018-12) IFRS and US GAAP: Similarities and differences Business combinations and noncontrolling interestsĮquity method investments and joint ventures
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