The CFPB overdraft lawsuit isn’t TCF’s only problem

It’s been a tough week for TCF Financial, which endured a flood of negative headlines after regulators accused it of tricking customers into signing up for overdraft services.

But the Wayzata, Minn., company’s regulatory woes were overshadowed Friday when CEO Craig Dahl encountered a barrage of questions about TCF’s steep decline in fees from the sale of auto loans.

Revenue from selling car loans plunged 90% from the prior quarter to just over $1 million. The gains were down just over 60% from a year earlier.

It was a reversal of fortune for a company that in recent years had built a fee-generating machine by originating and then selling or securitizing auto loans. Describing the decline as a “surprise,” TCF executives said conditions in the secondary market took a turn at the end of 2016 due to a mix of factors — among them rising interest rates and concerns from rating agencies about underlying loan quality.

TCF may soon shift away from the auto business unless the gains it receives in the market quickly turn around.

“It wasn’t a result that we were happy with,” Dahl said, discussing the performance of the company’s auto business on a conference call with analysts. “Our gain-on-sale strategy has not produced the consistency we’ve been looking for.”

Dahl noted during the call that the company plans to focus on expanding its commercial real estate loan book in the months ahead as it reassesses its plans for its auto segment.

“While we were committed to the securitization platform in the fourth quarter, if it cannot generate an acceptable return, we’ll need to shift our strategy,” said Mike Jones, executive vice president of consumer banking.

TCF had recently defended the business. It increased auto lending early last year even as many of its peers pulled back amid concerns over risk-taking in the market.

The auto loan portfolio at the $21.4 billion-asset TCF grew by nearly 40% at the beginning of 2016. But as yields on loans came under pressure later in the year, it began to shift its strategy, originating fewer loans to less-profitable borrowers with pristine credit scores.

As of Dec. 31 its auto portfolio was $2.7 billion, or about 5% larger than a year earlier. Auto loan yields declined 13 basis points to 4.04%.

While TCF’s total volume of loan sales has remained consistent, the profit margins on them have plunged, Jones said.

Asked whether the sharp decline in fees from auto loans was a temporary blip, executives said they did not feel comfortable making predictions.

That was not the only fee-based business that caused headaches for TCF.

During the call, Steven Alexopoulos, an analyst with JPMorgan Chase, asked company executives what portion of revenue from overdraft fees could be at risk if the Consumer Protection Financial Bureau prevails in its lawsuit against TCF.

The CFPB on Jan. 19 charged TCF with deceptively encouraging customers to sign up for overdraft protection. The agency accused the company of withholding information from consumers about their ability to opt out from overdraft protection, which imposes a $35 fee each time customers overdraw their account.

Executives declined to comment on the lawsuit — or its potential impact on the revenue TCF generates from overdraft fees. But they emphasized that the way it operates its overdraft program is “fair” and within bounds under the law.

During the fourth quarter, service charges and fees declined 7% to $35 million. As of Sept. 30, overdraft fees accounted for more than 30% of TCF’s pretax income — more than double many of its peers, according to a Dec. 9 report from Barclays.

“We disagree with the claims made by the CFPB, and we intend to defend ourselves accordingly,” Dahl said during prepared remarks at the beginning of the call. “Sweeping conclusions based on summary comparisons with larger banks do not account for differences in business mix and demographics.”