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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1998
Or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to ___________
Commission File Number 000-24051
UNITED PANAM FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
California 95-3211687
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1300 SOUTH EL CAMINO REAL
SAN MATEO, CALIFORNIA 94402
(Address of principal executive offices) (Zip Code)
(650) 345-1800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No
Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in PART III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant was approximately $10,200,000, based upon the closing sales price of
the Common Stock as reported on the Nasdaq National Market on March 17, 1999.
Shares of Common Stock held by each officer, director and holder of 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. Such determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares outstanding of the Registrant's Common Stock as of March
17, 1999 was 16,843,750 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A in connection with
the 1999 Annual Meeting of Shareholders to be held April 27, 1999 are
incorporated by reference in PART III hereof. Such Proxy Statement will be
filed with the Securities and Exchange Commission not later than 120 days after
December 31, 1998.
UNITED PANAM FINANCIAL CORP.
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business 1
General 1
Recent Events 1
Mortgage Finance 2
Insurance Premium Finance 12
Automobile Finance 18
Pan American Bank, FSB 23
Industry Segments 24
Competition 24
Employees 24
Supervision and Regulation 24
Taxation 34
Subsidiaries 35
Factors That May Affect Future Results of Operations 35
Item 2. Properties 39
Item 3. Legal Proceedings 40
Item 4. Submission of Matters to a Vote of Security Holders 40
PART II
Item 5. Market For Registrant's Common Equity and Related Shareholder Matters 40
Item 6. Selected Financial Data 41
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 43
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 67
Item 8. Financial Statements 67
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures 67
PART III
Item 10. Directors and Executive Officers of the Registrant 67
Item 11. Executive Compensation 67
Item 12. Security Ownership of Certain Beneficial Owners and Management 68
Item 13. Certain Relationships and Related Transactions 68
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 68
SIGNATURES 77
PART I
Certain statements in this Annual Report on Form 10-K, including statements
regarding United PanAm Financial Corp.'s (the "Company") strategies, plans,
objectives, expectations and intentions, may include forward-looking information
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These forward-
looking statements involve certain risks and uncertainties that could cause
actual results to differ materially from those expressed or implied in such
forward-looking statements. Such risks and uncertainties include, but are not
limited to, the following factors: limited operating history; loans made to
credit-impaired borrowers; need for additional sources of financing;
concentration of business in California; reliance on operational systems and
controls and key employees; competitive pressure in the banking and mortgage
lending industry; changes in the interest rate environment; rapid growth of the
Company's businesses; risks in connection with the securitization of mortgage
loans; general economic conditions; risks relating to the Year 2000; and other
risks identified from time to time in the Company's filings with the Securities
and Exchange Commission (the "SEC"). See "Item 1. Business Factors That May
Affect Future Results of Operations."
Item 1. BUSINESS
GENERAL
The Company was incorporated in California on April 19, 1998 for the
purpose of reincorporating its business in that state, through the merger of
United PanAm Financial Corp., a Delaware corporation (the "Predecessor"), into
the Company. Unless the context indicates otherwise, all references herein to
the "Company" include the Predecessor. The Company was originally organized as a
holding company for Pan American Financial, Inc., ("PAFI") and Pan American
Bank, FSB (the "Bank") to purchase certain assets and assume certain liabilities
of Pan American Federal Savings Bank from the Resolution Trust Corporation
("RTC") on April 29, 1994 pursuant to a whole purchase and assumption agreement.
The Company, PAFI and the Bank are considered to be minority owned. PAFI is a
wholly-owned subsidiary of the Company, and the Bank is a wholly-owned
subsidiary of PAFI. United PanAm Mortgage Corporation, a California corporation,
was organized in 1997 and is a wholly-owned subsidiary of UPFC.
The Company is a diversified specialty finance company engaged primarily in
originating and acquiring for investment or sale residential mortgage loans,
personal automobile insurance premium finance contracts and retail automobile
installment sales contracts. The Company markets to customers who generally
cannot obtain financing from traditional lenders. These customers usually pay
higher loan origination fees and interest rates than those charged by
traditional lenders to gain access to consumer financing. The Company has
funded its operations to date principally through retail and wholesale deposits,
Federal Home Loan Bank ("FHLB") advances, warehouse lines of credit, and whole
loan sales or securitizations.
The Company commenced operations in 1994, as a Hispanic-controlled
financial institution, by purchasing from the RTC certain assets and assuming
certain liabilities of the Bank's predecessor, Pan American Federal Savings
Bank. The Company has used the Bank as a base for expansion into its current
specialty finance businesses. In 1995, the Company commenced its insurance
premium finance business through a joint venture with BPN Corporation ("BPN").
In 1996, the Company commenced its current mortgage and automobile finance
businesses.
RECENT EVENTS
During November 1998, the Company and BPN, purchased from Norwest Financial
Coast, Inc. ("Coast") for $3.0 million the right to solicit new and renewal
personal and commercial insurance premium finance business from brokers who
previously provided contracts to Coast. The purchase price for the
1
agreement was provided 60% by the Company and 40% by BPN. The Company also
acquired the "Coast" name, and certain furniture, equipment and software.
In March 1999, United PanAm Mortgage Corporation completed its second
securitization of approximately $225 million in mortgage loans.
MORTGAGE FINANCE
The Company originates and sells or securitizes subprime mortgage loans
secured primarily by first mortgages on single family residences through United
PanAm Mortgage, a division of the Bank (such business, together with the Bank's
mortgage finance activities are referred to as "UPAM"). UPAM's mortgage
customers are considered "subprime" because of factors such as impaired credit
history or high debt-to-income ratios compared to customers of traditional
mortgage lenders. UPAM's customers use the proceeds of the mortgage loans
primarily to finance home purchases and improvements, debt consolidation,
education and other consumer needs, and may benefit from consolidating existing
consumer debt through mortgage loans with lower monthly payments.
UPAM's strategy utilizes a balanced retail and wholesale origination
approach. The retail division originates loans through the direct solicitation
of borrowers by mail and telemarketing and accounted for $382.4 million, or 32%,
of UPAM's total loan production during 1998. The wholesale division originates
loans through independent loan brokers and accounted for $807.4 million, or 68%,
of UPAM's total loan production during the same period.
During 1998, UPAM sold its loans with servicing released to other mortgage
companies and investors through whole loan packages offered for bid several
times per month. During 1998, UPAM sold $1.1 billion of loans through whole
loan sales at a weighted average sales price equal to 104.9% of the original
principal balance of the loans sold. UPAM completed its first securitization of
$114.9 million in mortgage loans in December 1997 at a net gain on sale of 5.2%
of the principal amount of loans securitized. In March 1998, the Company sold
its residual interests in this securitization for cash in the amount of $8.3
million which exceeded its carrying value of approximately $8.2 million at the
date of sale. UPAM completed its second securitization of $225 million in
mortgage loans in March 1999.
SUBPRIME MORTGAGE INDUSTRY
The residential mortgage market can be separated into two major segments:
"prime" and "subprime." Prime borrowers comprise greater than 80% of the
market and have credit quality and documentation that satisfy the requirements
of the Government National Mortgage Association ("GNMA"), Federal National
Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
("FHLMC").
Historically, the subprime mortgage loan market has been a highly
fragmented niche market dominated by local brokers with direct ties to investors
who owned and serviced this relatively higher margin, riskier product. In recent
years, subprime loan origination volume has increased significantly due to
additional loan products, aggressive marketing to consumers leading to more
awareness of subprime loan products, the tremendous growth in the asset-backed
securities ("ABS") market and additional market capacity provided by large well-
capitalized financial institutions that have entered the subprime market
recently.
As a result of disruptions in the capital markets and the international
flight to quality in the ABS market during the fourth quarter of 1998, spreads
on such securities widened considerably causing significant reductions in prices
in the securitization and whole loan sale market. Because UPAM has historically
sold substantially all of its loans in the whole loan sale market, this
reduction in pricing significantly impacted the Company's reported gains on
sales of loans. During the first three quarters of 1998, average sales of loans
were at prices in excess of 105% of the unpaid principal balance of the loan.
This compares with average
2
prices in the fourth quarter of 1998 of 102.8% of the unpaid principal balance
of the loan, a decline of over 40%. Mitigating some of the impact of this price
erosion was continued strong consumer demand enabling UPAM to tighten
underwriting standards, reduce loan to value ratios ("LTV"), increase note rates
and fees, and increase prepayment penalties.
BUSINESS STRATEGY
UPAM's strategic objective is to continue to develop its national subprime
residential mortgage business. In order to achieve this objective, UPAM intends
to (i) continue to originate subprime mortgage loans through a balanced retail
and wholesale network, (ii) originate high quality profitable loans to ensure
best pricing in the secondary market, and (iii) continue to develop a lower
cost operating structure. The Company believes that the subprime residential
mortgage market is highly fragmented and that success in this market depends
primarily on the ability to provide superior customer service, and competitive
pricing in a low cost environment. UPAM seeks to (i) locate experienced loan
officers in geographic proximity to large population centers, (ii) issue
conditional loan approvals promptly, generally within 24 hours after receipt of
an application, (iii) avoid imposing unnecessarily restrictive conditions on
loan approvals, (iv) fund loans on a timely basis, generally within 15 to 20
days following conditional approval, and in accordance with approved terms, and
(v) competitively price loans according to risk and market conditions.
3
OPERATING SUMMARY
The following table presents a summary of UPAM's key operating results and
statistics on a quarterly basis for 1998.
For the Quarter Ended
--------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------------- --------------- --------------- --------------
(Dollars in thousands)
LOAN ORIGINATION STATISTICS
Loans originated $263,790 $335,026 $358,567 $232,358
Number of loans originated 2,707 3,401 3,597 2,229
Average principal balance per loan $ 97 $ 99 $ 100 $ 104
Weighted average interest rate
Fixed-rate loans 10.33% 10.39% 10.31% 10.40%
Adjustable-rate loans 9.59% 9.58% 9.63% 9.70%
Weighted average loan-to-value ratio 75% 75% 76% 76%
First mortgage loans 96% 95% 96% 97%
Fixed-rate loans 28% 27% 31% 29%
Owner occupied 84% 87% 89% 91%
Retail originations 34% 34% 33% 25%
California 40% 44% 44% 42%
Loans with prepayment penalties
Retail 91% 92% 91% 86%
Wholesale 72% 82% 84% 86%
BORROWER-QUALITY STATISTICS (1)
AA or A- 68% 66% 64% 59%
B or C 28% 30% 32% 38%
C- or D 4% 4% 4% 3%
LOAN SALES STATISTICS
Loans sold or securitized $193,844 $344,578 $347,930 $198,349
Average sales price
(% of principal balance) 105.5% 105.3% 105.2% 102.8%
OPERATING STATISTICS
States loans originated in 33 44 37 40
Retail loan branches 23 22 22 18
Wholesale loan centers 5 6 6 4
_________
(1) See "--Loan Production by Borrower Risk Classification."
LOAN ORIGINATION
Retail Division. During 1998, the retail division originated $382.4 million
in loans, or 32%, of UPAM's total loan production. As of December 31, 1998, the
retail division employed 69 loan officers, located in 18 retail branches. Ten
of these branches are located in California, two are in Washington, and one each
in Arizona, Colorado, Florida, Illinois, Nevada, and Oregon.
4
The following table sets forth selected information relating to UPAM's retail
loan originations during the periods shown.
For the Quarter Ended
----------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------------- --------------- ------------------- -----------------
(Dollars in thousands)
Loans originated $90,736 $115,231 $117,454 $58,938
Number of loans originated 847 1,076 1,108 545
Average principal balance per loan $ 107 $ 107 $ 106 $ 108
Weighted average interest rate
Fixed-rate loans 9.87% 10.02% 9.82% 9.89%
Adjustable-rate loans 8.82% 8.90% 8.95% 8.99%
Weighted average loan-to-value ratio 74% 73% 73% 74%
First mortgage loans 96% 95% 95% 96%
Owner occupied properties 76% 79% 82% 88%
Wholesale Division. The wholesale division funded $807.4 million in loans,
or 68% of UPAM's total loan production, during the twelve months ended December
31, 1998. At December 31, 1998, the wholesale division had four loan centers
located in Utah, California, Florida and Ohio, and employed 58 account
executives. These loan centers maintain relationships with brokers that provide
loans to UPAM. During the twelve months ended December 31, 1998, UPAM originated
loans through approximately 1,400 independent mortgage brokers, with the top 37
brokers generating 25% of those loans and the largest broker accounting for
1.82%.
The following table sets forth selected information relating to wholesale
loan originations during the periods shown.
For the Quarter Ended
------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
----------------- ------------- ------------------- ------------------
(Dollars in thousands)
Loans originated $173,054 $219,795 $241,113 $173,420
Number of loans originated 1,860 2,325 2,489 1,684
Average principal balance per loan $ 93 $ 94 $ 97 $ 103
Weighted average interest rate
Fixed-rate loans 10.79% 10.69% 10.67% 10.72%
Adjustable-rate loans 9.89% 9.84% 9.85% 9.87%
Weighted average loan-to-value ratio 76% 77% 78% 76%
First mortgage loans 96% 96% 97% 97%
Owner occupied properties 88% 91% 91% 93%
PRODUCTS AND PRICING
UPAM offers both fixed-rate loans and adjustable rate loans ("ARMs"), as
well as loans with an interest rate that is initially fixed for a period of time
and subsequently converts to an adjustable-rate. Most of the ARMs originated by
UPAM are offered at a lower initial interest rate and are subject to lifetime
interest rate caps. At each interest rate adjustment date, UPAM adjusts the
rate, subject to certain limitations on the amount of any single adjustment,
until the rate charged equals the lower of the fully indexed rate or the
lifetime interest rate cap. There can be no assurance, however, that the
interest rate on these loans will reach the fully indexed rate if interest rates
rise rapidly to the level of the cap, the loans are pre-paid or the loans
migrate to foreclosure. UPAM's borrowers are classified under one of five
subprime risk classifications, and loan products are available at different
interest rates and with different origination points and fees depending on the
particular borrower's risk classification. UPAM's maximum loan amount is
generally $350,000 with an LTV
5
of 90%, $500,000 with an LTV of 85% and $750,000 with an LTV of 75%. Loans over
$750,000 are made on a case-by-case basis. Loans originated by UPAM during the
twelve months ending December 31, 1998 had an average loan amount of
approximately $99,000 and an average LTV of approximately 75%. Unless prohibited
by law or otherwise waived by UPAM upon the payment by the borrower of higher
origination fees and a higher interest rate, UPAM generally imposes a prepayment
penalty on the borrower. As of December 31, 1998, approximately 86% of UPAM's
loans included a prepayment penalty.
UNDERWRITING STANDARDS
UPAM originates loans in accordance with underwriting criteria that
generally do not satisfy traditional underwriting standards, such as those
utilized by GNMA, FNMA or FHLMC, and therefore may result in rates of
delinquencies and foreclosures that are higher, and may be substantially higher,
than those rates experienced by loans underwritten in a more traditional manner.
UPAM's underwriting guidelines are intended to evaluate the applicant's credit
history and capacity to repay the loan, the value of the proposed collateral and
the adequacy of such collateral for the loan. UPAM determines the loan terms,
including interest rate and maximum LTV based upon the underwriting guidelines.
Underwriters are required to have had either substantial subprime
underwriting experience or substantial experience with UPAM in other aspects of
the Company's subprime mortgage finance business before becoming part of UPAM's
underwriting department. Underwriters are not given approval authority until
their work has been reviewed by a corporate-based underwriter or a specifically
identified branch underwriter. In addition, a sampling of a new underwriter's
work is reviewed by a corporate level underwriter. No branch-based underwriter
has an approval limit greater than $400,000. All loans over $400,000 require
approval of the Chief Credit Officer or a designated corporate-based
underwriter. Exceptions from these established guidelines are also subject to
approvals, often at the corporate level. This approval process is reviewed
periodically by the Board of Directors. The Chief Credit Officer periodically
re-evaluates the authority levels of all underwriting personnel.
UPAM's underwriting guidelines require a credit report on each applicant
from a credit reporting company. UPAM's underwriters review the applicant's
credit history based on the information contained in the application and reports
available from credit reporting bureaus to determine if the applicant's credit
history meets UPAM's underwriting guidelines. A number of factors determine a
loan applicant's creditworthiness, including debt ratios, payment history and
the combined LTV for all existing mortgages on a property. Based on this review,
the underwriter assigns a preliminary rating to the application.
Assessment of the applicant's ability to pay is one of the principal
elements of UPAM's underwriting philosophy. UPAM's underwriters review the
applicant's credit profile to evaluate whether an impaired credit history is a
result of previous adverse circumstances or a continuing inability or
unwillingness to meet credit obligations in a timely manner.
All mortgaged properties are appraised by qualified independent appraisers
prior to funding of the loan. All appraisals are required to conform to the
Uniform Standards of Professional Appraisal Practice. Review appraisals are
required on substantially all wholesale loans (consistent with industry
standards since the appraiser involved on a wholesale origination would
generally not be on a list of approved appraisers maintained by UPAM) and retail
loans where the appraisal was prepared by an appraiser who has not been approved
by UPAM.
UPAM has a loan quality control process designed to ensure compliance with
its policies and procedures. Prior to funding a loan, UPAM performs a pre-
funding quality control audit which consists of verifying a loan applicant's
credit and employment. UPAM also ensures that the documentation is complete once
the loan is originated to facilitate its subsequent sale.
6
The underwriting guidelines set forth in the following table, and the
letter grades applied to each sub-prime borrower category, reflect solely the
Company's internal standards, and may not be comparable to those used by other
subprime mortgage lenders. UPAM continually evaluates its underwriting
guidelines and periodically modifies the underwriting guidelines as required by
investors.
7
CREDIT CRITERIA MATRIX (LTV'S UP TO 85%)
-------------------------------------------------------------------------------------------------
AA A- B
----------------------------- ------------------------------ ------------------------------
MORTGAGE RATING Maximum one 30-day late Maximum two 30-day late Maximum four 30-day late
Last 12 Months payment and no 60 or 90 payments and no 60 or 90 payments and one 60-day
day late payments within day late payments within late payment within last 12
last 12 months. Not more last 12 months. Not more months. Not more than 59
than 29 days delinquent at than 29 days delinquent at days delinquent at closing.
closing. closing.
CONSUMER CREDIT Excellent GOOD SATISFACTORY
----------------------------- ------------------------------ ---------------------------
24-Month History 12-MONTH HISTORY 12-MONTH HISTORY
----------------------------- ------------------------------ ---------------------------
All open and/or active - Excellent credit prior - Good credit prior 12 - Satisfactory credit
accounts in the review 24 months. months. Isolated prior 12 months. Isolated
period, are considered - No accounts currently incidences of minor 60 day incidences of 90 day credit
when calculating the 30 days or more delinquent. delinquencies will be delinquencies will be
ratio of derogatory - less than or equal to 25% considered. considered.
accounts to total of credit report items - Sufficient number of - Demonstrate
accounts. derogatory in last 12 months. accounts paid as agreed to ability/willingness to pay
- No 60 or 90+ day late offset isolated incidences majority of accounts as
payments within last 12 of 60 day delinquencies. agreed.
months. - No accounts currently 30 - No accounts currently 60
days or more delinquent. days or more delinquent are
- less than or equal to 35% of allowed.
credit report items derogatory
in last 12 months. - less than or equal to 45%
of credit report items
derogatory in last 12
- No 60 or 90+ day late months.
payments within last 12 - No 90 day late payments
months. in last 12 months.
BANKRUPTCY 3 years since 2 years since 18 months since
discharge/dismissal. discharge--Chapter 7 and discharge--Chapter 7 and
Re-established excellent Chapter 11. Two years Chapter 11. One year since
("AA") credit since since filing Chapter 13. discharge or 18 months
discharge/dismissal. Must be discharged prior to since filing with evidence
loan application or paid in plan paid as
full through closing. agreed--Chapter 13. Must
Re-established good "A-" be discharged prior to loan
credit since application or paid in full
discharge-dismissal. through closing.
Re-established good ("B")
FORECLOSURE No foreclosures last 3 No foreclosures last 2 No foreclosures last 2
credit since discharge/ years. years.
dismissal. years.
COLLECTIONS No collections, No collections or No collections or
CHARGE-OFFS charge-offs allowed in charge-offs in the last 12 charge-offs in the last 12
last 24 months. months. months.
TAX LIENS No liens, judgments last No liens, judgments last 12 Liens, judgments last 12
JUDGMENTS 24 months. months. months.
8
CREDIT CRITERIA MATRIX (LTV'S UP TO 85%)
--------------------------------------------------------------------------
C C-
----------------------------------- -----------------------------------
MORTGAGE RATING Maximum six 30-day, one 60-day Unlimited number of 30-day,
Last 12 Months and no 90-day late payments 60-day and 90-day late payments
within last 12 months. Not more or one 120-day late payment
than 89 days delinquent at within last 12 months. Current
closing. NOD or cured foreclosure allowed
if LTV is less than 70%. Not more
than 119 days delinquent at
closing.
CONSUMER CREDIT Fair POOR
----------------------------------- -----------------------------------
12-Month History 24-MONTH HISTORY
----------------------------------- -----------------------------------
All open and/or active - Moderate to significant - Majority of credit report
accounts in the review credit derogatories in the past. items derogatory in last 12
period, are considered - Currently delinquent accounts months.
when calculating the ratio allowed. - Percentage of derogatory
of derogatory accounts to - less than or equal to 55% of credit items is not a factor.
total accounts. credit report items derogatory
in last 12 months.
- 30, 60 and 90-day late
payments allowed.
This category applies to
borrowers who do not have at
least three accounts with
payments activity in last 12
months.
BANKRUPTCY 1 year since bankruptcy filing Bankruptcy filed within last 12
date. Must be discharged prior months. Must be discharged
to loan application or, for prior to loan application or,
Chapter 13, paid in full for Chapter 13, paid in full
FORECLOSURE through closing. through closing.
No foreclosures in last 12 Foreclosures cured in last 12
months. months.
COLLECTIONS Collections, charge-offs last 12 Collections, charge-offs last 12
CHARGE-OFFS months allowed. Pay off of months allowed. Pay off of
unpaid accounts required at unpaid accounts required at
underwriters discretion. underwriters discretion.
TAX LIENS Liens, judgments last 12 months. Liens, judgments last 12 months.
JUDGMENTS
9
LOAN PRODUCTION BY BORROWER RISK CLASSIFICATION
The following table sets forth information concerning UPAM's loan
production by subprime borrower risk classification for the periods shown. The
letter grades applied to each subprime borrower category reflect solely the
Company's internal standards, and may not be comparable to those used by other
subprime mortgage lenders.
FOR THE YEAR ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
------------------- -------------------
AA Risk Grade
Percent of total originations 27% 30%
Weighted average loan-to-value ratio 76% 75%
Weighted average interest rate 9.13% 9.25%
A- Risk Grade
Percent of total originations 37% 40%
Weighted average loan-to-value ratio 74% 76%
Weighted average interest rate 9.65% 9.47%
B Risk Grade
Percent of total originations 25% 22%
Weighted average loan-to-value ratio 73% 76%
Weighted average interest rate 10.24% 10.09%
C Risk Grade
Percent of total originations 7% 4%
Weighted average loan-to-value ratio 72% 70%
Weighted average interest rate 10.67% 10.51%
C- Risk Grade
Percent of total originations 2% 2%
Weighted average loan-to-value ratio 71% 68%
Weighted average interest rate 11.83% 11.25%
D Risk Grade
Percent of total originations 2% 2%
Weighted average loan-to-value ratio 69% 62%
Weighted average interest rate 12.72% 12.69%
10
LOAN PRODUCTION BY GEOGRAPHIC DISTRIBUTION
The following table sets forth the percentage of UPAM's loans (based upon
dollar amounts) originated by state for the period shown.
FOR THE YEAR ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
------------------- -------------------
California 43% 47%
Florida 10% 5%
Washington 9% 14%
Ohio 7% 3%
Colorado 6% 7%
Utah 4% 7%
New Jersey 3% 2%
Arizona 2% 5%
Georgia 2% --
Nevada 2% 2%
New Mexico 2% 1%
Oregon 2% 3%
All other combined 8% 4%
----------- -----------
Total 100% 100%
=========== ===========
LOAN SALES AND SECURITIZATIONS
Whole Loan Sales. During the twelve months ended December 31, 1998, UPAM
sold, for cash paid in full at closing, $1.1 billion of mortgage loans through
whole loan sales at a weighted average sales price equal to 104.9% of the
original principal balance of the loans sold.
Whole loan sales are made on a non-recourse basis pursuant to a purchase
agreement containing customary representations and warranties by UPAM regarding
the underwriting criteria applied by UPAM in the origination process. In the
event of a breach of such representations and warranties, UPAM may be required
to repurchase or substitute loans. In addition, UPAM sometimes commits to
repurchase or substitute a loan if a payment default occurs within the first
month following the date the loan is funded, unless other arrangements are made
between UPAM and the purchaser. UPAM also is required in some cases to
repurchase or substitute a loan if the loan documentation is alleged to contain
fraudulent misrepresentations made by the borrower. During 1998, UPAM
repurchased from investors $21.2 million of loans primarily as a result of early
payment defaults. Such loans have been reported, generally, as non-performing
loans and are included in the Company's held for investment portfolio. On a
case by case basis UPAM has sold some of the non-performing loans and may do so
in the future. Specific loss reserves have been recorded on these loans if the
outstanding principal balance is in excess of its estimated fair value.
UPAM seeks to maximize its premium on whole loan sales revenue by closely
monitoring institutional purchasers' requirements and focusing on originating
the types of loans that meet those requirements and for which institutional
purchasers tend to pay higher premiums. During the twelve months ended December
31, 1998, UPAM sold loans to 20 institutional purchasers, four of which
purchased approximately 84% of the loans sold by UPAM in this period.
Securitizations. UPAM completed its first securitization of mortgage loans
in December 1997, in the principal amount of $114.9 million. No loan
securitizations were completed during 1998. UPAM completed its second
securitization of mortgage loans in March 1999 in the principal amount of
approximately $225
11
million. Whether, when and how significantly UPAM decides to enter the
securitization market in the future will depend upon economic and secondary
market conditions and available financial resources.
LOAN SERVICING AND DELINQUENCIES
UPAM currently sells most of its loans on a servicing released basis. All
loans are serviced and held by the Bank until sold. The Bank subcontracts with
a third-party sub-servicer to conduct its servicing operations, and monitors the
sub-servicer's activities to ensure that they comply with its guidelines. If
UPAM securitizes additional mortgage loans, it may develop expanded in-house
capabilities for delinquency, foreclosure and REO activities management, while
continuing to use a third-party servicer to perform payment processing, account
maintenance, tax and insurance escrow accounting and other primary servicing
activities.
UPAM began receiving applications for mortgage loans under its regular
lending programs in January 1996 and to date has sold substantially all of its
loans on a whole loan, servicing released basis. Accordingly, UPAM does not have
representative historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating future
delinquency, loss and prepayment data with respect to its loans.
INSURANCE PREMIUM FINANCE
BUSINESS OVERVIEW
In May 1995, the Company entered into a joint venture with BPN under the
name "ClassicPlan" (such business "IPF"). Under this joint venture, which
commenced operations in September 1995, (i) the Bank underwrites and finances
automobile insurance premiums in California and (ii) BPN markets this financing
primarily to independent insurance agents that sell automobile insurance in
California and, thereafter, services such loans for the Bank. IPF markets to
drivers who are classified by insurance companies as non-standard or high risk
for a variety of reasons, including age, driving record, a lapse in insurance
coverage or ownership of high value or high performance automobiles. Insurance
companies that underwrite insurance for such drivers, including those
participating in the assigned risk programs established by California law,
generally either do not offer financing of insurance premiums or do not offer
terms as flexible as those offered by IPF.
Customers are directed to BPN through a non-exclusive network of insurance
brokers and agents who sell automobile insurance and offer financing through
programs like those offered by IPF. On a typical twelve-month insurance policy,
the borrower makes a cash down payment of 15% or 20% of the premium (plus
certain fees) and the balance is financed under a contract that contains a
payment period of shorter duration than the policy term. In the event that the
insured defaults on the loan, the Bank has the right to obtain directly from the
insurance company the unearned insurance premium held by the insurance company,
which can then be applied to the outstanding loan balance (premiums are earned
by the insurance company over the life of the insurance policy). Each contract
is designed to ensure that, at any point during the term of the underlying
policy, the unearned premium under the insurance policy exceeds the unpaid
principal amount due under the contract. Under the terms of the contract, the
insured grants IPF a power of attorney to cancel the policy in the event the
insured defaults under the contract. Upon cancellation, the insurance company
is required by California law to remit the unearned premium to IPF which, in
turn, offsets this amount against any amounts due from the insured. IPF does
not sell or have the risk of underwriting the underlying insurance policy. IPF
seeks to minimize its credit risk by (i) perfecting a security interest in the
unearned premium, (ii) avoiding concentrations of policies with insurance
companies that are below certain industry ratings, and (iii) doing business to
date only in California which maintains an insurance guaranty fund which
protects consumers and insurance premium finance companies against losses from
failed insurance companies.
In addition to insurance premiums, IPF will also finance broker fees (i.e.,
fees paid by the insured to the agent). If a policy cancels, the agent repays
any unearned broker fee financed by IPF. Broker fee
12
financing represents approximately 4% of total loans outstanding. At December
31, 1998, approximately 80% of all broker fee financing was to a single
insurance agency. When IPF agrees to finance an agent's broker fees, a credit
limit is established for the agent. Agents are required to maintain deposits
with the Bank to mitigate IPF's possible losses on broker fees financed. To
date, the Bank has not charged-off a broker fee balance.
At December 31, 1998 the aggregate gross amount of insurance premium
finance contracts was $44.7 million with 104,000 contracts outstanding. During
the twelve months ended December 31, 1998, IPF originated 137,743 insurance
premium finance contracts. During the last two years, growth in IPF primarily
resulted from the adoption in California of mandatory automobile insurance on
January 1, 1997 and the purchase in January 1998, with BPN, from Providian
National Bank for $450,000 of the right to solicit new and renewal personal and
commercial insurance premium finance business from brokers who previously
provided contracts to Commonwealth Premium Finance ("CPF"). The purchase price
for the agreement was provided 60% by the Company and 40% by BPN. The
relationship between the Company and BPN continues to be governed by the joint
venture arrangement already in effect. See "Relationship with BPN" below. The
Company also acquired the Commonwealth name and certain equipment and software.
The agreement also provides that Providian National Bank and the servicers of
its insurance premium finance business may not solicit or engage in the
insurance premium finance business in California for a period of three years
from the date of the agreement.
During November 1998, the Company and BPN, purchased from Norwest Financial
Coast, Inc. ("Coast") for $3.0 million the right to solicit new and renewal
personal and commercial insurance premium finance business from brokers who
previously provided contracts to Coast. The purchase price for the agreement
was provided 60% by the Company and 40% by BPN. The Company also acquired the
"Coast" name, and certain furniture, equipment and software. The agreement also
provides that Coast may not solicit or engage in the insurance premium finance
business in California and certain other states for five years from the date of
the agreement. Existing Coast customer receivables were not acquired.
RELATIONSHIP WITH BPN
BPN is headquartered in Chino, California, and markets the Company's
insurance premium finance program under the trade name "ClassicPlan." The
Company believes that IPF is the largest provider of financing for consumer
automobile insurance premiums in California. On a more limited basis, IPF also
finances insurance premiums for businesses purchasing property, casualty and
liability insurance. At December 31, 1998, BPN had 52 employees.
BPN solicits insurance agents and brokers to submit their clients'
financing requests to the Bank. BPN is responsible for monitoring the agents'
performance and assisting with IPF's compliance with applicable consumer
protection, disclosure and insurance laws, and providing customer service, data
processing and collection services to IPF. The Bank pays fees to BPN for these
services. The amount of these fees is based on fixed charges, which include a
loan service fee per contract and cancellation fees charged by the Bank, and the
earnings of the loan portfolio, which include (i) 50% of the interest earned on
portfolio loans after the Bank subtracts a specified floating portfolio interest
rate and (ii) 50% of late fees and returned check fees charged by the Bank.
Additionally, BPN and the Bank share equally (i) certain collection and legal
expenses which may occur from time-to-time, (ii) all net loan losses experienced
on the insurance premium loan portfolio and (iii) all net losses up to $375,000
experienced on the broker fees loan portfolio. BPN bears losses over $375,000
experienced on the broker fees loan portfolio.
The shareholders of BPN have entered into certain guaranty agreements in
favor of the Bank whereby they agree to pay any sums owed to the Bank and not
paid by BPN. The total potential liability of the guarantors to the Bank is
limited to $2,000,000 plus any amounts by which BPN is obligated to indemnify
the
13
Bank. Under these guaranties, all debts of BPN to the guarantors are
subordinated to the full payment of all obligations of BPN to the Bank.
The Company has entered into an option agreement with BPN and its
shareholders whereby the Company may purchase all of the issued and outstanding
shares of BPN (the "Shares Option") and all additional shares of any BPN
affiliate which may be organized outside of California (the "Affiliate Share
Option"). The option period expires March 31, 2005. The Company has agreed not
to exercise the Share Option prior to April 29, 1999 unless BPN or its
shareholders have breached their outstanding agreements with the Company. Until
the date occurring 90 days after delivery to the Company of a notice stating
that BPN has had $30,000,000 or more in loans outstanding for the six months
preceding delivery of such notice, which notice cannot be delivered prior to
October 29, 1999, the Company may exercise the Share Option for $3,250,000 and
must pay a $750,000 noncompete payment to certain shareholders and key employees
of BPN (the "Noncompete Payment"). If the Share Option is exercised any time
thereafter, the Noncompete Payment will be made and the option exercise price
shall be the greater of (a) $3,250,000 or (b) four times BPN's pre-tax earnings
for the twelve complete consecutive calendar months immediately preceding the
date of exercise less the Noncompete Payment. The Affiliate Share Option may not
be exercised independently of the Share Option. The exercise price of the
Affiliate Share Option will equal the sum of four times BPN Affiliate's pre-tax
earnings for the twelve month period prior to exercise.
In connection with the purchase of the rights to solicit new and renewal
business from Coast, the Bank made loans to two shareholders of BPN in the
aggregate amount of $1.2 million. The loans earn interest at a rate of 9.25%
per annum and are secured by the common stock of BPN. The loans provide for
principal and interest payments over a three-year period.
AUTOMOBILE INSURANCE PREMIUM FINANCE INDUSTRY
Insurance Finance. The private passenger automobile insurance industry in
the United States is estimated by A.M. Best Company ("A.M. Best"), a provider of
independent ratings on the financial strength and claims payment ability of
insurance companies, to have been a $109 billion market in annual premium volume
during 1996, with nonstandard automobile insurance comprising $23 billion of
this market. Although reliable data concerning the size and composition of the
personal lines premium finance market is not available, the Company believes
that the industry is highly fragmented with no independent insurance premium
finance company accounting for a significant share of the market. The Company
believes that the insurance premium finance industry in California is somewhat
more concentrated than elsewhere in the nation, with several long-established
competitors.
California Insurance Laws. Under current law, automobiles in the state of
California cannot be registered without providing proof of insurance or posting
required bonds with the Department of Motor Vehicles.
In California, as in most states, insurance companies fall into two
categories, admitted or non-admitted. All insurance companies licensed to do
business in California are required to be members of the California Insurance
Guarantee Association ("CIGA"), and are classified as "admitted" companies.
CIGA was established to protect insurance policyholders in the event the company
that issued a policy fails financially, and to establish confidence in the
insurance industry. Should an insurance company fail, CIGA is empowered to
raise money by levying member companies. CIGA pays claims against insurance
companies, which protects both the customer and the premium financiers should an
admitted insurance company fail. In such event, CIGA will refund any unearned
premiums. This provides protection to companies, such as IPF, that provide
insurance premium financing. As a result, IPF's policy is to limit financing of
insurance policies issued by non-admitted carriers to less than 5% of its total
portfolio. At December 31, 1998, policies issued by non-admitted carriers
comprised 4.6% of IPF's total portfolio.
14
Because insurance companies will not voluntarily insure drivers whom they
consider to be excessively high risk, California has a program called the
California Automobile Assigned Risk Program ("CAARP"), to which all admitted
companies writing private passenger automobile insurance policies must belong.
This 43-year-old program is an insurance plan for high risk, accident-prone
drivers who are unable to purchase insurance coverage from regular insurance
carriers. CAARP policies are distributed to the admitted companies in
proportion to their share of California's private passenger automobile insurance
market. The companies participating in CAARP do not have any discretion in
choosing the customers they insure under the program. The customers are
arbitrarily assigned to them by CAARP. Although CAARP offers financing of its
policy premiums, its terms are not as competitive as the insurance premium
finance companies and, therefore, many CAARP policies are financed by others.
At December 31, 1998, approximately 13% of the insurance policies financed by
IPF were issued under CAARP.
BUSINESS STRATEGY
IPF's business strategy is to increase profitably the volume of contracts
originated and maintained in its portfolio by expanding its relationship with
insurance brokers and agents and insurance companies in California and,
potentially, in other states. IPF intends to implement this strategy by:
. Strengthening its relationships with insurance brokers and agents by
offering a variety of high-quality support services (e.g., computer
hardware and software and customer reports) and finance programs
designed to enable them to better serve their customers;
. Investing additional resources to ensure IPF's ability to continue to
provide technologically advanced and efficient contract origination and
servicing systems and support services;
. Expanding its premium financing to other insurance lines of business
(e.g., commercial, property, casualty and liability insurance); and
. Expanding the Company's operations into new states either through joint
ventures or the acquisition of existing insurance premium finance
businesses in those states.
OPERATING SUMMARY
The following table presents a summary of IPF's key operating and
statistical results for the years ended December 31, 1998 and 1997.
AT OR FOR THE
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------
1998 1997
------------------------ -------------------------
(Dollars in thousands, except portfolio averages)
OPERATING DATA
Loan originations $152,998 $145,167
Loans outstanding at period end 44,709 39,990
Average gross yield (1) 19.51% 19.79%
Average net yield (2) 13.90% 14.01%
Allowance for loan losses $ 349 $ 450
LOAN QUALITY DATA
Allowance for loan losses (% of loans outstanding) 0.78% 1.13%
Net charge-offs (% of average loans outstanding) (3) 0.78% 0.35%
Delinquencies (% of loans outstanding) (4) 1.79% 1.64%
PORTFOLIO DATA
Average monthly loan originations (number of loans) 11,501 10,443
Average loan size at origination $ 1,109 $ 1,158
Commercial insurance policies (% of loans outstanding) 13.14% 2.1%
CAARP policies (% of loans outstanding) 13.05% 24.8%
Cancellation rate (% of premiums financed) 42.1% 49.0%
15
_____________
(1) Gross yield represents total rates and fees paid by the borrower.
(2) Net yield represents the yield to the Bank after interest and fee sharing
with BPN.
(3) Includes only the Bank's 50% share of charge-offs.
(4) This statistic measures delinquencies on canceled policy balances. Since
IPF seeks recovery of unearned premiums from the insurance companies, which
can take up to 90 days, loans are not considered delinquent until more than
90 days past due.
PRODUCTS AND PRICING
IPF generally charges from 16% to 23% annualized interest (depending on the
amount financed) and a $40 processing fee for each consumer contract, which the
Company believes is competitive in IPF's industry. In addition, contracts
provide for the payment by the insured of a delinquency charge and, if the
default results in cancellation of any insurance policy listed in the contract,
for the payment of a cancellation charge. Certain of these finance charges and
fees are shared with BPN. See "Relationship with BPN." The insured makes a
minimum 15% down payment on an annual policy and pays the remainder in a maximum
of ten monthly payments.
IPF designs its programs so that the unearned premium is equal to or
greater than the remaining principal amount due on the contract by requiring a
down payment and having a contract term shorter than the underlying policy term.
SALES AND MARKETING
IPF currently markets its insurance premium finance program through a
network of over 700 agents, primarily located in Los Angeles, Orange and San
Bernardino counties. Relationships with agents are established by BPN's
marketing representatives. The Company believes that IPF has been able to
attract and maintain its relationship with agents by offering a higher level of
service than its competitors. IPF focuses on providing each agent with up-to-
date information on its customers' accounts, which allows the agent to service
customers' needs and minimize the number of policies that are canceled. Many of
IPF's largest agents have computer terminals provided by BPN in their offices
which allow on-line access to customer information. Agents for IPF receive their
producer fees ($20, equal to 50% of the aforementioned $40 processing fee per
contract), as collateral against early cancellations. IPF does not require
return of this $20 producer fee for early policy cancellation unless the policy
pays off in the first 30 days.
To minimize its exposure to reliance on a limited number of agents, the
Company has instituted portfolio guidelines generally limiting the dollar amount
of contracts originated by any agent to 15% of IPF's total portfolio. The
Company performs a quarterly analysis of all agents based on information
provided by BPN. At December 31, 1998, IPF had one agent that exceeded the 15%
portfolio parameter, accounting for 32.7% of IPF's total portfolio.
UNDERWRITING STANDARDS
IPF is a secured lender, and upon default, relies on its security interest
in the unearned premium held by the insurance company. IPF can, however, suffer
a loss on an insurance premium finance contract for four reasons: (i) loss of
all or a portion of the unearned premium due to its failure to cancel the
contract on a timely basis; (ii) an insolvency of the insurance company holding
the unearned premium not otherwise covered by CIGA; (iii) inadequacy of the
unearned premium to cover charges in excess of unpaid principal amount; and (iv)
cost of collection and administration, including the time value of money,
exceeding the unpaid principal and other charges due under the contract. For the
twelve months ended December 31, 1998, IPF canceled for nonpayment contracts
representing approximately 42.1% of all premiums financed. Careful
administration of contracts is critical to protecting IPF against loss.
16
Credit application are taken at the insurance agent's office. Given the
secondary source of repayment on unearned premiums due from the insurance
company on a canceled policy, and in most cases, access to CIGA, IPF does not
carry out a credit investigation of a borrower on loans under $25,000. At
December 31, 1998, IPF had one insurance premium finance loan with an original
principal amount over $25,000.
SERVICING AND COLLECTION
The Company believes that an efficient and accurate servicing and
collection system is the most important management tool that an insurance
premium financing company can use to protect itself from losses as a result of
an insured's default on a contract. The insurance premium finance industry is
acutely time sensitive because insurance premiums are earned each day that an
insurance policy remains in effect, thus reducing, on a daily basis, the
collateral support provided by the unearned premium.
During July 1998, BPN purchased and installed a new computer system, a
Proliant 2500, manufactured by Compaq Computer Corporation. In addition, BPN
developed an Oracle-based management information system software which provides
complete online, real-time information processing services. The system also
provides direct electronic processing of many functions that were previously
paper intensive. This system satisfies IPF's current requirements for (i)
application processing, (ii) payment processing and collections, and (iii)
monitoring and reporting, and has significant capacity remaining. The Bank
purchased a 50% interest in the Oracle-based software developed by BPN for
$175,000.
Billing Process. A customer's monthly payments are recorded in BPN's
computer system on the date of receipt. BPN's computer system is designed to
provide protection against principal loss by automatically canceling a policy no
later than 18 days after the customer's latest payment due date. If a payment is
not received on its due date, BPN's computer system automatically prints a
notice of intent to cancel and assesses a late fee which is mailed to the
insured and his or her insurance agent stating that payment must be received
within 18 days after the due date or IPF will cancel the insurance policy. If
payment is received within the 18 day period, BPN's computer system returns the
account to normal status.
Collections Process. If IPF does not receive payment within the statutory
period set forth in the notice of intent to cancel, BPN's computer system will
automatically generate a cancellation notice on the next business day,
instructing the insurance company to cancel the insured's insurance policy and
refund any unearned premium directly to IPF for processing.
Although California law requires the insurance company to refund unearned
premiums within 30 days of the cancellation date, most insurance companies pay
on more extended terms. After cancellation, IPF charges certain allowable fees
and continues to earn interest. Although the gross return premium may not fully
cover the fees and accrued interest owed to IPF by the insured, principal
generally is fully covered. Policies which are canceled in the first two months
generally have a greater risk of loss of fees.
IPF charges against income a general provision for possible losses on
finance receivables in such amounts as management deems appropriate. Case-by-
case direct write-offs, net of recoveries on finance receivables, are charged to
IPF's allowance for possible losses. This allowance amount is reviewed
periodically in light of economic conditions, the status of outstanding
contracts and other factors.
Insurance Company Failure. One of the principal risks involved in financing
insurance premiums is the possible insolvency of an insurance company. Another
risk is that an insurance company's financial circumstances cause it to delay
its refunds of unearned premiums. Either event can adversely affect the yield to
an insurance premium finance company on a contract. Despite the protection
afforded by CIGA, IPF also reviews the ratings assigned to the insurance
companies by A.M. Best or their financial statements. To minimize its exposure
to risks resulting from the insolvency of an insurance company, IPF limits the
number of policies financed that are issued by insurance companies rated "B" or
lower by A.M. Best.
17
AUTOMOBILE FINANCE
BUSINESS OVERVIEW
The Company entered the subprime automobile finance business in February
1996 through the establishment of United Auto Credit Corporation ("UACC") as a
subsidiary of the Bank. UACC purchases auto contracts primarily from dealers in
used automobiles, approximately 79% of which have been independent dealers and
21% of which have been franchisees of automobile manufacturers. The borrowers on
contracts purchased by UACC are classified as subprime because they typically
have limited credit histories or credit histories that preclude them from
obtaining loans through traditional sources. UACC maintains nine branch offices
located in California and one each in Arizona, Colorado, Florida, Oregon, Utah
and Washington. At December 31, 1998, UACC's portfolio contained 10,654 auto
contracts in the aggregate gross amount of $83.9 million, including unearned
finance charges of $17.4 million.
SUBPRIME AUTOMOBILE FINANCE INDUSTRY
Automobile financing is one of the largest consumer finance markets in the
United States. In general, the automobile finance industry can be divided into
two principal segments: a prime credit market and a subprime credit market.
Traditional automobile finance companies, such as commercial banks, savings
institutions, thrift and loan companies, credit unions and captive finance
companies of automobile manufacturers, generally lend to the most creditworthy,
or so-called prime, borrowers. The subprime automobile credit market, in which
UACC operates, provides financing to borrowers who generally cannot obtain
financing from traditional lenders.
Historically, traditional lenders have not serviced the subprime market or
have done so only through programs that were not consistently available.
Recently, however, independent companies specializing in subprime automobile
financing and subsidiaries of larger financial services companies have entered
this segment of the automobile finance market, but it remains highly fragmented,
with no company having a significant share of the market.
BUSINESS STRATEGY
UACC's business strategy includes controlled growth at the branch level,
with limited volume goals and the gradual addition of new branches. Each branch
is targeted to generate between $650,000 and $750,000 in gross contracts per
month within five months of opening. The Company believes that UACC's strategy
of (i) controlled growth, (ii) disciplined underwriting, (iii) strong internal
audit procedures and (iv) focused servicing and collection efforts at the branch
level, will result in sustainable profitability and lower levels of delinquency
and loss than those experienced by many of its competitors, whose rapid growth
has resulted in portfolio quality problems.
The Company believes that the subprime automobile finance market is
inconsistently or poorly serviced by the consumer finance industry. As a
result, UACC's strategy is to differentiate itself by providing dealers with
consistent, same day decisions and rapid funding of approved contracts. The
Company believes that UACC is also more flexible than some of its competitors in
financing older, higher mileage vehicles and maintenance warranties.
18
OPERATING SUMMARY
The following table presents a summary of UACC's key operating and
statistical results for the years ended December 31, 1998 and 1997.
AT OR FOR THE
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------
1998 1997
------------------------ -----------------------
(Dollars in thousands, except portfolio and other
data)
OPERATING DATA
Gross contracts purchased $86,098 $44,056
Gross contracts outstanding 83,921 40,877
Unearned finance charges 17,371 10,581
Net contracts outstanding 66,550 30,296
Average purchase discount 9.12% 9.79%
APR to customers 21.31% 21.0%
Allowance for loan losses $ 4,138 $ 1,791
LOAN QUALITY DATA
Allowance for loan losses (% of net contracts) 6.22% 5.91%
Delinquencies (% of net contracts)
31-60 days 0.44% 0.84%
61-90 days 0.16% 0.20%
90+ days 0.08% 0.22%
Net charge-offs (% of average net contracts) 4.56% 4.94%
Repossessions (net) (% of net contracts) 0.72% 0.64%
PORTFOLIO DATA
Used vehicles 99.0% 99.0%
Vehicle age at time of contract (years) 6.2 6.1
Original contract term (months) 40.6 38.4
Gross amount financed to WSBB (1) 117% 116%
Net amount financed to WSBB (2) 106% 105%
Net amount financed per contract $ 7,725 $ 7,517
Down payment 20% 20%
Monthly payment $ 270 $ 270
OTHER DATA
Number of branches 15 10
___________
(1) WSBB represents Kelly Wholesale Blue Book for used vehicles.
(2) Net amount financed equals the gross amount financed less unearned finance
charges or discounts.
PRODUCTS AND PRICING
UACC targets transactions which involve (i) a used automobile with an
average age of five to eight years and (ii) an average original contract term of
38 to 42 months.
The financial profile of the target transaction includes (i) an amount
financed (before taxes, license, warranty and discount) equal to 95% to 100% of
invoice for new vehicles or current WSBB for used vehicles (after tax, license,
warranty and discount, the amount financed is targeted at 105% to 110%), (ii) a
contract rate and discount which yields 28.5%, (iii) an amount financed of
$7,000 to $10,000 with a down payment of 15% to 20%, and (iv) a monthly payment
from $225 to $325.
19
The target profile of a UACC borrower includes (i) time on the job of three
to five years, (ii) time at current residence of three to five years, (iii) a
ratio of total debt to total income of 33% to 37%, and (iv) a ratio of total
monthly automobile payments to total monthly income of 12% to 15%.
The application for an auto contract is taken by the dealer. UACC purchases
the auto contract from the dealer at a discount which increases the effective
yield on such contract. For the quarter ended December 31, 1998, the Company
allocated 80% of the discount to the allowance for loan losses, representing 8%
of the net contract amount. Management periodically reviews the portion of the
discount allocated to the allowance for loan losses in light of the Company's
operations and, in January 1999, increased the allocation to 9% of the net
contract amount.
SALES AND MARKETING
UACC markets its financing program to both independent used and franchised
automobile dealers. UACC's marketing approach emphasizes scheduled calling
programs, marketing materials and consistent follow-up. The Company uses
facsimile software programs to send marketing materials to established dealers
and potential dealers on a twice weekly basis in each branch market. UACC's
experienced local staff seeks to establish strong relationships with dealers in
their vicinity.
UACC solicits business from dealers through its branch managers who meet
with dealers and provide information about UACC's programs, train dealer
personnel in UACC's program requirements and assist dealers in identifying
consumers who qualify for UACC's programs. In order to both promote asset growth
and achieve required levels of credit quality, UACC compensates its branch
managers on a salary with a bonus that requires the achievement of delinquency,
charge-off, volume and return on average assets targets established for the
branch, as well as satisfactory audit results.
As of December 31, 1998, UACC directly marketed its programs to dealers
through its 15 branch offices in California, Colorado, Washington, Utah, Oregon,
Arizona and Florida.
GROSS NUMBER OF CONTRACTS
CONTRACTS PURCHASED OVER THE
OUTSTANDING AT YEAR ENDED
DECEMBER 31, DECEMBER 31,
BRANCH LOCATION DATE ESTABLISHED 1998 1998
- --------------- ------------------- ----------------- ---------------------
(IN THOUSANDS)
Irvine, CA March 1996 $10,149 620
San Diego, CA June 1996 11,659 867
Riverside, CA September 1996 11,940 869
San Jose, CA November 1996 7,847 593
Los Angeles, CA March 1997 8,978 737
San Fernando, CA May 1997 8,679 830
Upland, CA July 1997 7,312 804
Salt Lake City, UT August 1997 3,517 438
Phoenix, AZ September 1997 4,650 634
Portland, OR December 1997 2,921 454
Denver, CO February 1998 2,296 362
Sacramento, CA May 1998 2,069 200
Tacoma, WA June 1998 1,269 217
Redlands, CA September 1998 635 70
Orlando, FL December 1998 -- --
------------ -----------
$83,921 7,695
============ ===========
20
When a UACC branch decides to begin doing business with a dealer, a dealer
profile and investigation worksheet are completed. UACC and the dealer enter
into an agreement that provides UACC with recourse to the dealer in cases of
dealer fraud or a breach of the dealer's representations and warranties. When
UACC holds auto contracts aggregating $50,000 or more from a dealer, UACC
obtains a Dun and Bradstreet Analysis Report for such dealer. Branch management
periodically monitors each dealer's overall performance and inventory to ensure
a satisfactory quality level, and regional managers regularly conduct audits of
the dealer's performance.
The following table sets forth certain data for auto contracts purchased by
UACC for the periods indicated.
For the Quarter Ended
--------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------------- --------------- ------------------- -----------------
(Dollars in thousands)
Gross amount of contracts $ 17,774 $ 19,881 $ 23,044 $ 25,399
Average original term of contracts (months) 39.2 40.5 40.8 40.8
At December 31, 1997, 95% of UACC's auto contracts were written by its
California branches. During the last half of 1997 and 1998, UACC expanded into
Salt Lake City, Phoenix, Portland, Denver, Tacoma and Orlando thereby reducing
the level of auto contracts written by its California branches to 73% at
December 31, 1998. In addition to diversifying its geographic concentrations,
UACC intends to maintain a broad dealer base to avoid dependence on a limited
number of dealers. At December 31, 1998, no dealer accounted for more than 2.1%
of UACC's portfolio and the ten dealers from which UACC purchased the most
contracts accounted for approximately 13.6% of its aggregate portfolio.
UNDERWRITING STANDARDS AND PURCHASE OF CONTRACTS
Underwriting Standards and Purchase Criteria. Dealers submit credit
applications directly to UACC's branches. UACC uses credit bureau reports in
conjunction with information on the credit application to make a final credit
decision or a decision to request additional information. Only credit bureau
reports that have been obtained by UACC are acceptable.
UACC's credit policy places specific accountability for credit decisions
directly within the branches. The branch manager or assistant branch manager
reviews all credit applications. In general, no branch manager will have credit
approval authority for contracts greater than $15,000. Any transaction that
exceeds a branch manager's approval limit must be approved by UACC's Regional
Manager, Operations Manager or President.
Verification. Upon approving or conditioning any application, all required
stipulations are presented to the dealer and must be satisfied before funding.
All dealers are required to provide UACC with written evidence of insurance
in force on a vehicle being financed when submitting the contract for purchase.
Prior to funding a contract, the branch must verify by telephone with the
insurance agent the customer's insurance coverage with UACC as loss payee. If
UACC receives notice of insurance cancellation or non-renewal, the branch will
notify the customer of his or her contractual obligation to maintain insurance
coverage at all times on the vehicle. However, UACC will not "force place"
insurance on an account if insurance lapses and, accordingly, UACC bears the
risk of an uninsured loss in these circumstances.
Post-Funding Quality Reviews. UACC's Regional Manager and Operations
Manager complete quality control reviews of the newly originated auto contracts.
These reviews focus on compliance with underwriting
21
standards, the quality of the credit decision and the completeness of auto
contract documentation. Additionally, UACC's Regional Manager and Operations
Manager complete regular branch audits that focus on compliance with UACC's
policies and procedures and the overall quality of branch operations and credit
decisions.
SERVICING AND COLLECTION
UACC services at the branch level all of the auto contracts it purchases.
Billing Process. UACC sends each borrower a coupon book. All payments are
directed to the customer's respective UACC branch. UACC also accepts payments
delivered to the branch by a customer in person.
Collection Process. UACC's collection policy calls for the following
sequence of actions to be taken with regard to all problem loans: (i) call the
borrower at one day past due; (ii) immediate follow-up on all broken promises to
pay; (iii) branch management review of all accounts at ten days past due; and
(iv) Regional Manager or Operations Manager review of all accounts at 45 days
past due.
UACC will consider extensions or modifications in working a collection
problem. All extensions and modification require the approval of the branch
manager, and are monitored by the Regional Manager and Operations Manager.
Repossessions. It is UACC's policy to repossess the financed vehicle only
when (i) payments are substantially in default, (ii) the customer demonstrates
an intention not to pay or (iii) the customer fails to comply with material
provisions of the contract. All repossessions require the prior approval of the
branch manager. In certain cases, the customer is able to pay the balance due or
bring the account current, thereby redeeming the vehicle.
When a vehicle is repossessed and sold at an automobile auction or through
a private sale, the sale proceeds are subtracted from the net outstanding
balance of the loan with any remaining amount recorded as a loss. UACC generally
pursues all customer deficiencies.
Allowance for Loan Losses. UACC's policy is to place on nonaccrual status
accounts delinquent in excess of 120 days on a contractual basis, and to reverse
all previously accrued but unpaid interest on such accounts. Accounts that have
had their collateral repossessed are placed on nonaccrual by the end of the
month in which they are repossessed regardless of delinquency status. Accounts
are not returned to accrual status until they are brought current.
UACC's policy is to charge-off accounts delinquent in excess of 120 days.
The remaining balance of accounts where the collateral has been repossessed and
sold is charged-off by the end of the month in which the collateral is sold and
the proceeds collected.
Loss reserves based on expected losses over the life of the contract are
established when each contract is purchased from the dealer. The reserve is
provided from the dealer discount that is taken on each transaction. Loss
reserve analyses are performed regularly to determine the adequacy of current
reserve levels. For the quarter ended December 31, 1998, the Company allocated
8% of the net contract purchased to the allowance for loan losses. The loss
allowances recorded at the time of purchase represent an estimate of expected
losses for these loans. If actual experience exceeds estimates, an additional
provision for losses is established as a charge against earnings. Management
periodically reviews the portion of the discount allocated to the allowance for
loan losses in light of the Company's operations and, in January 1999, increased
the allocation to 9% of the net contract amount.
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The following table reflects UACC's cumulative losses (i.e., net charge-
offs as a percent of original net contract balances) for each contract pool
(defined as the total dollar amount of net contracts purchased in a six month
period) purchased since UACC's inception.
Number of Mar. 1996 Oct. 1996 Apr. 1997 Oct. 1997 Apr. 1998 Oct. 1998
Months - - - - - -
Outstanding Sept. 1996 Mar. 1997 Sept. 1997 Mar. 1998 Sept. 1998 Dec. 1998
---------- --------- ---------- --------- ---------- ---------
1 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
3 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
5 0.0% 0.0% 0.1% 0.1% 0.1%
7 0.3% 0.4% 0.5% 0.5% 0.5%
9 1.0% 0.9% 1.1% 1.2% 1.1%
11 2.8% 2.1% 2.3% 2.1%
13 4.4% 3.1% 3.3% 2.9%
15 5.9% 4.1% 4.2% 3.7%
17 6.8% 4.8% 4.8%
19 7.7% 5.4% 5.3%
21 8.5% 5.8% 5.7%
23 8.7% 6.3%
25 9.1% 6.6%
27 9.2% 7.2%
29 9.3%
31 9.6%
33 9.9%
Original Pool ($000) $ 4,885 $ 9,297 $ 15,575 $ 22,488 $ 30,271 $ 17,951
======= ======= ======== ========= ======== ========
Remaining Pool ($000) $ 953 $ 2,953 $ 7,499 $ 14,768 $ 24,783 $ 16,505
======= ======= ======== ========= ======== ========
(%) 19% 32% 48% 66% 82% 92%
======= ======= ======== ========= ======== ========
UACC purchased its first auto contracts in March 1996 and, accordingly, a
maximum of 33 months of loss history was available at December 31, 1998.
PAN AMERICAN BANK, FSB
BUSINESS OVERVIEW
The Bank is a federally chartered stock savings bank formed in 1994 to
purchase from the RTC certain assets and to assume certain liabilities of the
Bank's predecessor, Pan American Federal Savings Bank. The Bank has been the
principal funding source to date for the Company's residential mortgage,
insurance premium and automobile finance businesses primarily through its
deposits, FHLB advances, warehouse lines of credit and whole loan sales. In
addition, the Bank holds a portfolio of primarily traditional residential
mortgage loans acquired from the RTC in 1994 and 1995 at a discount from the
unpaid principal balance of such loans, which loans aggregated $32.3 million
(before unearned discounts and premiums) at December 31, 1998. The Bank has
focused its branch marketing efforts on building a middle income customer base,
including efforts targeted at local Hispanic communities. The Bank has bilingual
employees in each of its branches, and key members of the Company's and the
Bank's Board of Directors and management are of Hispanic heritage and are active
in communities served by the Bank. In addition to operating its retail banking
business at four branches located in Northern California and one in Southern
California, the Bank provides, subject to appropriate cost sharing arrangements,
compliance, risk management, executive, financial, facilities and human
resources management to other business units of the Company. The business of the
Bank is subject to substantial government supervision and regulatory
requirement. See "--Supervision and Regulation - Business Savings Bank
Regulation."
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INDUSTRY SEGMENTS
Information regarding industry segments is set forth in Footnote Number 21
to the Consolidated Financial Statements included in Item 8 to this Annual
Report on Form 10-K.
COMPETITION
Each of the Company's businesses is highly competitive. Competition in the
Company's markets can take many forms, including convenience in obtaining a
loan, customer service, marketing and distribution channels, amount and terms of
the loan, loan origination fees and interest rates. Many of the Company's
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than the Company. The Company's competitors in
subprime mortgage finance include other consumer finance companies, mortgage
banking companies, commercial banks, credit unions, savings associations and
insurance companies. The Company competes in the insurance premium finance
business with other specialty finance companies, independent insurance agents
who offer premium finance services, captive premium finance affiliates of
insurance companies and direct bill plans established by insurance companies.
The Company competes in the subprime automobile finance industry with commercial
banks, the captive finance affiliates of automobile manufacturers, savings
associations and companies specializing in subprime automobile finance, many of
which have established relationships with automobile dealerships and may offer
dealerships or their customers other forms of financing, including dealer floor
plan financing and lending, which are not offered by the Company. In attracting
deposits, the Bank competes primarily with other savings institutions,
commercial banks, brokerage firms, mutual funds, credit unions and other types
of investment companies.
The historical profitability of the subprime lending industry and the low
barriers to entry has attracted competitors. Certain large, national finance
companies and mortgage originators have announced their intention to adapt their
mortgage loan origination programs and allocate resources to the origination of
subprime loans. The Company and its competitors may also face increasing
competition from governmental-sponsored entities, such as FNMA and FHLMC. FHLMC
currently purchases what it terms "Alternative-A" mortgage loans and may
establish a program to purchase so-called "B" and "C" mortgage loans in the
future. FHLMC also has purchased securities backed by subprime mortgage loans
and has re-securitized them for resale. Additional competition may lower the
rates the Company can charge borrowers, reduce the volume of the Company's loan
origination and increase demand for the Company's key employees with the
potential that such employees will leave the Company for its competitors.
Fluctuations in interest rates and general and localized economic
conditions also may affect the competition the Company faces. Competitors with
lower costs of capital have a competitive advantage over the Company. During
periods of declining interest rates, competitors may solicit the Company's
customers to refinance their loans. In addition, during periods of economic
slowdown or recession, the Company's borrowers may face financial difficulties
and be more receptive to offers of the Company's competitors to refinance their
loans. As the Company seeks to expand into new geographic markets, it will face
additional competition from lenders already established in these markets.
EMPLOYEES
At December 31, 1998, the Company had 592 full-time equivalent employees.
The Company believes its relations with its employees are satisfactory.
SUPERVISION AND REGULATION
Set forth below is a brief description of various laws and regulations
affecting the operations of the Company and its subsidiaries. The description of
laws and regulations contained herein does not purport to be complete and is
qualified in its entirety by reference to applicable laws and regulations. Any
change in
24
applicable laws, regulations or regulatory policies may have a material effect
on the business, operations and prospects of the Company.
HOLDING COMPANY REGULATION
General. The Company is a unitary savings and loan holding company subject
to regulatory oversight by the Office of Thrift Supervision (the "OTS"). For
purposes of this discussion, the description of holding company regulation also
applies to PAFI, a direct subsidiary of the Company and the parent of the Bank.
As such, the Company is required to register and file reports with the OTS and
is subject to regulation and examination by the OTS. In addition, the OTS has
enforcement authority over the Company and its subsidiaries, which also permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the subsidiary savings association. This regulation is intended
primarily for the protection of depositors and the Savings Association Insurance
Fund ("SAIF") and not for the benefit of shareholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test or meets the
definition of domestic building and loan association pursuant to section 7701 of
the Internal Revenue Code of 1986, as amended (the "Code"). If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other SAIF-
insured savings association) would become subject to restrictions applicable to
bank holding companies unless such other associations each also qualify as a QTL
or domestic building and loan association and were acquired in a supervisory
acquisition. See "- Business Savings Bank Regulation - Qualified Thrift Lender
Test."
Restrictions on Acquisitions. The Company must obtain approval from the OTS
before acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings association without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition. In
addition, no company may acquire control of such an institution without prior
OTS approval. These provisions also prohibit, among other things, any director
or officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of a savings and loan holding
company, from acquiring control of any savings association not a subsidiary of
the savings and loan holding company, unless the acquisition is approved by the
OTS.
REGULATION OF MORTGAGE FINANCE OPERATION
The consumer financing industry is a highly regulated industry. UPAM's
business is subject to extensive and complex rules and regulations of, and
examinations by, various federal, state and local government authorities. These
rules and regulations impose obligations and restrictions on UPAM's loan
origination, credit activities and secured transactions. In addition, these
rules limit the interest rates, finance charges and other fees UPAM may assess,
mandate extensive disclosure to UPAM's customers, prohibit discrimination and
impose multiple qualification and licensing obligations on UPAM. Failure to
comply with these requirements may result in, among other things, demands for
indemnification or mortgage loan repurchases, certain rights of rescission for
mortgage loans, class action lawsuits, administrative enforcement actions and
civil and criminal liability. Management of UPAM believes that UPAM is in
compliance with these rules and regulations in all material respects.
25
UPAM's loan origination activities are subject to the laws and regulations
in each of the states in which those activities are conducted. UPAM's lending
activities are also subject to various federal laws, including those described
below.
UPAM is subject to certain disclosure requirements under the Truth in
Lending Act ("TILA") and the Federal Reserve Board's Regulation Z promulgated
thereunder. TILA is designed to provide consumers with uniform, understandable
information with respect to the terms and conditions of loan and credit
transactions. TILA also guarantees consumers a three-day right to cancel certain
credit transactions, including loans of the type originated by UPAM. Such three-
day right to rescind may remain unexpired for up to three years if the lender
fails to provide the requisite disclosures to the consumer.
UPAM originates loans which are subject to the Home Ownership and Equity
Protection Act of 1994 (the "High Cost Mortgage Act"), which makes certain
amendments to TILA. The High Cost Mortgage Act generally applies to consumer
credit transactions secured by the consumer's principal residence, other than
residential mortgage transactions, reverse mortgage transactions or transactions
under an open-end credit plan, in which the loan has either (i) total points and
fees upon origination in excess of the greater of eight percent of the loan
amount or $435 or (ii) an annual percentage rate of more than ten percentage
points higher than United States Treasury securities of comparable maturity
("Covered Loans"). The High Cost Mortgage Act imposes additional disclosure
requirements on lenders originating Covered Loans. In addition, it prohibits
lenders from, among other things, originating Covered Loans that are
underwritten solely on the basis of the borrower's home equity without regard to
the borrower's ability to repay the loan and including prepayment fee clauses in
Covered Loans to borrowers with a debt-to-income ratio in excess of 50% or
Covered Loans used to refinance existing loans originated by the same lender.
The High Cost Mortgage Act also restricts, among other things, certain balloon
payments and negative amortization features. UPAM commenced originating Covered
Loans during 1996.
UPAM is also required to comply with the Equal Credit Opportunity Act
("ECOA") and the Federal Reserve Board's Regulation B promulgated thereunder,
the Fair Credit Reporting Act ("FCRA"), the Real Estate Settlement Procedures
Act of 1974 ("RESPA") and the Home Mortgage Disclosure Act ("HMDA"). Regulation
B restricts creditors from requesting certain types of information from loan
applicants. FCRA requires lenders, among other things, to supply an applicant
with certain information if the lender denies the applicant credit. RESPA
requires lenders, among other things, to supply an applicant with certain
disclosures concerning settlement fees and changes and mortgage servicing
transfer practices. It also prohibits the payment or receipt of kickbacks or
referral fees in connection with the performance of settlement services. In
addition, beginning with loans originated in 1994, UPAM must file an annual
report with the Department of Housing and Urban Development pursuant to HMDA,
which requires the collection and reporting of statistical data concerning loan
transactions.
In the course of its business, UPAM may acquire properties securing loans
that are in default. There is a risk that hazardous or toxic waste could be
found on such properties. In such event, UPAM could be held responsible for the
cost of cleaning up or removing such waste, and such cost could exceed the value
of the underlying properties.
Because UPAM's business is highly regulated, the laws, rules and
regulations applicable to UPAM are subject to regular modification. There are
currently proposed various laws, rules and regulations which, if adopted, could
materially affect UPAM's business. There can be no assurance that these proposed
laws, rules and regulations, or other such laws, rules or regulations, will not
be adopted in the future which could make compliance much more difficult or
expensive, restrict UPAM's ability to originate, broker or sell loans, further
limit or restrict the amount of commissions, interest and other charges earned
on loans originated, brokered or sold by UPAM, or otherwise adversely affect the
business or prospects of UPAM.
26
REGULATION OF INSURANCE PREMIUM FINANCE COMPANIES
The auto insurance premium finance industry is subject to state
regulations. The regulatory structure of each state places certain restrictions
on the terms of loans made to finance insurance premiums. These restrictions,
among other things, generally provide that the lender must provide certain
cancellation notices to the insured and the insurer in order to exercise an
assigned right to cancel an automobile insurance policy in the event of a
default under an insurance premium finance agreement and to obtain in connection
therewith a return from the insurer of any unearned premiums that have been
assigned by the insured to the lender. Such state laws also require that certain
disclosures be delivered by the insurance agent or broker arranging for such
credit to the insured regarding the amount of compensation to be received by
such agent or broker from the lender.
REGULATION OF SUBPRIME AUTOMOBILE LENDING
UACC's automobile lending activities are subject to various federal and
state consumer protection laws, including TILA, ECOA, FCRA, the Federal Fair
Debt Collection Practices Act, the Federal Trade Commission Act, the Federal
Reserve Board's Regulations B and Z, and state motor vehicle retail installment
sales acts. Retail installment sales acts and other similar laws regulate the
origination and collection of consumer receivables and impact UACC's business.
These laws, among other things, (i) require UACC to obtain and maintain certain
licenses and qualifications, (ii) limit the finance charges, fees and other
charges on the contracts purchased, (iii) require UACC to provide specified
disclosures to consumers, (iv) limit the terms of the contracts, (v) regulate
the credit application and evaluation process, (vi) regulate certain servicing
and collection practices, and (vii) regulate the repossession and sale of
collateral. These laws impose specific statutory liabilities upon creditors who
fail to comply with their provisions and may give rise to a defense to payment
of the consumer's obligation. In addition, certain of the laws make the assignee
of a consumer installment contract liable for the violations of the assignor.
See "--Regulation of Mortgage Finance Operation."
Each dealer agreement contains representations and warranties by the dealer
that, as of the date of assignment, the dealer has compiled with all applicable
laws and regulations with respect to each contract. The dealer is obligated to
indemnify UACC for any breach of any of the representations and warranties and
to repurchase any non-conforming contracts. UACC generally verifies dealer
compliance with usury laws, but does not audit a dealer's full compliance with
applicable laws. There can be no assurance that UACC will detect all dealer
violations or that individual dealers will have the financial ability and
resources either to repurchase contracts or indemnify UACC against losses.
Accordingly, failure by dealers to comply with applicable laws, or with their
representations and warranties under the dealer agreement, co