Know Before You Owe: Regulatory Lessons Learned From Auto Finance

canstockphoto11491708At the very least, lenders should identify who in the organization is responsible for compliance, and dedicate as many resources as possible toward creating a compliance system that management deems appropriate for the company’s size, complexity, and consumer risk profile, David E. Gemperle, partner at Nisen & Elliott LLC, told Powersports Finance.

“In subprime, you’re at a much higher risk for scrutiny than if you’re a prime lender,” Gemperle said. “So, at a minimum you have to identify who is responsible — your head of compliance, your head of operation — and then you should identify the areas of law that you need to comply with, and then adopt policies for compliance. Those don’t need to be down to the level of what exactly you do in each situation, but you should at least demonstrate your knowledge of the alphabet soup of laws that are applicable to you as a finance company.”

There are three areas in particular that lenders in the powersports finance space should take note of, particularly in light of recent development in the auto finance industry:

Fair Lending

The Equal Credit Opportunity Act prohibits discrimination by a “creditor” based on race, age, religion, and gender — among other things. In particular, an indirect lender’s rate participation policies — which permit dealer mark-up — may alone be sufficient to trigger liability under the Consumer Financial Protection Bureau and Department of Justice’s interpretation of ECOA, if the lender’s policies are found to result in discriminatory impact, according to Gemperle.

In the auto finance industry, BMO Harris Bank made the switch to flat fees in May 2014, with BB&T Bank following suit in June 2015. However, from a competitive standpoint, moving to flat fees is not always the easiest decision to make, Gemperle said.

“The reward on flats is the compliance reward is high, but the competitive penalty is a business consideration,” he said. “If you don’t move to flats, you should definitely be scrutinizing your portfolio yourself,” and prepare it to be reviewed through the statistical analysis used by the CFPB for “racial proxies based on last names and addresses, and for difference from group to group between the amount of dealer compensation that is being received in the form of dealer reserve or rate participation markup,” he added.

Unfair, Deceptive, or Abusive Act or Practice (UDAAP)

Under the Dodd-Frank Act, the CFPB may take action to prevent a service provider from committing or engaging in what it deems to be an unfair, deceptive, or abusive act or practice, under Federal law, in connection with any transaction with a consumer for a financial product or service.

However, the Federal Trade Commission began a nationwide “crackdown” on dealers in 2014, and has since fined numerous dealers for “false” and “deceptive” advertising — most recently, it fined nine Los Angeles-based dealerships in late September with agency’s first ever “yo-yo” financing-tactics charge.

Under the Dodd-Frank Act, the CFPB may also take action to prevent a service provider from committing or engaging in what it deems to be an unfair, deceptive, or abusive act or practice, under federal law, in connection with any transaction with a consumer for a financial product or service.

Lenders should know their dealer partners and practices, Gemperle said. “If UDAAP is going to occur, most likely, it’s at the dealer level,” he said. “The concern is the blowback to you, so the better you know the dealers and know their compliance profile, the better you’d be able to minimize that risk.”

Car-gavelServicemember Civil Relief Act (SCRA)

SCRA, in regard to powersports in particular, is a “promising area” for the CFPB and other regulators, “because it’s kind of an intersection where there’s high powersports consumer demand and historical attention by the CFPB and other regulators,” Gemperle said.

Under the SCRA, lenders cannot charge servicemembers or their covered dependents more than a 36% military annual percentage rate, “which generally includes the following costs [with some exceptions]: finance charges, credit insurance premiums or fees, add-on products sold in connection with the credit extended, and other fees such as application or participation fees,” the CFPB wrote in its updated exam procedures for the Military Lending Act, released in late September.

Lenders are also required to issue a court order before repossession — something Wells Fargo Dealer Services paid $24 million for violating in auto finance. Wells Fargo reached a settlement with the DOJ and the Office of the Comptroller of the Currency in late September.

“Lenders should be aware that it’s not the responsibility of the Servicemember to tell you that they’re a servicemember for some of the significant rights under the SCRA,” Gemperle said. “So you should be checking the DMDC’s database proactively throughout the collection process, before you repossess, before you dispose, and before you try to collect.”

It is also possible that powersports lenders could be using “hand-me-down forms” based on knowledge of somebody who worked at a motor vehicle lender previously, Gemperle said. “They should look at their forms with fresh eyes to see, ‘Am I complying with the rules applicable to me?’” he said. “You may have more rights than you think as a creditor, but certainly it’s common for someone to use old forms they got from an auto company that they used to work at, I imagine.”

This article was first published in the Powersports Finance Quarterly winter issue.

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