Tag Archive | "Consumer Financial Protection Bureau"

The Bigger Compliance Puzzle


When it comes to compliance, most of the talk the last several months has centered on the Consumer Financial Protection Bureau (CFPB) and the guidance it issued. The guidance does not directly impact dealers – but it does affect the lenders dealers rely on, and it has certainly changed the way many lenders look at the contracts sent to them for approval.

However the CFPB, and the changes being slowly enacted because of it, aren’t the only regulations dealers need to be aware of. An important part of any agents’ value-added services is to make sure dealers are not neglecting all the other aspects of compliance for which they will be held accountable.

First, and most importantly in many ways, is to make sure there is someone at the dealership itself who has taken ownership of compliance in all aspects of the dealership. Before even identifying any holes in the compliance strategy, there first has to be someone who is responsible for them. “Every dealer should have its own compliance officer,” said Terry O’Loughlin, director of compliance, Integrated Document Solutions, Reynolds and Reynolds. “Agents should encourage the dealer to have someone who is appointed to that position. That person should have responsibility to oversee all compliance efforts.”

He went on to note, “There should be a business plan just for compliance – something a dealer can do cheaply if they appoint someone. It could be their controller, it could be the general manager, or it could be someone else in the office, but someone has to be charged with that responsibility.”

While it is still not a mainstream concept, many dealers are starting to take that advice to heart. “I can tell you that, at least in my experience so far, a good number of dealers are beginning to stir,” said Tom Hudson, chairman, Hudson Cook LLP. “For example, I visited with a large dealership in North Carolina recently; they had commissioned a compliance expert to compile a handbook, when in the past they had never had one. They also appointed their own compliance manager, which is something we’re seeing a little more frequently as well.”

“The dealer needs to know who should have compliance knowledge, then make sure they have it,” said Dave Robertson, executive director, AFIP. He believes, however, that the knowledge shouldn’t be concentrated in one person, but that everyone who deals with contracts needs to be educated. “If people in the dealership are required to do their job relative to regulations – such as the people who write contracts – they must be knowledgeable about them. They can’t be required to follow the rules if they don’t know them.”

While he believes it is important for everyone to be aware of the rules, he does, however, advocate a system of audits to ensure they are following through – rules aren’t any use if they are not being followed. “The dealer must have an audit program where there is a systematic, organized audit,” Robertson said. “They have to make sure the rules are actually being put into practice. There needs to be a regular audit of F&I and deal jackets to make sure everything the staff have learned is, in fact, being followed.”

Once a dealer has appointed their compliance manager, and given them the authority, they need to do audits and, most importantly, follow up with the appropriate consequences when violations are found. So, what should the audit focus on?

O’Loughlin said that the place to start and his first very strong recommendation would be to have every dealer review their Safe-Guards Rule and Red Flags Rule programs, as well as review and update privacy policies. Dealers also need to ensure they are in compliance with the updated Consumer Protection Act which, last October, changed how and when consumers can be contacted by businesses. “If dealers are contacting their customer base, they need to make sure they have an updated authorization agreement so they can send e-mails, call them on the phone, text them, send them faxes or initiate any kind of communication – electronic or otherwise,” he said. “My suspicion is that many dealers haven’t taken this step. There have been cases where dealers called a customer on their cell phones and incurred costs to that customer – and anyone who does that is liable for those costs. This is something dealers want to reevaluate if they have any ongoing reminder campaigns.”

“I had one dealer come to me looking for a deal jacket review,” said Hudson. “I said happy to do it, but what about your underwriting manual, collections manual, red flags manual, etc.? He said ‘we don’t have that’. It is a federal requirement – dealers have to do that, but a lot of dealers are struggling putting together the internal compliance arrangements they need. Big dealerships have been at it for a while, but as you scale down in size, compliance efforts are more wanting. The smallest dealerships still have a long way to go.”

Robertson advised that one of the first places dealers should start when revamping their compliance policy is to seek training. The government, he said, has several comprehensive training programs on specific topics, and then there are a variety of third party programs, like his own AFIP certification for F&I managers. “That is a big component of a dealer’s program,” he stressed again. “People who need the knowledge, must have the knowledge.”

Hudson agreed, noting that if he were a small dealer, there are a few resources he would be pursuing right now. “Go to your state association and lean hard on the director,” he said. “Tell them, look you need to be developing this stuff for all of us, to spread the cost over all the smaller dealerships. They need to develop materials all the small dealers can adapt, and I haven’t seen any sign of that yet.”

Another form O’Loughlin believes dealers should re-evaluate is their arbitration agreements. He noted that the government recently convened a hearing on arbitration clauses, and part of the mandate for the panel is to look at how those clauses apply to consumers. “The expectation is that they’re going to deny the application of arbitration in the future,” he noted. “They haven’t done it yet, but in the meantime, there have been a series of cases that have changed arbitration agreements to be more balanced between the dealer and consumer. If your dealers haven’t looked at them in a while, they should do so now. And they should follow the federal Arbitration Act, rather than state law, is my recommendation.”

O’Loughlin’s final advice? “Start the new year by taking a look at all dealer documentation. Make sure everything is all marked with a current effective date, and that the most current groups of forms are in the library, so F&I managers aren’t using something out of date. It’s not a happy task, but starting on a new year, some forms do expire.”

Hudson wrapped up by quoting O’Loughlin. “Terry has an interesting concept that I agree with – we have been on panels together – and he is fond of saying that anything worth doing is worth doing poorly. That always makes everyone sit up. Dealers all have the obligation to put together privacy manuals, and things like that. The dealer who attempts to do something like that themselves, who sits down, studies the rules, and creates a policy that is homemade, and not bought from a professional – the dealer who makes a stab at doing something – is better off than the dealer who didn’t do anything at all. If the compliance police come in, and ask for a manual on privacy, the dealer who has one that’s not great because they did it themselves is way ahead of the dealer who didn’t do anything. Even a poorly done compliance system is better than none at all – effort counts, it really does.”

For Robertson, it all comes down to treating customers fairly and honestly, and then compliance just becomes a natural fit. “The dealer has to say, can I make a living treating people fairly and doing it right?” he noted. “And if they can’t, there’s a fatal flaw in the business plan. I’ve been in the business for 40 years, and I’ve had them tell me you can’t sell cars without screening, but they have done it wrong for so long, they don’t know how to do it right. For the dealer, though, it’s crucial that if there is ever an opportunity, always do the right thing. I’ve seen that in 50% of lawsuits, if dealer had handled it properly the first time, it wouldn’t have gotten to that point. I don’t want anyone to have something of mine they don’t want to have – if I sold you something you don’t want you’ll do whatever it takes to make sure you don’t keep it. But if the dealer did the right thing at the first opportunity, it wouldn’t have been a problem.”

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Open Dealer Exchange: Digital Files Reduce Noncompliance Risk


Tampa Bay, Fla. — To alleviate compliance issues associated with the Consumer Financial Protection Bureau (CFPB)’s targeting of the auto finance sector, Open Dealer Exchange (ODE) issued a press release encouraging finance sources to consider using electronic methods to standardize the industry.

ODE has streamlined the auto-buying process with its Digital Deal, which company officials said can assist in adhering to the CFPB’s call for “openness and transparency.” Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB has the authority to take action against lenders engaging in unfair, deceptive, or abusive practices. Noncompliance with CFPB rules could result in millions of dollars in fines and penalties, even lawsuits.

As auto lenders are subject to the CFPB investigative and enforcement authority, ODE officials said the Digital Deal provides an extensive level of security not available with paper documents. It provides lenders with the ability to flag and see possible discriminatory selling practices unwittingly committed due to human error — in addition to eliminating errors in data entry, missing signatures, missing documents and contract mistakes to name a few.

Steve Luyckx, ODE general manager, said that while extensive paperwork has been a mainstay of car purchases, modern technology has forged a new trail. He said he anticipates a time when traditional filing cabinets are superseded by cloud files.

“ODE is a vanguard for consumer protection in the auto industry because it does away with the high probability of human error — which consequently revolutionizes the [car buying] experience, eliminating two-thirds of the added time in the sales cycle and providing data-security vigilance,” Luyckx said. “Automated documents not only help lenders reduce the risk of noncompliance, but they are also more easily protected from fraud, identity thieves and natural disasters than their paper counterparts. The security can’t be argued.”

According to Luyckx, lenders should consider making internal operations 100 percent paperless. If noncompliance is suspected, a CFPB investigation will likely be broad-ranging, covering every aspect of lending operations, from advertising and marketing to loan underwriting and pricing to servicing, collection, repossession and credit reporting. Condensing all relevant information and making it easily accessible could go a long way in securing a positive outcome if an investigation is initiated, he claimed.

ODE consists of two separate divisions: Lender Services and Provider Exchange Network (PEN). ODE’s Lender Services division focuses on the relationship between the automotive lender and the dealership’s main computer system, the dealer management system (DMS).

ODE enables lenders to become more integrated into a dealer’s workflow throughout the entire vehicle purchase experience, including data validation services, electronic forms, eVaulting and funding packet transfers.

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Compliance, Technology to Headline Vehicle Finance Conference


Washington — Thought leaders from across the vehicle finance industry will share their expertise at the American Financial Services Association (AFSA)’s 18th Annual Vehicle Finance Conference and Exposition, scheduled for Jan. 22-24, 2014, at the Sheraton in New Orleans. This year’s theme is “Navigating the New Normal.”

The conference will kick off with a macro-level examination of industry trends by John Gray, president, of Experian Automotive, Michael Buckingham, senior director of automotive finance for J.D. Power & Associates and Sarah Watt House, economist for Wells Fargo Securities LLC. Experts from research, strategy and vehicle finance firms will also delve into technology innovations, how to connect with younger generations, relationship management and risk management.

Bob Lutz, retired vice chairman of General Motors, will be at the conference to share key lessons he learned over his 47-year career. He will also identify best practices during his keynote address.

The conference will feature Patrice Ficklin, assistant director for the Consumer Financial Protection Bureau (CFPB)’s Office of Fair Lending. She will discuss the bureau’s approach to regulation and compliance based on the fair lending bulletin it issued in March 2013.

The conference will also feature a candid panel discussion among vehicle finance CEOs. Feature participants will include Daniel Berce, president and CEO of GM Financial, Thasunda Brown Duckett, CEO of Chase Auto Finance and Mike Groff, president and CEO of Toyota Financial Services. In addition, four leaders from the National Automobile Dealers Association (NADA) will share the dealer perspective in the “Top Issues for Dealers in 2014” session.

The conference will close with a look forward from Sheryl Connelly, Global Consumer Trends and Futuring Manager for Ford Motor Co. She will discuss probable shifts in consumer values, attitudes and behaviors.

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Ally Reaches $98M Settlement with DOJ, CFPB for Lending Discrimination


Detroit — The Department of Justice (DOJ) and the Consumer Financial Protection Bureau (CFPB) announced Friday the federal government’s largest auto loan discrimination settlement in history to resolve allegations that Detroit-based Ally Financial Inc. and Ally Bank have engaged in an ongoing nationwide pattern or practice of discrimination against African-American, Hispanic and Asian/Pacific Islander borrowers in their auto lending since April 1, 2011.

The agreement is the first joint fair lending enforcement action by the department and CFPB. With this agreement, eight of the top 10 largest fair lending settlements in the department’s history have been under U.S. Attorney General Eric Holder’s leadership.

The settlement provides $80 million in compensation for victims of past discrimination by one of the nation’s largest auto lenders, and requires Ally to pay $18 million to the CFPB’s Civil Penalty Fund. Ally also must refund discriminatory overcharges to borrowers for the next three years unless it significantly reduces disparities in unjustified interest rate markups. This system will create a strong financial incentive to eliminate discriminatory overcharges.

“With this largest-ever settlement in an auto loan discrimination case, we are taking a firm stand against discrimination in a critical lending market,” said Holder. “By requiring Ally to provide refunds to those who are overcharged because of their race or national origin, this agreement will ensure relief for Americans who are victimized. It will enable the Justice Department and the CFPB to work closely with Ally and others to prevent discriminatory practices in the future. And it will reinforce our determination to respond aggressively to discrimination in America’s lending markets — wherever it is found.”

The settlement resolves claims by the department and the CFPB that Ally discriminated by charging approximately 235,000 African-American, Hispanic and Asian/Pacific Islander borrowers higher interest rates than non-Hispanic white borrowers. The agencies claim that Ally charged borrowers higher interest rates because of their race or national origin, and not because of the borrowers’ creditworthiness or other objective criteria related to borrower risk.

The average victim paid between $200 and $300 extra during the term of the loan. The Equal Credit Opportunity Act (ECOA) prohibits such discrimination in all forms of lending, including auto lending. Ally’s settlement with the DOJ, which is subject to court approval, was filed in the U.S. District Court for the Eastern District of Michigan in conjunction with the DOJ’s complaint. Ally resolved the CFPB’s claims by entering into a public administrative settlement.

“Discrimination is a serious issue across every consumer credit market,” said CFPB Director Richard Cordray. “We are returning $80 million to hard-working consumers who paid more for their cars or trucks based on their race or national origin. We look forward to working closely with the Justice Department and Ally to make sure this serious issue will be addressed appropriately in the years ahead as well.”

Rather than taking applications directly from consumers, Ally makes most of its loans through over 12,000 car dealers nationwide who help their customers pay for their new or used car by submitting their loan application to Ally. Ally’s business practice, like most other major auto lenders, allows car dealers discretion to vary a loan’s interest rate from the price Ally initially sets based on the borrower’s objective credit-related factors.

Dealers receive greater payments from Ally on loans that include a higher interest rate markup. The coordinated investigations by the department and the CFPB that preceded the settlement determined this system of subjective and unguided pricing discretion directly results in Ally’s qualified African-American, Hispanic and Asian/Pacific Islander borrowers paying more than qualified non-Hispanic white borrowers.

The agencies claim that Ally fails to adequately monitor its interest rate markups for discrimination or require dealers to document their markup decisions. Ally’s first effort to monitor for discrimination in interest rate markups began only earlier this year after it learned of the CFPB’s preliminary findings of discrimination, and resulted in only two dealers being sanctioned and subjected to nothing more than voluntary training.

“Ally does not make loans directly to consumers, but rather, it purchases installment contracts originated by auto dealers,” Ally said in a statement. “Ally’s long-time process for evaluating auto installment contracts from dealers does not include information on a consumer’s race or ethnicity. Ally assesses these contracts and sets pricing based solely on a consumer’s creditworthiness and contract characteristics.

“The CFPB and DOJ assert that pricing disparity has occurred for certain protected classes of consumers as a result of the auto dealer’s ability to mark-up Ally’s rate at which it buys a retail installment contract,” the statement continued. “The CFPB and DOJ also assert that Ally has responsibility for the conduct of its dealer customers and allege that Ally has not sufficiently monitored the pricing practices of its dealer customers.

“Ally does not engage in or condone violations of law or discriminatory practices, and based on the company’s analysis of its business, it does not believe that there is measurable discrimination by auto dealers.”

The settlement represents the first resolution of the department’s joint effort with the CFPB to address discriminatory auto lending practices. The 2010 Dodd-Frank Act gave both the DOJ and the CFPB authority to take action against large banks like Ally for violating the ECOA. Although the department has filed previously filed lawsuits alleging violations of ECOA involving car loans, today is the first ECOA lawsuit against an auto lender that operates nationwide.

“This settlement provides relief to those who were harmed by this discrimination,” said U.S. Attorney for the Eastern District of Michigan Barbara McQuade. “Lenders must consider an individual borrower’s credit worthiness, based on income, savings, credit history and other objective factors when determining the terms of a loan. This settlement will ensure that in the future, borrowers will be able to obtain loans from Ally based on their own credit history free from discrimination based on race or national origin.”

In addition to the $98 million in payments for its past conduct and requirement to refund future discriminatory charges, the settlement requires Ally to improve its monitoring and compliance systems. The settlement allows Ally to experiment with different approaches toward lessening discrimination and requires it to regularly report to the department and the CFPB on the results of its efforts as well as discuss potential ways to improve results.

The settlement provides for an independent administrator to locate victims and distribute payments of compensation at no cost to borrowers whom the department and the CFPB identify as victims of Ally’s discrimination. The department and the CFPB will make a public announcement and post information on their websites once more details about the compensation process become available. Borrowers who are eligible for compensation from the settlement will be contacted by the administrator, and do not need to contact the department or the CFPB at this time.

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NADA Issues Statement on Joint CFPB/DOJ Enforcement Announcement


McLean, Va. – In response to the enforcement announcement on Dec. 20 by the Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ), the National Automobile Dealers Association (NADA) issued the following statement:

“NADA fully supports our nation’s fair lending laws and the commitment of federal agencies to eliminate discrimination in the marketplace.

“Regrettably, in today’s announced enforcement action, the CFPB continues to withhold the secret methodology it uses to determine whether unintentional discrimination has occurred. The public still does not know whether the bureau takes into account legitimate factors that can affect finance rates – for example, a dealer’s ability, regardless of race, to lower the interest rate to meet a customer’s monthly budget. The CFPB’s failure to reveal its approach is particularly troubling given the repeated and recent requests from bi-partisan members of both houses of Congress for this essential information.

“We are encouraged that today’s announcement does not mandate any form of a dealer flat fee compensation system. A flat fee system would eliminate consumers’ right to save money by negotiating lower interest rates with their local car dealers.”

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CFPB Releases Preliminary Arbitration Research


Washington — The Consumer Financial Protection Bureau (CFPB) released preliminary research on the use of arbitration clauses in connection with consumer financial products and services. The study found that more than 90 percent of the arbitration clauses examined by the bureau explicitly bar consumers from participating in class arbitrations.

“If you were to look in your wallet right now, the chances are high that one or more of your credit cards, debit cards or prepaid cards would be subject to a pre-dispute arbitration clause,” said CFPB Director Richard Cordray during a field hearing on arbitration in Dallas today.

The bureau was created with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Under the act, the CFPB is required to study the use of pre-dispute arbitration contract provisions in connection with the offering of consumer financial products or services, and to provide a report to Congress. The preliminary research released Wednesday is part of an ongoing study.

Consumer advocates have long argued that arbitration clauses hurt consumers, as arbitrators often side with the company or service provider during a dispute. The CFPB’s research found that arbitration clauses were also significantly more daunting to consumers than the credit card agreements associated with them.

“Regardless of who was using them, arbitration clauses in credit card agreements were almost always more complex and written at a more demanding grade level of readability than the other parts of the contracts we studied,” Cordray noted. “In fact, in every case, the rest of the credit card contract scored better in terms of readability than did its arbitration clause considered alone.”

The research concluded that very few consumers use arbitration at all, at least when compared to the number of consumers involved in lawsuits and class actions. In the second phase of the bureau’s study, “we will look to see what happens to arbitration filings and endeavor to compare what we see happening in arbitration to what we see happening in litigation, including class litigation,” Cordray added.

Earlier this year, Tom Hudson predicted that the CFPB would ultimately eliminate arbitration agreements from auto transactions as a result of its review of such agreements. Like other auto industry members, he suggested that the CFPB’s first move would be to eliminate arbitration agreements from auto transactions. Instead, the bureau targeted rate markups first.

“The smart money says we’ll see an across-the-board prohibition of arbitration agreements in connection with consumer financial services,” Hudson wrote in February.

The research released this week did not touch on auto finance, instead focusing on credit cards and bank cards.

“Another thing I noted was that the bureau’s listing of the various anti-consumer features, or lack of pro-consumer features, of the arbitration agreements that it had found in these other product areas will make the arbitration provisions in common use in the vehicle finance market look very consumer-friendly by comparison,” Hudson said.

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