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Compliance

Data Security Compliance in 2022

According to the nonprofit Identity Theft Resource Center, more than half of all small businesses in the US experienced at least one security or data breach in 2021, a 17 percent increase from 2020, at an average expense of $250,000 to $500,000 per incident. As automotive lenders and dealers increase their use of digital sales and technology to house personal and confidential information, data breach incidents have a direct impact on both revenue and regulatory compliance.

The Safeguards Rule

The Federal Trade Commission issued a final rule that amends the Safeguards Rule (the “Rule”) that went into effect January 10, 2022. The Rule places requirements on “financial institutions” regarding information security programs and the use of customer information. The amended rule notably expands the “financial institution” definition, which is now applicable to debt collectors and certain debt buyers, among others. Many businesses are now finding themselves subject to the Rule for the first time.

Update: Prior to the revisions, the Rule required covered entities to perform a risk assessment and then develop and implement safeguards to address identified risks. Now, risk assessments must include specific criteria and be in writing.

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Compliance EFG Companies Government Regulations

Targeting GAP

If you look at the flurry of GAP-related state-level legislative bills proposed so far in 2022, you could surmise that this consumer protection tool is under fire. According to American Financial Services Association Senior Vice President Danielle Arlowe, the organization has counted 30 pieces of legislation in 2022, compared to 14 bills between 2019 – 2021. These new legislative efforts join existing statutes on the books in 11 states which require the lender to refund a consumer who cancels financed GAP coverage.

At the federal level, officials have again raised the issue that bundled GAP coverage renders the auto loan to be under the purview of the Military Lending Act (MLA). The Consumer Financial Protection Bureau, Department of Defense, and Department of Justice recently argued in the class-action lawsuit Davidson vs. United Auto Credit that loans containing a nonexempt product such as GAP would not be exempt from MLA.

These developments put retail automotive lenders in a difficult position. For example, the California Assembly Bill AB 2311 requires that customers be notified that GAP insurance is an option and requires that lenders automatically refund any GAP balances if the loan is paid early. Other components of the bill stipulate a cap on the price of the GAP insurance as well as banning its sale under certain criteria related to the amount financed. Arlowe believes the industry is at a turning point with GAP insurance and the relationship between creditor, dealer, and administrator.

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Economy

The Fed’s Impact on Auto Lending

2022 has kicked off with some very mixed signals. While corporate earnings and retail auto sales closed out the 2021 fiscal year with strong numbers, the stock market has been on a roller coaster ride, and labor and supply chain issues continue to stifle growth. Adding to the confounding picture is the rate of inflation. At its current rate – 7.04 percent – most economists and investors do not expect inflation to return to anything like the double-digit levels that prevailed in the early 1980s. However, the rate of inflation and the contributing indices will still have an impact on auto lending in 2022.

Let’s look a little deeper into the details. The U.S. economy grew 1.7 percent in the fourth quarter, a 6.9 percent annual rate and its largest one-year jump since 1984. While impressive, the expansion reflects the depth of the damage inflicted by the pandemic in 2020/2021.

From a consumer standpoint, the rate of inflation is reflected in both the consumer price index and the personal consumption expenditure index — each climbed to a 39-year high last year. The cost of goods and consumers’ consumption of those goods has a direct correlation with inflation and purchasing power. To put it simply, you would have to spend 7.04 percent more money in 2022 than in 2021 for the same item.

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