A lot has happened with the Consumer Financial Protection Bureau (CFPB) in the past year. From large settlements to court rulings, the CFPB brought itself under the spotlight.
Let’s start at about this time last year. The House of Representatives passed H.R. 1737, the “Reforming CFPB Indirect Auto Financing Guidance Act” with a strikingly majority vote of 332-92. The piece of legislation would direct the CFPB to amend how it issues guidance to indirect auto lenders by:
- providing a public notice and comment period before issuing the guidance in final form;
- making publicly available all information relied on by the CFPB, while also redacting any information exempt from disclosure under the Freedom of Information Act;
- consulting with the Board of Governors of the Federal Reserve System, the Federal Trade Commission, and the Department of Justice; and,
- study the costs and impacts of the guidance to consumers, as well as women-owned and minority-owned small businesses.
In addition, the bill would nullify the CFPB’s “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act Bulletin”. This bulletin instructed lenders to either eliminate dealer pricing discretion, or constrain dealer pricing discretion by monitoring dealership practices and using “controls” to force dealerships to adjust their practices.
With the bill not yet ratified, the CFPB went on to investigate Toyota Motor Credit Corp (TMCC) and in February, 2016, and forced TMCC to join the growing list of lenders to cap dealer markup at 125 basis points for loan terms up to 60 months, and 100 basis points for loan terms longer than 60 months. After this last large settlement, the CFPB turned their attention to payday loans and title loans, and later, credit unions.
Flash forward to September, 2016, when the CFPB started feeling the pressure shortly after announcing a $185 million settlement with Wells Fargo for creating fake accounts. It came out that Wells Fargo’s practices were known and reported about by the L.A. Times nearly three years prior to the investigation. This called into question the CFPB’s methods and investigation timelines.
This was quickly followed by an October surprise. The U.S. Court of Appeals for the District of Columbia Circuit ruled against the CFPB in a case involving a finance company in the mortgage space, rescinding a $109 million enforcement action and calling the CFPB “unconstitutionally structured.” In the ruling, Judge Brett Kavanaugh described the CFPB’s structure as “novel” with a single director who only answers to the President. Kavanaugh wrote that the structure “poses a far greater risk of arbitrary decision making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency.”
And, now we move to the Senate Bill S. 2663, which represents the next phase in last year’s House Bill H.R. 1737. The industry is eagerly waiting to see if the Senate will ratify the bill or send it back to the House of Representatives for revisions. With the next general session planned for January, 2017, we still have some time to wait.
However, the CFPB is not waiting. In fact, they recently began using more tried-and-true federal investigation methods, including mystery shopping. Mystery shoppers pose as consumers and apply for loans to test the lenders for discrimination. This has been used by the Federal Trade Commission and Department of Justice for decades as a valuable tool to determine compliance. Going forward, we can expect the CFPB to broaden their compliance tool kit with more methods that have been approved and well utilized by other entities.
As a lender, what can you do? Essentially stay the course! Ensure all your processes are documented. Utilize a compliance officer that has been trained under programs such as the National Auto Finance Association. Train your employees on your compliance procedures and have processes in place to determine individual compliance. Remember, consistency is key. Maintain processes that make compliance part of the routine in your institution and conduct random compliance audits to ensure all processes are followed consistently by everyone. This should be done on at least a monthly basis. Lastly, focus on customer service. You’ll tend to find the institutions that have the best customer service tend to also maintain strict compliance. The two practices simply go hand-in hand.
A good tactic is to treat every customer as if they are a mystery shopper by providing best service possible to every person who goes to your website, uses your mobile app, or walks through your doors. Work equally as hard for each customer you see to get them the best deal for their financial situation.
Remember, if you have documented process, work them, and audit them, you should have nothing to worry about. The further along the road to compliance you can get the better prepared you will be in the event of an audit. The CFPB isn’t waiting for legislative changes to take effect and neither should you.