CFPB Upheaval

The Consumer Financial Protection Bureau (CFPB) had a busy first quarter of 2017 defending itself. In Q4 of 2016, the U.S. Court of Appeals for the District of Columbia ruled the CFPB “unconstitutionally structured”. In Q1 of this year, the CFPB began the appeal process and it’s not looking too good for them.

Among those supporting the unconstitutional ruling are:

• The Department of Justice (DOJ)
• 15 state Attorneys General
• American Financial Services Association (AFSA)

The DOJ stated that the ruling should be upheld in its entirety, including the remedy to give President Trump full authority to remove the CFPB’s director at will. In addition, the AFSA submitted a list of other suggested regulatory reforms for the CFPB to the Trump administration.

While the CFPB has been granted a rehearing of the initial case that determined the unconstitutional ruling, the regulatory agency has still had its powers significantly curbed, specifically in the case of Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc.

In this case, the Supreme Court ruled that while disparate impact claims were intended to be included in the Fair Housing Act, plaintiffs seeking to use those claims must prove that a defendant’s policies could cause disparity. Even though this case fell in the real estate industry, the end ruling had significant implications for the CFPB across auto finance, as well.

The majority opinion, written by Justice Kennedy, was worded to discourage plaintiffs from abusing the disparate impact claim, by having them prove the claim in four ways:

1. The plaintiff must identify a specific policy causing the discrimination.
2. The plaintiff’s argument cannot be based solely on statistical evidence.
3. The plaintiff must demonstrate causality as well as correlation between a disputed policy and the alleged discriminatory effect.
4. The plaintiff must prove that a less discriminatory way to meet the legitimate goal of the disputed policy exists.

This ruling places a heavier burden of proof on the CFPB, and has caused them to shift gears away from using disparate impact as an enforcement model.

During this time of upheaval, the CFPB has still worked to maintain current operations in a supervisory capacity. In a recent interview with Subprime News, Hudson Cook’s Lucy Morris, a former deputy enforcement director at the CFPB, stated, “From what I can tell, the CFPB is still going strong on the enforcement and supervision side … it’s not clear to me that there is going to be any immediate changes to the CFPB, either in its leadership or structure. In fact, there’s been a ramping up on the supervision side, in particular in auto finance.”

Regardless of the spotlight on the CFPB, none of what has occurred provides permission to discriminate. And, the CFPB’s new focus on supervision does not mean that lenders and dealers cannot be held liable for discrimination. In fact, you can expect a few states, such as California, New York, and Illinois to escalate enforcement actions.

So, what now? With the CFPB’s heightened focus on auto finance, lenders have been under pressure to demonstrate dealership compliance, putting the onus on dealers to provide compliance documentation that they can then provide the CFPB.

While this might sound overwhelming, it doesn’t have to be. It really all boils down to:

Documenting processes, employee acknowledgements and repercussions

I’ve spoken with a lot of dealers who thought documenting processes would take an investment of thousands of dollars and a legal team. This does not have to be the case. Everyone has their own way of doing things. And, that’s fine as long as it’s compliant.  Start with the checklist on your deal jackets. Define and write down a process behind each item on the list. Each process only needs to have three items: what you do, why you do it and how you do it. Repeat this for every process. Try setting a goal for your managers to complete 2 – 3 processes per week. Before you know it, you’ll be on your way to having this task complete.

Securing a written acknowledgement ensures your employees understand their individual roles within the dealership, and behaviors and consequences associated with them. When it comes to enforcing compliance, think about how you discipline your kids. If you set a consequence or reward for a certain behavior – and didn’t follow it through with action – your kid probably didn’t learn the behavior you were trying to teach. The same principle applies in business. Reinforce the correct behaviors in your dealership. Sticking to the processes and behaviors equals rewards. Failure to follow the correct steps means no rewards – and possible reprimands.

Assigning a person in the dealership to own compliance

Dealers are often told to hire a compliance manager to handle their F&I auditing, compliance training, and ongoing oversight.  And the dealer’s response is a giant eye roll! No one wants to hire a six-figure, non-revenue-generating executive to police compliance. But the great news is that many dealers already have this person on staff!  A competent team member can be trained to take on this role – in addition to their existing duties. For example, someone in the accounting department might be the perfect solution.

Regularly auditing your deal jackets and procedures

A good rule of thumb is to perform a compliance audit at least every quarter, however I recommend doing this every month, paying close attention to the following:

• Is your team regularly using rate deviation logs?
• Are they correctly identifying Red Flags?
• Are they sending out Privacy Notices the way they should?
• What procedures does your dealership have in place to protect consumers’ non-public information?
• Is there a more efficient way of maintaining compliance that can eliminate wasted time and money?

At EFG Companies, we’ve taken steps to ease the compliance burden for dealerships. Our new Common Sense Compliance^® platform is chock-full of easy-to-use tools in plain language. From bite-sized three-minute YouTube videos to podcasts featuring industry experts, we have developed materials that will appeal to everyone in the dealership.

Check out and share our Guide to Common Sense Compliance with your team members. Take a look at our YouTube Videos, and listen to our Compliance Podcast with host, Steve Roennau, the AFIP- and NAF-certified Vice President of Compliance at EFG. contact us to see how we can prepare you for whatever the current political climate throws your way.