Steve Roennau
Vice President
Compliance
EFG Companies
Compliance has been a hot topic going on three years in the auto finance space. Lenders, such as Ally Financial, Toyota Motor Credit, and the American Honda Finance Corporation, have reached resolutions with the CFPB based upon dealership practices. We’ve all known that the CFPB has been trying to regulate dealerships through lenders. With this heightened sensitivity to compliance, other regulatory bodies that have jurisdiction over automotive dealerships, such as the FTC, are now turning their gaze to dealership practices.
While everyone is frustrated with the ambiguity of the CFPB, there are some well-defined actions dealerships can take to ensure compliance with entities like the FTC. With this in mind, now is the time for dealers to brush up on their F&I practices to ensure compliance, starting with this simple question: When a dealership sells a car and secures financing, who is the creditor at the time of sale?
If you said the dealer is the creditor, you would be correct. However, many F&I managers often think that the lender is the creditor. This mindset opens the door for non-compliant behavior as the F&I manager could think that their actions have fewer repercussions. As a dealer who knows about the legal repercussions, wouldn’t you rather have an informed staff that takes accountability for their actions?
That accountability starts with training. In a high-turnover environment it can be tempting to forgo classroom training, but in the long-run, making a small investment in training your team on compliance now can save you thousands in legal fees. In addition, giving everyone in the dealership a baseline understanding of the regulations surrounding your industry can help ensure compliance through all departments, from sales to accounting.
So what has the CFPB’s proverbial knickers in a twist? Disparate Impact. But, before we go into that we need a quick history lesson.
Compliance and Regulation B
Because dealerships are considered a creditor at the time of sale, their F&I transactions fall under Regulation B, which was created to prevent discrimination against applicants for consumer credit. Many people aren’t familiar with Regulation B, but they are familiar with the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA), which fall under Regulation B.
The ECOA, passed in 1974, provides instructions on how creditors can evaluate creditworthiness to eliminate discrimination. The ECOA regulates what and how information can be used to evaluate credit.
The FCRA, passed in 1970, works hand-in-hand with the ECOA, regulating the notices that must be given to consumers about the credit decision. Under the FCRA, once an F&I manager runs a credit report, they are required to provide a Risk-Based Pricing/Credit Disclosure, designed to educate the consumer on how their credit score affects their ability to borrow at attractive terms. To help dealers stay in compliance, NADA created a standard form for this purpose called the Credit Exception Notice, which should be given to all customers to disclose their credit score and the options available to them.
Lastly, dealerships are required to give every customer who applies for credit an Exception Notice. If two customers apply jointly for credit, each applicant should be provided a separate notice.
What do all these notices have to do with discrimination? The idea is to create visibility into a credit-decision for consumers. So, if a consumer has a good credit score, which is disclosed to them by the dealership, they can expect a rate that reflects that credit score – therefore it theoretically should not be possible to discriminate.
This is where the CFPB comes in. According to them, it’s possible for dealers to “unknowingly” violate the ECOA, creating a loophole for the industry to exploit. They call this disparate impact, or practices that seem neutral but result in negative impact to customers in a protected class. The CFPB has various, unproven ways to determine when this occurs. While the CFPB does not have jurisdiction over dealers for Disparate Impact, it is raising the question of whether dealers are knowingly acting in a biased or discriminatory manner, bringing in the FTC.
So, what happens if your team knowingly violates the ECOA?
For each “knowing” violation, your dealership could accrue civil penalties up to $3,500 per violation. Then a Federal Lawsuit is filed, imposing fines of up to $16,000 for each future violation. In addition, your dealership could be liable for state lawsuit claims, including class action claims under state ‘unfair and deceptive acts or practices (UDAP statuses), which permit the recovery of actual and punitive damages, including attorney’s fees and costs.
As dealers can expect more scrutiny in this area, take the time now to ensure your team is operating in the most compliant manner possible. At EFG Companies, our AFIP-certified trainers can equip your team with the skills and processes to ensure compliance while maintaining dealership profitability. Empower your team to take personal accountability for your dealership’s success. Contact us today.