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Compliance

Here to Stay

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Recently, the Supreme Court reversed a decision by a federal appeals court in Louisiana, rejecting a challenge concerning the constitutionality of the funding structure of the Consumer Financial Protection Bureau (CFPB). The case originated from a challenge by industry groups to a “payday lending” rule issued by the CFPB in 2017. By approving the CFPB’s funding from the Federal Reserve, rather than through the congressional appropriations process, the ruling protects the agency from future funding threats.

Reinvigorated by the Supreme Court’s decision, the independent agency, which is responsible for enforcing consumer finance laws, has shown signs that it intends to move forward with all activities—rulemaking, investigation, and enforcement—at full speed. Agree or disagree with their role and existence, the CFPB is here to stay and credit union leaders should make sure they are in full compliance.

In a recent interview with NPR, CFPB director Rohit Chopra provided some insight into the agency’s mission, approach to consumer protection and fraud investigation. Born out of the Great Recession, the CFPB receives over 200,000 consumer complaints each month and works to address financial scams and fraud. In fact, the agency plans to issue a delayed auto lending report, outlining the results of its inquiry into the portfolios of nine auto lenders. While the specific details regarding the content of the report are not yet available, anticipated topics will include affordability, practices in loan servicing and collections, as well as competition among subprime lenders.

Earlier in the year, the agency sent out a mandatory request for auto financing data. The request was two-fold:

  • Comprehensive data from large lenders. Lenders originating over 20,000 auto loans in the previous year will submit comprehensive loan-level data, mirroring the original order’s scope.
  • Limited data from smaller lenders. Lenders with 500 to 20,000 loan originations will report on specific metrics like the number of vehicles repossessed and the number of loan modifications.

With an estimated 4,000 auto finance companies who operate in the subprime space and offer vehicle add-on products, the CFPB is focused on rising auto prices and the impact it has had on borrowers’ loan amounts, monthly payment amounts, delinquencies and repossessions. These types of data gathering actions are often a precursor to formal rulemaking. While this specific request is focused on a certain type of auto lender, all auto lenders should pay heed.

Compliance violations can be costly

Let’s take a quick review of the key federal compliance regulations impacting credit unions and their auto loan portfolios.

  • FTC CARS Rule – while the Federal Trade Commission’s Combating Auto Retail Scams (CARS) Rule is targeted primarily at auto dealers, lenders should be well informed about the regulation. Effective July 30, 2024, the rule prohibits misrepresentation about material information, requiring dealers to clearly disclose the offering price, excluding only government charges. It also makes it unlawful for dealers to charge consumers for add-ons that don’t provide benefits and requires dealers to obtain consumers’ express, informed consent for certain charges.
  • NCUA Fair Lending Examinations – the National Credit Union Administration (NCUA) will perform fair lending examinations this year for federal credit unions meeting specific conditions. Even if you are a smaller credit union or fall outside the indirect auto loans to total loans ratio, adhering to the general framework is good business.
  • Truth in Lending and Consumer Leasing Rules – based on the dollar thresholds issued by the Federal Reserve Board and the CFPB, consumer credit transactions or consumer leases of $65,000 or less are subject to Regulation Z (Truth in Lending) and Regulation M (Consumer Leasing) requirements. Given the high cost of both new and used vehicles these days, it’s likely that most auto loans will fall under these regulations.

In addition to these federal compliance regulations, it’s likely that your state and local entities have additional rules that must be followed.

Now, let’s consider the cost of being out of compliance. At this point in the year, your credit union has likely had to provision more resources to loan loss reserves to cover deteriorating consumer credit quality and at-risk assets. While most of those declines are due largely to credit card delinquencies, many credit unions are beginning to see defaults on auto loans as consumers face unemployment, rising inflation and depleted savings.

With reduced reserves, a smaller credit union might look for ways to trim other expenses such as compliance-related training, audits, exam preparation, etc. Don’t do it! Trust me – the cost of being involved in an expensive compliance audit, legal fees, potential negative judgements – and the risk to your reputation – are not worth the risk.