Mark Rappaport
President
Simplicity Division
EFG Companies
When the CFPB was created, the Dodd-Frank law gave the CFPB authority to study mandatory, predispute arbitration agreements. Before the CFPB could do anything, they needed to conduct this study, report to Congress, and then propose whatever rule they deemed in the consumer’s best interest.
Last summer, the CFPB proposed a rule that would limit finance companies’ ability to use mandatory predispute arbitration agreements. Under the proposed rule, consumers would not be prohibited from participating in a class-action law suit. The CFPB also put a provision in the proposed rule that would require companies to report individual arbitration awards to the CFPB.
On July 10, 2017, the Consumer Financial Protection Bureau announced its final version of the rule on arbitration. The final rule has almost all of the exact same provisions as the proposed version from last summer. The rule specifically states that while finance companies may use arbitration agreements, they are prohibited from preventing consumers from engaging in a class action law suit.
This week, the U.S. House of Representatives voted 231 – 190 to revoke the rule, using authority under the Congressional Review Act. A similar resolution is on tap to be debated in the Senate in the coming weeks.
While the rule is currently under debate, lenders everywhere await very eagerly for the final outcome. In the auto finance industry, the rule could put both dealers and lenders at a greater risk for class-action law suits.
Arbitration Rule Impact on Auto Finance
If the rule stands, lenders would need to update all their contracts to eliminate any language asking consumers to waive their rights to pursue a class action lawsuit, i.e. the class action waiver. Lenders would also need to work with dealers to verify that the class action waiver language is eliminated from any dealership agreement, and all finance products, such as vehicle service contracts.
In addition, we would begin to see more lenders re-evaluating credit pricing and credit decisioning processes to account for the increased risk of class action litigation. The consumer market widely expected to be hit hardest from this re-evaluation is the subprime market as lenders adjust their pricing models to accommodate both a high-credit-risk tier and the additional risk of potential class action law suits. This could make it that much more difficult for subprime consumers to receive credit, and increase the competition among lenders to find ways to maintain their subprime auto loan volume while increasing credit qualifications and APR.
Action Items for Today
While lenders and dealers contact their state Senate representatives on the resolution to block the arbitration rule, auto finance lenders can take some proactive steps to keep their auto loans competitive in case the arbitration rule goes through.
Strategic lenders are considering avenues outside of the traditional lending benefits commonly used by the industry, like APR. One option that benefits lenders, dealers and consumers is the use of consumer protection products, such as a vehicle service contract (VSC).
Finance products like a VSC protect consumers from the negative financial repercussions if their vehicles experience costly mechanical breakdowns. This helps alleviate the credit-risk portion of the credit qualification algorithm, helping lenders stay relevant in all credit tiers.
In addition, loans with a complimentary VSC component have the potential to maximize dealership profitability through the sale of upgrades, further enhancing a lender’s relevancy with both consumers and dealers.
Thus, lenders offering products like a VSC have a significant advantage to increase market share and reduce risk.
With more than 40 years of experience in innovating compelling consumer protection products, EFG Companies knows how to strategically place the right product mix with your loan to achieve greater loan volumes while remaining compliant. Contact us to find out how today!