Categories
Compliance

Dealer Markup is Back in Play

Jason Hash
Contributing Author:
Jason Hash
Training Manager
EFG Companies

The 2013 Consumer Financial Protection Bureau (CFPB) regulation which held financial institutions responsible for potential discriminatory lending practices at dealerships was repealed by the President on Monday. The original 2013 CFPB bulletin was intended to address the potential for racial discrimination at dealerships by encouraging lenders to cap interest rate markup at 150 basis points, as opposed to the industry standard of 250 basis points. This was all based on disparate impact theory, which refers to practices that adversely affect protected classes of individuals, even though employer rules and practices are meant to be neutral. The CFPB used this theory to make the argument that dealer markup practices could result in unintentional discrimination during the credit process, and must therefore be reined in.

During its five-year existence, the directive prompted the implementation of flat fees as well as millions of dollars in fines charged to financial groups in the form of consent decrees. The root of the CFPB guidance took issue with the practice of dealers placing the buyer into a higher-interest deal than the lender had originally approved, and then the dealership collects the difference.

Thanks to some fancy footwork by Senator Pat Toomey (R-Pa.), who asked the Government Accountability Office (GAO) to review the CFPB’s guidance, and Senator Jerry Moran (R-Ks) for putting S.J. 57 onto the floor for a vote, the regulation, and its guidance, has ceased to exist. And, if you ask some, all is now right with the world.

Groups on many sides of the situation took issue with the ruling. Auto industry trade groups argued that the bureau used its guidance to indirectly regulate the activities of dealers, which are mostly exempt from the bureau’s oversight under the Dodd-Frank Act. In addition, they argued that the guidance would ironically have an adverse effect on the groups of people it was trying to protect by limiting a dealer’s ability to secure competitive funding. Banking and financial groups reaffirmed their commitment to fair lending practices, saying they have been regulated for years and were not to blame for dealer actions that may or may not result in unintentional discrimination.

Categories
Compliance

CFPB in 2017

Steve Roennau Vice President Compliance EFG Companies
Contributing Author:
Steve Roennau
Vice President
Compliance
EFG Companies

In January of this year, President Trump issued an Executive Order which required agencies like the Consumer Financial Protection Bureau (CFPB) to re-address how they issue new regulations. The order required agencies to eliminate two regulations each time they issue a new one. Because of this, we saw very little activity coming out of the bureau on issuing new regulations.

In addition, criticism of the CFPB reached a tipping point, forcing politicians to take a hard look at the powers granted the bureau. A good example of this is the Arbitration Rule that the CFPB tried to force through Congress in the third quarter. While the rule initially passed Congress, it was nullified by President Trump in November.

The latest news surrounding the bureau focuses on the change of leadership, as Richard Cordray stepped down from the position of Director. With the CFPB embroiled in internal politics, we can expect another year of limited activity. However, it is no longer a fiscally sound or viable idea to return to the auto lending practices of yesterday.

Regardless of any legislative changes, compliance will continue to be in the spotlight in the coming years. Whether or not the CFPB functions under more strict parameters, we can expect a heightened level of oversight from the Department of Justice, the Federal Trade Commission, and consumer advocacy groups.

For this reason, it’s important that you foster a collaborative compliance platform for your dealer partners. Ask yourself:

When discussing compliance with a dealer, do I ask about their compliance goals and best practices? Or, is the discussion more of a lecture on how I expect dealers to comply with my compliance goals?

The path forward in compliance is by cultivating a dialogue with dealers on how to work together towards shared compliance goals.

Categories
Business Growth Compliance Featured

Staying Ahead of the CFPB Arbitration Rule

Mark Rappaport President Simplicity Division EFG Companies
Contributing Author:
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.