Business Growth Compliance Economy

Will New Rules Hamper Growth?

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Credit unions have notched the highest percentage of auto loan originations since 2007. Leveraging consumer inflationary concerns and lower interest rates, Experian’s “State of the Automotive Finance Market” report for the second quarter released Aug. 25 showed credit unions produced 25.8 percent of the loans and leases from lenders in the three months ending June 30, up from 18.3 percent a year earlier and 22.1 percent in this year’s first quarter. Pop the corks and let the confetti fly!

Inflation concerns are likely to remain for the rest of 2022. The Federal Reserve signaled earlier this month that it plans to continue its aggressive approach to raising interest rates, with a target of 4.0 percent. However, declining gas prices across the country prompted a notable increase in the Consumer Confidence Index for August. Purchasing intent and vacation intent also increased, indicating that monetary concerns have not made a noticeable impact on consumer behavior.

In fact, consumers have made overall improvements in their financial health since the pandemic. Experian’s Melinda Zabritski, Senior Director of Automotive Financial Solutions, has seen continued improvement in consumer credit scores over the last several years with a greater percentage falling in the prime category.

Regulatory concern on the horizon

But there is a potential speed bump on the horizon impacting continued credit union growth in auto lending. Federal Trade Commission (FTC) has proposed new regulations impacting federal advertising laws and prohibitions on unfair and deceptive dealership practices. The 37-page document outlines six key areas the agency would like to address with regards to dealership practices:

  • Full up-front pricing, costs and finance disclosures
  • Sales process disclosures
  • Add-on product benefits
  • Bait & switch
  • Surprise junk fees
  • Record retention

While the bulk of the proposed revisions are directed toward auto dealers, there are potential implications for auto lenders as well.  The effects are subtler and may take longer to be felt—but could be as significant.

Reduced optional products revenue

The FTC expressly intends the rule to impact dealers’ sales of optional products. In response, dealers may increase vehicle sales prices to replace lost revenue or seek higher dealer reserves in financing transactions. Coupled with continued inflation and rising interest rate pressures,  indirect lenders should be prepared to respond to potential market changes.

Holder Rule risks to assignees

While the rule specifically does not contain a private right of action, many states’ unfair or deceptive acts or practices (UDAP) laws do include this component. Many treat the FTC’s determination by rule that a practice is unfair or deceptive as legally conclusive. Some believe that consumers and their lawyers may be more willing to consider bringing suits against dealers and indirect auto lenders. The potential risk of litigation begs the need for greater due diligence by assignees, establishment of standards for assignment of loans, and indemnification provisions related to noncompliance.

Follow-on CFPB and state scrutiny of automotive lenders

While banks, credit unions and other automotive lenders fall outside the FTC’s jurisdiction, these FTC regulations will shine a spotlight on the overall auto lending industry. Lenders should expect added CFPB scrutiny, specifically on retail installment contracts (RICs) that comply with the proposed rule, with a specific focus on optional products that generate additional interest revenue to the lender.

Additional and more complex recordkeeping and compliance requirements

Overall, the regulatory changes will create added financial costs for dealers as well as the automotive lenders.

These revisions are in the comment phase until September 12, 2022. EFG has developed a microsite that unpacks the details.  At EFG, we understand the retail automotive and auto lending landscape. We help you fortify your dealer relationships and increase loan volume with valuable and compliant consumer protection products. We’re not just a provider, we’re a business partner. Contact us today to see how EFG can help grow your business.