Like other lenders that make loans through automobile dealers, Pelican Auto Finance LLC is required by the Consumer Financial Protection Bureau to monitor how its 5,000 dealers in 27 states treat their deep-subprime customers. In particular, the CFPB wants to make sure that all borrowers with similar characteristics pay the same price for cars and the same interest rates on loans.
Monitoring dealers is a key focus of the CFPB’s edict on lenders, who, unlike dealers, are regulated directly by the agency. “The CFPB looks to us to be a policeman,” says Joel Kennedy, Pelican’s chief operating officer and chief compliance officer. “The states look at it that way, too. We have to treat [dealers] as an extension of ourselves in order to protect our business.”
The first step in the process is to “apply a great deal of diligence when we on-board the dealer and agree to purchase loans from them,” Kennedy says, adding that “you have to think about ways that could go wrong.” Specifically, lenders must make sure their dealer partners are properly licensed and have solid policies and procedures.
“The biggest red flags are consumer complaints,” says Braden Perry, a partner in the Kansas City law firm of Kennyhertz Perry LLC. Complaints to the lender “should be logged and kept as part of their books and records, and the lender should request review of these complaints regularly as part of their compliance program,” he says.
“If a regulator decides to do an investigation, it is imperative that the lender can provide information in a clear and efficient manner and be able to defend its compliance plan and convey to the regulators that it reviews its dealers and takes consumer protection seriously,” he says.
Indeed, Pelican checks the “touch points with consumers” to make sure that dealers are treating them fairly. For example, it looks for loans that “don’t make sense,” such as if the borrower’s payment-to-income ratio is too high or if the customer is taking out a 60-month loan on a vehicle with 150,000 miles.
Pelican also checks the vehicle’s condition.
“If the vehicle has some serious issues, we are not going to fund the deal,” he says. “We want to make sure consumers aren’t being taken to the cleaners by the dealers. We make sure our guidelines are protective of the customer.”
Pelican also stays away from loans that include a dealer markup, which raises the interest rate on the loan without the customer knowing about it, a big CFPB no-no.
“That’s a place that is tricky for a company to try to defend themselves,” Kennedy says.
In addition, Pelican monitors individual dealer’s portfolio performance quarterly, or on a more frequent basis, if necessary. Where there are issues, it notifies the dealer to take corrective action. Pelican has made “a significant investment” by hiring a third party to monitor its compliance management system and to evaluate its origination process, on a dealer-by-dealer basis.
“They will expose any bad actors at the dealer level that appear to be driving differentiation with customer pricing,” Kennedy says.
For dealers that fail to measure up, lenders must enforce penalties, which may entail terminating the relationship.
“Dealers who have shown a habit of not doing right by the customer or whose loan performance is poor, we will eliminate the relationship with that dealer,” Kennedy says, adding that “bad actors who lose their funding sources will eventually die on the vine.”