The Department of Justice announced a settlement of the federal government’s first-ever discrimination lawsuit involving “buy here, pay here” auto lending yesterday, according to a press release from the DOJ.
The lawsuit, filed in January 2014 by the DOJ and the State of North Carolina, alleged that Auto Fare Inc. and Southeastern Auto Corp. “violated the federal Equal Credit Opportunity Act by engaging in a pattern or practice of “reverse redlining” by intentionally targeting African-American customers for unfair and predatory credit practices in the financing of used car purchases,” according to the release. The state of North Carolina also accused the BHPHs of actions that violated the state’s Unfair and Deceptive Trade Practices Act.
Specifically, in the lawsuit, the two dealerships were accused of having sales prices, down payments, and interest rates that were disproportionately high compared to other subprime used-car dealers. The DOJ said that because the dealerships did not “meaningfully assess the customers’ creditworthiness or ability to repay,” repossessions and rates of default were disproportionately high. Additionally, the dealerships engaged in repossessions when customers were not in default, according to the DOJ.
“All consumers deserve to be treated fairly when they buy a car,” North Carolina Attorney General Roy Cooper said in the release. “We hope this case sends a strong message that car dealers cannot use race when targeting buyers with overpriced cars and oppressive loans.”
Under the settlement, the dealerships will be required to implement a number of changes to ensure that loan terms and repossession practices are no longer unfair or predatory, according to the release, including “limiting projected monthly payments to no more than 25% of a borrower’s income; requiring interest rates to be at least five percentage points below the state’s rate cap; mandating a lower interest rate for borrowers who have specified evidence of lower credit risk.”
The settlement, which was reached after the court denied the dealerships’ motion to dismiss the case, is subject to court approval, and was filed yesteday in the U.S. District Court for the Western District of North Carolina.
“It is not only illegal, but also fundamentally wrong, to target borrowers of color for predatory loans and exploit their need for a car to do essential tasks such as getting to work,” Acting Assistant Attorney General Vanita Gupta of the Civil Rights Division said. “Combating discrimination in all segments of the auto lending market is, and will remain, a top priority for the Civil Rights Division. I am pleased that these dealerships have agreed to reform problematic lending and servicing practices and adopt policies that promote responsible lending. I hope that other buy here, pay here dealerships will evaluate their practices in light of this settlement.”
The settlement also requires the dealerships to establish a $225,000 settlement fund to compensate victims of their past discriminatory and predatory lending.
If you do only one thing to prepare for the CFPB… Develop a Compliance Management System (CMS) for your business.
If you are a frequent reader of my articles, you know that I have emphasized that message over and over again. Today, I want to address the most important elements of a Compliance Management System (CMS) for auto dealers and their associated financing sources—each company needs to develop their own written compliance program as well as to develop a system or to use an existing system that is repetitive or similar in function when your arranging an auto loan or lease, for your customers.
The CFPB expects that each entity under its supervision will adopt a written, formal compliance program that guides compliance efforts of the company. At a minimum, the compliance program must include three components: 1) policies and procedures, 2) training, and 3) monitoring and corrective action. As the CFPB puts it, “A sound compliance program is essential to the efficient and successful operation of the supervised entity.”
So, the $64,000 question is, “What should a company’s compliance program look like?” Of course, the answer is that each company’s compliance program will be different depending on the industry, yet similar for each associate of that industry. The compliance program needs to be tailored to the particular type of business or service the company engages in, and it needs to be adopted and maintained in such a way that it is actually integrated into the day-to-day business operations of the company.
Over the last few years, a large segment of our company has been working with different consumer finance companies and auto dealers to design and implement a software program that will help the auto dealers comply with the CFPB directive. To share several observations from our experience:
1. It is not easy, but it is worth it. Frankly, for many finance companies as well as auto dealers, this has been a challenging undertaking because, as we have discussed in many of my previous post, the industry is still getting use to the idea of substantial Federal regulatory oversight.
Preparing a proper written and fully functioning compliance program and integrating it to work with all parties at the same time over the Internet was very time consuming and required a great deal of attention from multiple decision makers. As we have set it up to date, a finance company or an auto dealer depending on how large the company is, the process usually takes on average from one month to several months. But for those who will invest their time and effort, it will pay off—both in terms of protecting consumers from harm as well as being prepared for the CFPB.
2. A compliance program locked in someone’s head is not good enough. When I ask finance companies about compliance statements and policies, I sometimes hear that seasoned employees know what to do so there is no need for written policies. Those days are over, if they ever existed. In the eyes of the CFPB, complying with Federal law is not optional, and many Federal laws require written policies. The bottom line is that it is impossible to have a compliance “program” without a written document.
3. Even good companies have compliance problems. Almost all companies have compliance deficiencies—even those with strong compliance departments. The scope and severity of problems greatly varies from company to company. It is better to catch compliance issues internally rather than waiting for the CFPB, or a plaintiff’s lawyer, to uncover a problem.
4. The benefits of preparing a compliance program are two-fold. The primary benefit is having a complete written statement of the compliance efforts of the company that can be used in training employees and establishing a companywide “culture of compliance.” But just as important, a secondary benefit is that the exercise of preparing a compliance program will act as an internal audit of company policies. When we work with a company on a compliance program, we start with the CFPB Supervision and Examination Manual and the questions that we know the CFPB will ask. The key in preparing the compliance program is to come up with right answers to those questions.
5. Preparing the written compliance program is just the tip of the iceberg. Once a company finalizes the written compliance program, the work has only begun. The real objective is to use the compliance program, in the CFPB’s words, “as an essential source document that may serve as a training and reference tool for employees.” Companies must incorporate the compliance program into daily workings of the business. At a minimum, this means distributing the compliance program to employees and updating the program from time to time.
6. In the eyes of the CFPB, rules aren’t made to be broken. Dealing with federal law is not easy, especially these days. It certainly seems like the number of federal consumer protection regulations is increasing, and they are getting longer and more difficult to implement. Just over the last few years, companies have had to learn about Red Flags, Risk-Based Pricing, Direct Disputes and others. We expect that this trend will only escalate with the CFPB exercising its regulatory muscle.
In this post, I would like to highlight a recent CFPB order that illustrates that companies cannot ignore new regulations. In 2009 (in the pre-CFPB days), the federal banking agencies and the FTC adopted the Furnisher Rule under the Fair Credit Reporting Act. This Rule requires companies that furnish information to consumer reporting agencies (i.e., “furnishers”) to adopt a written policy regarding the accuracy and integrity of information reported. Some companies complied. Many others did not.
Fast forward to August 2014. The CFPB ordered Texas-based First Investors Financial Services Group to pay $2,750,000 for failing to comply with the Furnisher Rule, and knowingly reporting inaccurate information about consumers to consumer reporting agencies. The incorrect reporting resulted from a faulty computer program. When First Investors discovered the issue, they alerted the software vendor but continued to use the software program. In addition to the fine, the CFPB also ordered First Investors to engage in remedial action, including correcting all consumer files that were subject to errors.
The CFPB does not look favorably on companies that ignore federal regulations. First Investors violated federal law by failing to maintain a policy and report to the consumer reporting agencies with accuracy and integrity.
In Director Cordray’s remarks on the First Investors order, he noted that the harm was magnified because the affected customers were generally subprime borrowers. Director Cordray concluded his remarks by warning, “Any furnisher not currently meeting these requirements should take immediate steps to abide by the law. We will continue to monitor this market carefully, and we will not hesitate to take further enforcement actions as they are needed.” Finance companies, take note.
Additionally, this emphasizes the ongoing theme that the CFPB holds a company responsible for its service providers and vendors. First Investors could not simply hide behind its software provider. The CFPB expects that a company will adequately supervise its vendors. In other words, federal rules aren’t made to be broken.
A good written compliance program will be the central piece of a company’s compliance management system. If you do not have a written compliance program at your fingertips, your company is not prepared for the CFPB and I don’t care if you are a dealer or one of their financing sources.
If you need assistance I will be happy to answer your question or help guide you in the preparation of a proper CMS Manual or program.