The changing terrain of compliance in 2020

Regulatory changes in the financial services sector may move at a snail’s pace, but actions taken in 2019 signal advances on some of the industry’s top issues. Regulators have been fleshing out details on collection call frequency; courts have been fighting over the definition of an autodialer and consumers’ right to revoke consent; auto purchasing remains a top priority for the Federal Trade Commission; and states’ roles in policing lenders continues to evolve.

In fact, auto financiers shelled out $458 million in settlements this year for unlawful repossessions, improper lending and Telephone Consumer Protection Act violations, according to Auto Finance News data. With new guidelines governing the Fair Debt Collection Practices Act, a California privacy law set to go into effect, and courts wrestling over the TCPA, lenders should shore up compliance efforts in 2020 as clearer regulations come into focus.

Here are four compliance concerns that lenders should keep eyes on as the industry enters a new decade:

Consent confusion

Flagship Credit Acceptance, Nissan Motor Acceptance Corp. and Wells Fargo each shelled out millions of dollars in recent months to settle TCPA claims. Still, the courts continue to grapple with fundamental questions about revocation of consent and the definition of an autodialer, making it difficult for lenders to service accounts while avoiding class-action lawsuits, said Robert Tennant, chief legal officer at Veros Credit.

“The real threat is in a case where there were either an abnormally high number of calls to a customer or a certifiable class-action suit,” Tennant said.

Courts in the Second Circuit found that if a contract has a provision that allows a consumer to be contacted by an autodialer, the consumer can’t just revoke that consent, Tennant explained. “Unfortunately, other circuits don’t like that approach and have held that modification can occur at any time,” he added.

Courts are also sparring over the definition of an autodialer, with no clear end in sight. “In 2018, we had a case where the D.C. District Court struck down the Securities and Exchange Commission’s definition of an autodialer and sided with the Federal Communications Commission,” Tennant said. Simply put, an autodialer only needed to have the capacity to store and dial phone numbers without also being a random or sequential number generator, which is part of the TCPA’s statute. “The definition is similar to an iPhone,” he explained.

Lenders can protect themselves from ambiguity in TCPA by capturing consent early on in contracting with consumers, said Mike Lavin, executive vice president, chief operating officer, and chief legal officer at Consumer Portfolio Services.

“The first part is tracking retail sales installment contracts on the front end of the business to ensure we’ve obtained consent,” Lavin said, noting that CPS obtains 85% of its consent through this method. “If we don’t have consent, we do a welcome call to obtain consent — it’s sort of an art and a science.”

Call frequency in flux

Despite “decelerating” enforcement actions, the Consumer Financial Protection Bureau issued a notice of proposed rulemaking earlier this year that outlines guidelines that would govern the Fair Debt Collection Practices Act, said Ken Rojc, managing partner at Nisen & Elliott.

As such, lenders must be cautious about how they manage call limits to consumers as outlined in the FDCPA. Currently, the limit is set to once per week, per debt, Lavin said.

“You can really combat [contact limit infractions] with best-in-class technology,” Lavin explained, noting that CPS’s software automatically manages contact caps, whether the contact is through manual calls, dialer calls, emails or text messages. Basically, the software removes consumers from the call queue after contact is made, preventing user error on the part of employees. Once the seven days have passed, the software puts the consumer back in the queue.

“What I found in my experience is that regulators are receptive to this approach — it’s almost like if you show them the technology, you’re innocent until proven guilty,” Lavin said. “But if you don’t have the technology, and you’re just relying on John Doe to do this and do that, you’re guilty until proven innocent.”

However, there are ways around the seven-day contact limit, Veros’s Tennant said, including if consumers consent to being contacted again after making a promise to pay. Questions remain, though, surrounding documentation. “Do you have an automated system, and how does that system know that there was an agreement for a follow-up call before the seven days?” he said. “I think those questions are going to be open for a while.”

Zeroing in on unfair lending

The Federal Trade Commission remains steadfast in its regulatory oversight, especially regarding auto purchases, said Maricela Segura, regional director of the FTC’s Los Angeles office, noting that the agency’s Consumer Sentinel database received about 100,000 auto-related complaints last year.

“Most of our actions run the gamut from dealer advertising to bad-actor practices in finance offices,” Segura said.

Mostly, the FTC is concerned with misleading, unfair or deceptive practices from auto dealers or lenders. “The FTC Act prohibits deceptive or unfair practices in — or affecting — commerce,” Segura said. “When we look at what’s deceptive, we consider whether there is a misrepresentation that was material to consumers’ buying habits.”

Simply put, “it’s all about what you say versus what you do,” said Mark Edelman, member at McGlinchey Stafford.

Specifically, the FTC has set its sights on “yo-yo financing,” Segura noted. Yo-yo financing — also known as “spot delivery” — occurs when a dealer allows a customer to take possession of a vehicle before financing is complete, and then strong-arms him to return to the dealership to sign paperwork with either a larger down payment or higher monthly payments. These dealers will tell consumers they are legally required to sign the new agreement or face vehicle repossession, forfeiture of the down payment or a lawsuit.

From a lender’s perspective, contracts subject to these claims are essentially worthless, Edelman noted. Further, “the dealer that you allegedly have a repurchase obligation with to buy that contract onto your dealer agreement certainly doesn’t have the wherewithal with state and federal agencies chasing them down, so now you’re left with this [useless] contract,” he said.

Stiffer state enforcement

State regulators and attorneys general have answered former CFPB Acting Director Mick Mulvaney’s call to take a more active role policing financial services. “States took that as a cue to step up their enforcement actions,” Nisen & Elliott’s Rojc said, noting that states have moved in with a “rather broad brush” — New York, California and New Jersey, in particular.

The California Consumer Privacy Act (CCPA) is one point of interest for the states, said Michael Benoit, partner at Hudson Cook. “The CCPA imposes obligations on certain businesses — including financiers — with regard to personal information that can be used to reasonably identify a particular consumer or household,” he said. He added that although the statute goes into effect Jan. 1, 2020, California Attorney General Xavier Becerra has said he will refrain from enforcing it until July.

“We’re all used to differentiating non-public personal information and public personal information, but that’s not how you think about [the CCPA],” Benoit said. “CCPA covers any piece of information concerning the consumer, including not only information that you obtained from consumers directly, but also information that you obtain indirectly from a third party, like marketing lists or passively collected website information.”

Other states, too, have followed in California’s footsteps. “Washington state came very close to enacting a very similar statute,” Benoit noted. “I think New Jersey is looking at a statute, too.”

To that end, there are several states that are keeping an eye on California to see if the CCPA can serve as a national model, Rojc said. “There are some rumblings that we may eventually see a federal privacy act,” he said, noting, however, that a federal policy is unlikely in the current political environment. “Maybe in 2021,” he quipped.

Further, the CCPA could spell trouble for lenders once it goes into effect next year. The final legislation made the law more confusing, rather than add clarity, mostly because the California attorney general had to outsource people to write the final rules, and the people hired ventured outside of the statute. “It’s going to be a source of some litigation,” Benoit noted.

In a nutshell, state enforcement is “more textured now,” Benoit said. “At our firm, I’d say we have about one-third federal enforcement and two-thirds state enforcement,” he noted. “A couple of years back it was all federal enforcement.”

Editor’s note: This story first appeared in the December issue of Auto Finance News, out now.