Lawyers at the Auto Finance Performance and Compliance Summit were unified in their advice to not pull back from auto finance compliance amid the perceived easing of regulators because there are active examinations taking place at a hand-full of lenders they represent.
“Lenders should stay the course,” said Kenneth Rojc, managing partner of the automotive finance group at Nisen & Elliott, LLC. “If you do take a riskier avenue then you might be faced with a situation where you’re examined by a federal or state regulator to explain, ‘Why did you ease back on these controls, what did you perceive as different?’”
Any changes would have to be discussed with a lenders legal and compliance team, as well as the regulator themselves for “proactive guidance” on the best ways to wind down, he said. Bottom line, any changes have to be justified.
One of the areas of increasing concern has been ancillary products. Dealerships have been adding these contracts to retail installment contracts more frequently in recent years, especially as lenders cap the number of interest dealerships are allowed to charge consumers above the rate they were approved, Rojc said.
“There has been an incremental compression in rate participation margins … and dealers are trying to make up that income in other areas,” he said. “The most likely product arena is ancillary products.”
He predicts regulators will be more keen on pursuing deceptive practices during the financing process, especially disclosures of service contracts and guaranteed asset protection policies.
Wells Fargo Auto is involved in an ongoing investigation into its GAP refund policies and Ally Financial Inc. earlier this year closed a limited followup investigation into the same ancillary products. Additionally, Wells Fargo just settled its collateral protection insurance case with the CFPB for $1 billion.
“If I’m in a business and I don’t use collateral protection insurance, that doesn’t mean when a consent order comes out that relates to CPI I don’t have to look at it,” said John Redding, partner at Buckley Sandler LLP. “Look at what were the underlying issues and analyze your own business based on those issues to see if you are vulnerable to those kinds of things.”
Just because a dealership places those policies or a vendor runs the refund process, doesn’t mean lenders can sit in the passenger seat and expect everything will turn out fine, Kathleen Ryan, a partner in the consumer financial services practical group at Akerman LLP.
“The days are gone where you can say, ‘that’s a third party and it’s not my responsibility,’” Ryan said. “Anywhere there is an incentive to sell things there is risk and the possibility that a regulator will come in and [feather-and-] tar everyone with a broad brush of deception, which is a very flexible tool in the hands of regulators. … If there is a product they don’t like there is often a way to find chinks in the way it was sold or the way it was serviced that allows [regulators] to get at it.”
