Are You a Predatory Auto Lender? [SPONSORED]

No! Of course not! Auto lenders simply review the information provided to make funding decisions based on credit score, loan-to-value, and debt-to-income ratios. But, what happens when the information provided isn’t correct?

What if the income or vehicle value is higher than they should be?

As a lender, you know that you are ultimately responsible for verifying all the information provided on a credit application. After all, your loan portfolio could be at significant risk if you end up loaning money to people who can’t keep up with their monthly payments. In addition, there could be critical compliance ramifications.

This past month, Ally Financial made headlines once again because an Oklahoma dealership was found power booking and inflating consumer income on credit applications. According to the Tulsa Frontier, a lawsuit filed in July 2016 in Oklahoma County District Court contained an affidavit that stated that after finding evidence of bank fraud by the Oklahoma dealer, Ally indicated that it would not do anything about the loans in question unless consumers became aware of the issue.

Then, in January of this year, Ally was cited in a lawsuit filed by a group of shareholders with evidence that the lender was engaged in predatory lending and putting their loan portfolios at risk. On May 26, 2017, a Consumer Financial Protection Bureau (CFPB) complaint was filed asking that both the dealership and lender pay penalties to customers who received the loans, and to put better verification processes in place for auto loan paperwork.

To date, Ally Financial has worked to settle individual cases in arbitration. However, with both shareholders and the CFPB now involved, we can probably expect a broad investigation to take place into all of Ally’s practices.

This presents an essential case study of what NOT to do.  You’re probably thinking, “How could any lender let this blindside them?” However, the question you should be asking is, “What processes do I have in place to ensure this doesn’t happen to MY institution?”

In this case, Ally did tell the dealership to stop, but they did not put practices in place to prevent future bank fraud. More steps could be taken to reduce compliance and risk exposure. If a lender finds that a dealer has been power booking deals or inflating consumer income, they can:

• Conduct an audit to determine how wide-spread the issues may be.
• Contact the dealer to have them either buy-back the suspicious loans, pay the lender for the portion of the loans that are overvalued, and/or pay the consumers for the discrepancies.
• Contact the affected consumers.
• File a Suspicious Activity Report.

When something like this happens, the point is to control and resolve the situation quickly and efficiently. The last thing you want to do is to wait for consumers to file a complaint. It’s much better customer service to address discrepancies before they have a chance to become complaints.

Lastly, remind dealers of the ramifications they could face should they be caught perpetuating bank fraud. Most likely, the sales managers who power book or inflate income on credit applications don’t know the seriousness of what they are doing. Take a minute and think about this from their perspective. A salesperson has a consumer who does not make enough money to afford a car with which they have already fallen in love and taken for a test drive. They’ve already spent a good amount of time negotiating the trade-in and the value of the new car, but that number is still not low enough for the customer to qualify for financing. In this case, the sales manager can either lose the sale, or fudge the numbers. Which do you think some will choose? In their mind, they may be thinking, “It’s just numbers. I make a sale and the customer drives away happy, what’s the harm?”

The next time your representatives are in the dealership, make sure they include compliance as a discussion topic. Have them remind dealers that the employee and/or dealership management and owners could face up to 30 years in prison and a $1 million fine. If everyone in the dealership knew that, how often do you think they would power book or inflate income on an application? How much more closely do you think they would look at applications to ensure complete accuracy before doing anything? In the world of compliance, knowledge is power.

At EFG Companies, we utilize more than 40 years of experience navigating the shifting compliance and sales atmospheres to help lenders work with dealers to achieve compliant profitability. Contact us today to find out how.