Weekly Wrap: Regulators step up enforcement

JJ Hornblass 00:00
Hi, everyone. I’m JJ Hornblass and welcome to the roadmap from auto finance news since 1996, the nation’s leading newsletter on automotive lending, and leasing. This is our weekly wrap for what’s happening in auto finance for the week of September 21 2020. Before we get started, I want to thank auto finance students, advertisers, alpha d phi, phi s pay near me and remitter for their continuing support. Thank you to them very much. And I am so pleased to be joined by Joey Pizzolato, the deputy editor of auto finance news and Amanda Harris, who is the Associate Editor of auto finance news. Welcome to both of you. It is Friday, September 25 2020. This week, we was marked by the passing of justice Ruth Bader Ginsburg. We also saw a fascinating data from the venture capital firm Andreessen Horowitz that showed among, among other many other things, that demand for used golf balls went through the roof during the pandemic. The September Kansas City fed Composite Index came out this week, which showed it was a 11 points higher for August, which implies a greater expansion of factory regional factory activity in September. We also saw this week, a the announcement of the $16.1 billion reverse merger of United wholesale mortgage that’ll be the largest SPAC deal on record. And finally, news this morning, that the September new vehicle sales forecast is expected to show a year over year decline of 12 point 12%. While used vehicle sales will show a growth rate of 11% in year over year for September. So now on to auto finance. The most notable story, I think this week, was really a deeper analysis by our colleague Marci Bellis on the credit acceptance Corp lawsuit that was filed by the Attorney General of Massachusetts, just at the tail end of August. And what that implies for enforcement, regulatory compliance, as it relates to subprime lenders, nationwide. Maybe Joe, you want to give us a little bit more background on on some of the conclusions that she came to before we get into a bit of a discussion on this?

Joey Pizzolato 03:04
Yeah, absolutely. So at the heart of the this lawsuit is consumers ability to repay and really what this this says is, regulators look at a pool of loans, say subprime loans, for example. And they they measure the default rate on for that population. And if the default rate is higher than they, whatever their benchmark is, their assumption is that loans should not have been made to that specific consumer. So the best use ag in particular, is targeting subprime lenders with higher default rates, specifically CAC is is settled with byrider by your payment and your lender, also Santander consumer. And, and really, you know, kind of this this whole, you know, ability to repay was really born out of the credit crisis and subprime mortgages in the extremely high default rate that we saw that led to the financial collapse and and after that, regulators really started putting more of a focus on the ability to repay

JJ Hornblass 04:15
what would be the lender argument against this enforcement tact?

Joey Pizzolato 04:26
Well, it’s actually really interesting to Marcy decided to do a deep dive into this this week, because I spoke to a couple lawyers in about this in regards to kind of, you know, inclusive financial inclusion, excuse me, and really, you know, it prevents a lot of lenders from from serving underserved communities and you know, you know, consumers with lackluster credit or no credit. And furthermore, you know, there are some regulations such as you Interest Rate caps that are designed to protect the consumer that actually keep that safe consumer out of the market. So for example, if I’m a consumer in a state that has a loan rate of 18%, but it’s only financially feasible for a lender to lend to me at a higher rate, because obviously lenders have to price and risk servicing for subprime borrowers is is kind of by an industry standard, more expensive, um, lenders are unable to do that. Which which is which poses a problem.

JJ Hornblass 05:35
I mean, we there there have been arguments around suitability, or the demands on financial institutions, to gauge suitability, this is across multiple financial products. And I’m not a lawyer. So I’m assuming that there’s precedents for this. But you know, you look at a circumstance like we’re in right now. And you look in default rates as it relates to what’s going on right now. And, you know, to, you know, you can very easily argue, from an enforcement standpoint that Well, those borrowers Weren’t you didn’t you didn’t have the proper, you know, means test to determine suitability for those, those borrowers, that kid you’re, you’re in, in the midst of a, you know, 100 year episode a once in 100 year episode. And so I understand that they’re going to take, you know, they’re going to sort of try to engage this over a greater duration of time. But I look, this is a, this ends up being a political thing, where, you know, there is the the notion that the own who is the onus on who is the onus of evaluation or determination on is the onus on the customer or the consumer, or is the onus on the lender? I mean, we’re not, you know, clearly, if there’s systemic abusive practices. You know, that’s problematic. But suitability is like a, there’s like, there’s no end to that potentially.

Joey Pizzolato 07:22
Well, glad you mentioned that. Because it, there are two schools of thoughts, right. Like, there’s the one, as you mentioned, where the onus is, is on the lender to know, whether or not you know, somebody has the ability to repay. But you know, there is also a large school of thought that says the consumer knows what’s best for them, they know that if they can afford a loan, especially in the subprime space, subprime consumers are resilient, um, just just by characteristic of their kind of, you know, stance in the credit segment. So, so it’s really kind of up to the regulator and like you said, Massachusetts, they’re a big player in taking enforcement action and yeah, is a very political office. Yeah,

JJ Hornblass 08:11
yeah. So, um, it was interesting that, you know, that this CAC case in Maryland, got 40 attorneys general to kind of sign on to it. So, you know, this is clearly, you know, look, these, this is what happens in regulatory enforcement. You have, you have circumstances where, you know, the ages see that there’s like an opportunity out there, and then they all jump on the bandwagon. Which I think at the end of the day is actually not necessarily always beneficial for the consumer and certainly is going to make for some tougher times. For lenders. I mean, the other we also saw a settlement at the CFPB level this week, with Lobell financial but that seemed like a more straightforward situation. I think, you know, this. Like, what, what happened there, Amanda? Why, why was Lobell forced to pay was I think $1.3 million, a $1.3 million dollar penalty.

Amanda Harris 09:30
Yeah, that’s correct. Yeah, this one, like you said, is a little bit more straightforward. Um, so really, to kind of talk on a high level and, and the gist of the whole thing was that they were promising a certain service for consumers paying for this waiver, and then they weren’t following through so to kind of get a little more information they have this, um, you know, loss damage waiver that they put on borrowers accounts. It’s not really insurance but it basically acts as protection against vehicle damage. And they kind of do that when a borrower has a borrower has insufficient insurance, and they use that kind of instead of collateral protection insurance. So what they would do is they would charge a premium for basically placing that waiver. And then what it was supposed to do is that then those consumers if they did have vehicle damage, or even a total loss of the vehicle, could file a claim and get that, you know, reimburse to them. Well, the problem was, apparently, since I think it was about 2012, that this goes back to many of those consumers, you were paying for the waiver, we’re actually getting their claims, you know, looked at they weren’t, they weren’t addressing those claims. So they weren’t actually, you know, paying for the the image of the vehicles, they weren’t, basically, they weren’t following through with what the waiver actually said it was supposed to be doing. So that was one issue, which obviously, is, is pretty clear cut as a an unfair practice, because they weren’t doing what the customer is actually paying for them to do. So that was basically the main gist of it. Some of the other issues that came out of it was, you know, they also had a stipulation in there, if borrowers were 10 days or more delinquent, then the waiver could come off and they would no longer be applying that or that meant that the borrower should not know or have to be paying for that because they would no longer be getting that service. But again, that since 2012, a lot of them were actually still paying for that, but their claims are still being denied. So it’s kind of a two fold of not providing service, you said and then not meeting the requirements for removing the waiver and removing that extra, you know, payment on top of what they were doing at the same time. So those two major things,

JJ Hornblass 11:46
is there a sense of any of that this is this is perhaps happening at other lenders beyond Lobell or is this was this more restricted just to Lobell.

Amanda Harris 11:57
This seemed like it was more restricted to this particular lender, as far as this actual, you know, what was happening with this waiver. But it does speak to, you know, just kind of a warning in the industry of obviously, you want to make sure that you’re, you know, providing what you said you’re going to provide, and, you know, make sure that the paperwork that goes to consumers what they’re signing, they know what they’re getting, and then that’s actually being followed through on. So that was kind of like the main thing, and it was, again, pretty clear cut, um, you know, that this is obviously not something that you should be doing. And it could just been that there was some mistake that this has been missed, you know, for many years. You know, we just don’t really know how this kind of happened, but obviously, it somehow got under the radar and, and has been missed since 2012. That this was going on. So I think it just speaks to being careful.

JJ Hornblass 12:49
Yeah. We saw some data this week that came out on kind of the flip side of this issue, which is consumer fraud. Um, you know, in the case of low belly, perhaps they weren’t doing what they were supposed to do. But here, it’s on the on the consumer side. The numbers on since synthetic fraud and auto finance are, I think, significant. 22% of all, false identity fraud, fraud episodes are in lending and lending are connected to auto loans. Why? Why is this so pervasive in the auto lending space?

Amanda Harris 13:39
Yeah, so this data come from came from a subset of about 1400 synthetic identities that were being looked at. And they found you know, that most of those when connected with an auto loan, they were basically setting up these fake identities using social security numbers, data, burse. And the name. And the big issue for the auto finance world is a lot of this is done, actually, the majority, like 96% of this is done, where they’re basically using an applicant’s name and date of birth, actually refer to a real person. So that’s going to match obviously, what’s on the driver’s license, because it is their name and their date of birth. But they’re using a social security number that is not theirs. Well, obviously, your driver’s license, don’t list your social security number. So right then and there, that’s just a really obviously open area that can be missed when you’re doing a credit application, because you’re verifying it with the driver’s license. Well, what’s on the driver’s license is the real information. And so because majority of this synthetic fraud is happening that way, whereas calling first party where they’re using that particular information and using a made up or somebody else’s social security number, that’s really where that gap is forming, because the way they’re verifying right now for credit application, so really, to kind of be proactive in that you really have to also be Verify that they’re using a social security number that is theirs, or else you’re gonna, you know, possibly pull the wrong credit report which could lead, you know, to problems on the portfolio later on higher charge offs. And then it’s kind of looking like it’s a credit issue. And really, it’s, you know, it’s fraud that’s happening behind the scenes. So that’s really why this is such a big deal is because most of them are done that way.

15:22
It’s harder to catch. So

JJ Hornblass 15:25
is there? Is there a way to, you know, and is there technology to solve this problem?

Amanda Harris 15:31
I think the main thing is, you know, learners just need to be more aware that this is going on. And with COVID, you know, it kind of really pushed a lot more with technology and remote processes, which makes us even easier, because they can obviously have things just mailed to an address or doing it online, it just makes it a lot easier to commit these kind of synthetic frauds and create these identities, and use that data. So I think just being more aware of it for one, and then you can work with companies that you know where the data came from, for example, you can work with those kind of companies that kind of detect that for you, and look for synthetic identities. And just, you know, just seeing the red flags, and really verifying the social security number as well, instead of just kind of going the normal route with the name and their date of birth.

Joey Pizzolato 16:18
tack on to that, you know, we had Todd wolf on our auto finance summit this summer, and he spoke specifically about frauded auto financing, you know, the auto finance coalition, they are a consortium of, you know, a lot of auto lenders that get together and really sharing data, they say, you know, sharing data talking about a lot of these fraud rings, they operate kind of on a mass scale, it’s not just really like a, a one off, you know, job has a lotto is, you know, gonna take you for, you know, $30,000 for this used car that he doesn’t really want. No, I mean, this is like, this fraud is being conducted on a massive scale. And if you share information, you find, you know, social security numbers that are used over and over again, you can find addresses that, that are used specifically to perpetuate this fraud. And through that, you know, sharing of data between lenders, they can really kind of start to pick out the pockets where where this fraud, you know, lives.

JJ Hornblass 17:18
So I guess if anyone wants to get in touch with the coalition, we can help them with that.

17:25
I’m sure we can.

JJ Hornblass 17:27
All right, Joey, what do we have going on next week,

Joey Pizzolato 17:30
next week. Next week, we are excited, incredibly excited to release our diversity and inclusion issue. Obviously, it is a highly important topic, we talk to a lot of auto lenders, a lot of lawyers, we talk to a lot of people to really get a sense of, you know, where diversity and inclusion is in auto finance. You know, I’m happy to say that, you know, the auto finance has made great strides, but like any worthwhile endeavor, there’s still a lot of work to be done. And, you know, the the executives we talked to have some really great advice on what auto lenders can can continue to do to further those efforts. So, you know, that’s going to be our number one story next week.

JJ Hornblass 18:16
Great. We are now within a month of the auto finance summit, which is October 20 to 22. We are making complimentary registrations available for lenders and you can get that you can get that complimentary registration by going to auto finance summit.com and registering at a lender if you’re a lender. So please do that. And don’t forget to visit us at auto finance news dotnet. Thank you all so much for joining us on the roadmap. We’ll see you next time and see you online as well. Thanks, everyone.