SAN DIEGO — Dire warnings for auto lenders were the order of the day at the Auto Finance Risk & Compliance Summit here on Monday.
“The regulatory field has a lot of landmines in it today,” said Dan Soto, chief compliance officer for Ally Financial Inc.
Still, the auto finance industry needs to take a positive attitude toward regulatory pressure, he said.
In answer to a question about the Securities and Exchange Commission pursuing companies that securitized subprime auto loans, Soto said instead of just complaining, the burden is on the industry to convince regulators that the crash in subprime mortgages that helped lead to the Great Recession won’t happen in subprime auto loans.
“A lot of what we’re seeing coming out of the government is for good reason. We all saw what happened with the mortgage business,” he said.
“Regulators including the SEC want to make sure there aren’t some of the same practices that happened in mortgages, happening in autos,” Soto said. “In the end, it is not even close to the same.”
Nevertheless, there’s plenty of reason for alarm in the auto finance industry.
In another presentation, Federal Trade Commission attorney Yan Fang called auto finance “an area we are certainly focusing a lot more efforts on.”
Finally, compliance executives for two big captive finance companies warned about pitfalls related to consumer complaints filed on the Consumer Financial Protection Bureau database, social media, and other venues.
Dan Bickmore, GM Financial senior vice president and chief compliance officer, said auto lenders must be proactive and keep track of mere “comments” in addition to complaints, “things you might not even categorize as a complaint.”
Dan Earles, national manager of enterprise compliance for Toyota Financial Services, said the CFPB requires lenders to chose from a limited number of “canned” responses to consumer complaints, which can’t possibly cover all situations adequately.
Soto said compliance is everyone’s job in a corporation from top to bottom, but that attitude has to start at the top.
“Tone at the top matters,” Soto said in a keynote address to kick off the conference. “If you get nothing else out of this presentation, it’s that tone at the top matters.” He said compliance officers need to get out from behind their computer screens and “kick the tires” of the various business lines for which they are responsible.
What’s the worst that could happen? This hasn’t happened in auto finance – yet– but Soto said regulators are even prepared to seek jail time for executives.
“Not only are they going after firms, they’re going after the individual executive officers,” he said. “What a way to start a presentation, right? Dire, dire, dire.”
Ally speaks from experience about the landmines. The Consumer Financial Protection Bureau and the U.S. Department of Justice socked Ally with a $98 million consent order in December 2013, including $80 million in consumer restitution and a civil penalty of $18 million.
The CFPB accused Ally of tolerating discrimination by allowing dealer discretion in setting dealer reserve, or dealer markup. That discretion resulted in higher interest rates for legally protected classes of borrowers, a “disparate impact.”
Ally paid the restitution and the penalty, but immediately after the consent order was announced, Ally issued a separate statement denying it tolerated discrimination, or that there even was any discrimination. Lender groups complain the statistical method the CFPB uses to detect disparate impacts is fatally flawed.
“For me personally, there is one thing I personally took great offense to, and that was to be called a discriminator,” Soto said at the conference Monday. “I’m not a discriminator, and Ally is not a discriminator. To have that put on us, it was something that just wasn’t true.”
Ultimately, Soto said, he and company just had to “deal with it.”
