In this episode of the Industry Pulse, McGlinchey’s Colin Quillinan, Jeremy Rzepka and Mark Edelman discuss the impacts of the ongoing COVID-19 pandemic on the auto finance industry. Creditors should prepare for a continued shift to digital lending, changing state laws, and a wave of repossessions in early 2021. [toggle title="TRANSCRIPT"] Amanda Harris 00:01 Hello everyone and welcome to the December issue of the industry pulse, a monthly market update on trends and auto finance. Amanda Harris, Associate Editor of auto finance news. The industry poults features a rotating Faculty of six industry experts that will give twice annual reports on crucial market topics such as credit quality, credit demand, residual values, regulatory compliance, macro economics and more. I'm happy today to welcome our speakers from McGlinchey we have Colin Quillinan, Jeremy Rzepka, and Mark Elderman. Colin advisors advises a broad range of providers of consumer financial services on compliance with state and federal law, including user restrictions, preemption, licensing and other regulatory compliance matters. Jeremy provides regulatory and compliance counsel to banks, finance companies, mortgage companies, online lenders and FinTech startups. And Mark has provided guidance to banks, finance companies and online lenders throughout the United States on regulatory compliance matters in the arena of consumer financial services for more than 25 years. He counsels clients on a full range of issues, including consumer loan documentation, ecommerce, underwriting licensing state and federal regulatory examinations and investigations, and more. So we are happy to have all three of you here with us today. And we really appreciate you taking the time and sharing your insights with us today. Thanks, man. Thank you. Well, let's go ahead and jump in with a few questions. So of course, one thing that's on everybody's mind still is the ongoing covid 19 pandemic. So I wanted to see each of you kind of touch on how the pandemic has really turned the industry upside down, and how, you know, has impacted auto sales and the finance industry and how that has been forced to change the way businesses, you know, do things in 2020? Mark Edelman 02:01 Well, first of all, thank you in auto finance news, you've got the boring compliance lawyers here. So we're very happy to be rounding out the year. And to be a part of this. I think that one of the key areas that we've seen a lot of change in the auto space as a result of COVID-19 is changing the way they need to do business and actually forcing some of the industry to move into more of a digital footprint. Jeremy Rzepka 02:33 And I think Jeremy has some thoughts on that. And, and so Jeremy, can you kind of give us kind of lead us into where you see the the migration and how things have been going from the operations of both the vehicle sales, but also, more importantly, for this audience how that's impacted the the financial services side? Yeah, absolutely. You know, it's been interesting, the, the auto finance industry, for some time was really a, you know, it's had to change the way it does business, fundamentally, a lot of people were still relying on in person sales and in person transactions. And unfortunately, in the COVID pandemic, that just hasn't been the norm anymore, people have had to shift to, you know, doing sales, virtually doing virtual walkthroughs of vehicles, and conducting their transactions in an entirely remote environment, including, you know, drop off for vehicles. And then, of course, actually completing the financing documents remotely. So, because of that, they really had to incorporate policies and procedures, and processes to upgrade their digital lending platforms. Which is, you know, it's been good and that that information has been out for some time. But they've had to take steps to actually work on getting customers comfortable with that, and getting their staff ready and available to assist customers in a remote environment. Mark Edelman 04:08 So when you say digital lending, what do you mean by that? So, you know, digital lending can mean any number of different things, digital lending, you know, maybe last year would have been something where we're talking about, Jeremy Rzepka 04:24 you know, completing auto finance transactions using electronic means. So last year, you know, that might have meant that you go to your dealer or some other location and you actually complete not a finance transaction in person, but using an electronic dealer management system, where they're signing documents using a touchpad or signature pad. But in 2020, a lot of the processes have been moved to a totally virtual environment and taking those platforms online. So what that means now is that they're completing electronics. matures in an online space and getting documents delivered electronically. Amanda Harris 05:06 Any thoughts? Colin Quillinan 05:09 Um, yeah, that's a it's been an interesting year. Definitely. I think that a lot of the the auto finance lenders, as Jeremy mentioned, a lot of these things had been planned out for a while, but now, it's, they were kind of thrust into the situation. And and I think that dealers have found themselves in a lot of times a lot of places, because of the preparation that they've done previously. I think that, that they found themselves in situations where they're more comfortable probably than they originally anticipated they might have been. So so I think that it's interesting and be interesting to see where it goes from here. Mark Edelman 05:49 So Jerry, how does, how does the process work? You know, if you're in the auto finance space, you know, you mentioned the legacy, you know, people got comfortable with signing their name on a pad and then getting a printout of a document and basically saving ink from the pen. And then that document was captured. But obviously, things have changed. So in 2020, how has, how has that process evolved? Yeah, absolutely. So there's been a number of different solutions out there. And as I'm sure you can imagine, those platforms vary from auto finance company to auto finance company. And it varies from state to state, frankly, there are different processes and procedures to get those things done. Jeremy Rzepka 06:36 You know, there's different ways that you can sign your name, whether that be, as you mentioned, using a touchpad or other signature option, or using, you know, electronic signature tools that provide audit trails and other things like that to make sure that they meet certain compliance and security standpoints for electronic signatures. So each platform is a little different. They all kind of, you know, strive to meet the same goal of you know, completing transactions, using electronic means in a secure environment. But each one operates a little differently. And it varies from auto finance company, to auto finance company, and the vendor that they choose to use, right, of course, Mark Edelman 07:18 you've got multiple players. in this arena, you've got the originating dealer that may have their own DMS, you have the dealers, which could be have their own portals or ways of accessing documents. Or they could be part of a larger electronic documentation system as well, where they're part of the DMS. But you mentioned one item, which, of course, is near and dear to all of our hearts is the compliance aspect of all this. Because, you know, this is a situation where it seems logical, it seems relatively straightforward. you're capturing data, and you're transmitting data. But you know, we all know that we live in a legal framework where we have 51 different states, including district of columbia that can have their own sets of rules. There is a lot of bureaucracy involved from anyone who has ever purchased or leased the car, understands all the forms that have to be signed and filed. So from a compliance perspective, kind of give us an overview, if you will, of some of the issues, some of the challenges, I guess I shouldn't say issue some of the challenges that exist with doing a digital transaction and are all these challenges overcome? Are we still, you know, do we still have some hurdles? Do we still have some hybrid issues, where we have some holdouts from a wet ink and paper. Jeremy Rzepka 08:51 So, you know, at a base level, the esign Act, the electronic signatures in global and national consumer act, and the general widespread adoption of the uniform electronic transactions act across many states is generally permits electronic signatures, which you know, are required for many auto finance transactions. So, esign and UAE to both esign and then the state's adoption of data preamps number of different state laws that deal with electronic signatures. So, you actually sign is a federal law and then you eat as state laws, correct? They Yuya is the state state adoption of the uniform electronic transactions act. So, he sign generally permits the use of electronic signatures, but the actual process and to get that worked into different state processes is done at a more state level. So what that means is that states also Generally can accept electronic signatures, the laws on lien and title filings or individual agencies, filing procedures may vary from state to state. Some states, although electronic signatures may be permitted, have really relied on what ink signatures and actual paper filings as opposed to, you know, an electronic signature or scanned or electronic file, file copy of the lien filing. So that varies from state to state. Unfortunately, for the most part, those that electronic signatures and electronic filings have been permitted across state lines. But there are some outstanding roadblocks still where some states that have certain filing requirements still prefer or at least preferred what wedding signatures prior to some changes in the last year. So Mark Edelman 11:02 we see some emergency x or some acceleration, you know, you don't want to have a good opportunity to make changes go to waste. And certainly COVID. You know, precipitated a lot of changes that are, I guess, accelerated a lot of changes, not just in this space, but in many other spaces that were long overdue. So did we see any kind of acceleration of some of these are de hurdling, if you will, the process to did states kind of get on the bandwagon a little bit more realizing that their old ways were blocking commerce? Yeah, absolutely. So one of the things that we've seen Jeremy Rzepka 11:52 in recent years has been adoption of remote online notarization. Laws. So which some actual lien entitle filing still require documents to be notarized prior to filing. So in most states, it's been critical that online notarization is permitted. So there's been while there's been some adoption of that, and then in the last, I don't know, eight months or so over the last year, there, there's been emergency filings or executive orders that permitted state agencies or notaries for that matter to conduct remote online notarization procedures. So that has helped in that regard. And then a lot of agencies are likely reviewing their current process and procedures in saying, while we used to accept paper filings for, you know, certain lien and title, title filings, but as they've gone into a more remote environment, it's been more practical to actually accept electronic transactions and documents so that people could actually complete filings in a remote environment. Amanda Harris 13:04 Yeah, that's great. And quick question for you, Jeremy, you kind of mentioned, you know, that some of those robots may have been, you know, at least temporarily removed or helped out by those emergency, you know, orders, just in your thoughts, you know, any thoughts on like, if some of that will stay, or main or, you know, might become a little bit accelerated as far as them opening the doors permanently? Or how quickly might that happen? Yeah, I think it's, it's pretty likely that even if not initially, Jeremy Rzepka 13:38 converted to law right off off the bat, I think states are going to take a look back at this year and say, Wow, you know, we've made tremendous strides, moving to a more virtual and electronic environment. And we've actually done remarkably well, it's, it's, for those states, a, it's it's tough often to have these large existing process, and procedures in place to actually complete violence, particularly if you're, you're relying on you know, county officials or a number of different players. But the this, the current pandemic has really forced people to adopt the way they do business and that that's state agencies as well. And I think that they found tremendous success. So I think it's likely that they'll say, look, the processes and procedures that we've implemented over the last eight months have been successful. And it's something that they should likely consider moving forward. It's just a matter of time before they actually convert those, you know, temporary executive orders or whatever they may be into law. Mark Edelman 14:49 And we're dealing with is, you know, as a former state employee, not very nimble and willing to change entities and organizations. There's a Lot of politics in the process, there are a lot of individuals involved in the process where you're automating their positions. And so I, you know, I think that's, I think that's very helpful. You know, that, I guess, perceptions can be, can be burst based on what actually happens. Any other things that you see coming as we move into 2021 in the, in the space of digitalizing the process? I know, there's a lot of things on the horizon and, and kaolinite, you and I are going to talk a little bit about some other things that are going on from and loss remediation and asset recovery perspective. But in terms of the front end, the origination, the processing, the documentation, you know, anything, Jeremy that you see is happening on a moving forward basis. Yeah, so I've been working with some companies, you know, clients who really been investing time and effort to make sure that their electronic compliance procedures are, are ready to go, I don't envision that those, those companies are going to say, look, we just invested all this time and effort into making sure that these platforms are ready to go, I don't think they're just going to say, Okay, let's throw them out the door. You know, as we turn the corner to 2021, and hopefully into a more normal environment, Jeremy Rzepka 16:29 I think that they're going to want to keep those avenues open. And in some respect to a lot of those electronic transactions have helped consumers and businesses alike, moving forward the electronic transaction, provide a certain level of comfort, from a compliance standpoint, to make sure that forms and procedures are completed in a timely manner. It offers, you know, speed and efficiency, both for the consumer and the business to make sure that things are completed quickly and filed appropriately. So I think that they're going to say we've, we've done all this work. And this is another avenue that our company and our consumers can use to help facilitate auto finance transaction transactions, and they'll continue to look to use those as we move forward. Mark Edelman 17:22 I don't want to throw a, you know, a cloud of darkness over this. But you know, certainly the pushback, potentially, to electronic transaction, and documentation is the potential for increased fraud. And so, you know, that's a hurdle and concern of many, particularly what is deemed to be synthetic fraud. So, you know, obviously, fraud is always a concern, whether it's an in person or online transaction, but can you give some thoughts about ways that you see the industry becoming more sensitized to, you know, the fraud issue, particularly as it relates to online transactions? Yet market, as you mentioned, Jeremy Rzepka 18:12 fraud is something that auto finance companies has long been worried about, while not worried, but you know, implemented procedures to make sure that they are actively trying to prevent fraud. So moving into a more digital space, where you're not actually seeing a person in front of you, you get a copy of their driver's license, or whatever it may be, and you could kind of help get some comfort in that regard. They just need to be a little extra more vigilant in identity verification procedures. As you mentioned, there, there are different aspects of fraud. And one of the things that are slightly newer, in a remote environment is this this concept of synthetic fraud, which is really not where someone's stealing someone's identity, but actually fabricating an entirely new identity. And, you know, the thing I would just tell people who are trying to implement compliance procedures is that just because you're going virtual, it doesn't necessarily mean that your customers aren't real. They're they're real people who have real backgrounds and real credit histories. So you know, if something looks unusual, or it looks like someone opened up accounts in five different cities in five days, that's that's probably not a not a strong thing. We may be virtual in a different space, but people are still generally living in the same locations. So asking different challenge questions, reviewing credit histories diligently, you know, seeing asking questions that are not necessarily on the front end of their credit application, such as a previous address, or checking to see that they are consistently using the same phone numbers are all good tactics and compliance procedures that auto finance companies should include in there fraud identification procedures. And it's something that they should continue to look at as we move to toward a more remote environment with electronic transacting. Mark Edelman 20:12 Well, you know, it's change is not always perceived as good. But I think in this instance, there's a lot of good to come from that. Speaking of change column, we've certainly seen both an uptick and a change in the way that asset recovery and remediation is working in the auto finance space. And it's been an issue since, you know, day one, I would guess when stay at home orders were issued and a change in work environment and the change in people's ability to pay, resulting in potential for greater delinquencies and asset recoveries. So you know, we know that that changes happen, we're well into it, we're on to whatever many extra holiday whatever surge, you want to call it. Certainly not getting any better. And so what kind of what's going on in the world right now as it relates to asset recovery. And, you know, the issues that face the creditors who were keen and insightful enough to create these online digital transactions, now, they've got some other issues that they're facing in terms of account management. Sure. And it's, obviously 2020 brought a tremendous amount of change that Jeremy just mentioned, across the industry. And it's and it was repossessions and asset recovery as well, and in this world is, you know, Mark, and, you know, we work quite a bit with clients. The repossession laws are already a very convoluted set of laws across the country. There's the UCC, obviously, which has kind of a more general standard set of requirements that a number of states have adopted. But there are already state specific requirements in a lot of states that are already cumbersome for a creditor forget about COVID. So it's already hard to stay on top of everything. So what 2020 is brought is a lot of state moratorium, or guidance or executive orders emergency legislation that's gone into effect, that has made an already very complex, confusing set of laws even more confusing. Colin Quillinan 22:37 It's the different timelines that are involved. So some states may have issued a moratorium in March or April, that was effective until June, whereas other states issued something in May, that was effective until July. And then on top of that, it came in the forms of as we mentioned, legislation, it came in the form of executive orders, very confusing. So it's brought a lot of confusion to the industry. of the 51 jurisdictions, including DC, as Mark pointed out, about 16. So about 32% of the states issued some type of a moratorium or guidance throughout that state, a number of those states the that the effective periods have run their course. I do want to caution creditors and auto finance companies that even if fat has run its course in the state that you're doing business or one of the states that you do business, you know, that doesn't mean that you're completely out of the woods, you need to do a look back and make sure that during that time period that you were complying with with the guidance or the moratorium. And then also, again, as Mark mentioned, we're not out of the woods yet. You know, there is an uptick in cases. You know, New York City, just closed indoor dining yesterday, you know, there's there's a lot still going on. So it is very easy for these executive orders legislative bodies, to pass this type of moratorium again, or extend something that may have already lapsed, we're seeing it all over the place. So living day to day, making sure you're staying on top of current events as they unfold. Well, I think we're in we're certainly in uncertain economic times. One of the one of the issues that we're facing is that, Mark Edelman 24:40 at least as of today, we don't have any type of economic stimulus or any other type of relief for borrowers. So even those that were able to make it through the first round without having issues on their own Count, you know, they're they're going to be looking to creditors for assistance. And, you know, that's, that is going to be an interesting issue to see whether creditors are going to reopen the deferral programs that were running, you know, in the earlier phase of, you know, eight months ago, seems like 800 years ago. And, you know, May and June and July, whether those are going to those are going to see a winter reappearance as we start to see more borrowers struggling. And as Collin pointed out, you know, a state that has the mechanism to know how to pass a moratorium is much easier to extend or to pass a second one than it was the first one. Because, you know, you have the processes and the wheels in motion to do those things. So it is something that can be done. And and one of the key points is, I think Collin touched on this, which is, if you're in a world where repossessions are not restricted or collection activities are not restricted, that doesn't mean that it's not going to come under regulator scrutiny. So, you know, what types of things generally, should creditors be doing during this period where the expectation is that the volume of repossessions is going to increase? What should they be doing internally with respect to systems or policies? What what types of things should they be thinking about use of vendors and things like that, because, you know, examinations be the at a federal or state level, are going to be focusing on the servicing aspect, particularly the asset recovery aspect of an auto finance business. So there's certain suggested steps or guidance or areas of focus that you think would recommend would be prudent for creditors to be paying attention to? Colin Quillinan 27:09 Yeah, sure. We'll we'll start with the regulatory examinations and cut that aspect of it. And then, you know, worked at some kind of, you know, systems implementations, use of vendors, obviously, but just starting off with the regulatory examinations. And this is something that regulators are going to be looking for, particularly in states where there was some type of moratorium or guidance. And that's, you know, one of the things that that we're still asking the question, and we're not going to find out until after, you know, these first round of examinations are the regulators that that didn't didn't require repossessions necessarily to end what they recommended. And they said, you know, that you shouldn't work with the borrower. So there was no actual requirement. But, you know, you can bet that when they come in during the examination, they're gonna ask about that. And if you answer and say, well, you're never required that, that's likely not going to be a great answer for them. So a few things that, that, that auto finance companies competitors can do in preparing for this next exam, is actually something that ideally should have been implemented a while ago. This is where your preparation is going to pay off, is that, you know, a robust, established a well written compliance management system that will allow you to address this head on, that has to do with and Jeremy mentioned this previously, but well drafted policies and procedures, updating those were necessary to work with affected customers. The regulators, I, I guarantee you, I when I was working in house, this was something that they asked him all those first day letters, they're asking for reports to your board and senior management committees, you know, are they getting the information that they're that is necessary for them to discuss, you know, what needs to be done at the operations level in order to address these issues. So making sure that that information is included in the reports and is making its way to the necessary committees and board, making sure that the employees are properly trained updating your training? They will certainly be looking at your training packages, the attendance of your training, consumer complaints, that's always a big one, they'll look to that first and say, you know, where are the complaints? Where are the pain points coming? You know, if there's a large percentage of complaints in a certain part of the country, they'll say what's going on there. So making sure that you're addressing your consumer complaints, making sure that they're properly logged. That will help you monitoring to make sure the business's lines are you know, implementing the policies and procedures. That'll be important and then your internal audit function. You know, to the extent that your internal audit schedule has already been established for the year, possibly adding a new audit, you know, making sure that this is something obviously knows planning it right or planning for it. So, if your schedule was approved by your board or senior management committee, in the beginning of 2020, I would hope that you would possibly amend that schedule, add an additional audit, or at least expand a prior existing audit to encapsulate this type of review. So those are a few things from a regulatory perspective that I think will be helpful. But again, this was something that your preparation for, you know, years prior and putting together an effective compliance management system, it should help you and should benefit you now. So I think that's something that, that creditors should be looking to. Mark also mentioned, a few things kind of going forward, just practically speaking, I think that that folks could be looking at or creditors should be looking at is, you know, the possible implementation of certain systems automation, you know, as the stimulus packages have, you know, come to an end that PPP loans are, you know, on their way out, the student loan relief is, you know, coming to an end, I believe, at the end of the year from the cares package. And so, if we don't see anything at a federal level that, you know, provides additional relief, and we do see COVID continue to object. You know, I know that there's a vaccine, so there's a light at the end of the tunnel, hopefully. But, you know, if people continue to, you know, have issues with making payments and unemployment, you're going to see an uptick as these moratoriums, to the extent that they're not extended, you know that there's potentially going to be an uptick in repossessions. So you need to prepare yourself for that. So, you know, to the extent to the extent that you can automate any of those processes rely on third party vendors that we know are experts in this field. That's, that's a way that companies can get ahead of this and plan for next year. Mark Edelman 32:09 Well, let me just, you know, this is a, it's always an ongoing issue loss asset recovery is always an ongoing issue, but the system's been stressed. And I think that one of the things that's important, and there was a recent CFPB consent order that highlighted this is that testing, and you talked about QC and audit, I think that's very important because you can have the best policies and procedures in place. But if you're not following what you are supposed to be doing, if you are not monitoring cars that are put out for repossession versus cars, where you've made an agreement with the borrower, or actions that are being taken by your vendors, you know, that's very important. And it really goes toward, you know, we always say all along, you need to not only have a nice shiny book that sits on either an actual or virtual shelf that has all your policies and procedures and, and your compliance management system in place. But you need to turn it on, you need to make sure that it's doing what it's supposed to do. And I think that stretches across what Jeremy talked about from the digital contracting, making sure that you're doing the things that you should normally be doing when you're underwriting deals when you're checking the validity of the borrower. When your identity of shoot me the identity of the borrower, when you're doing your day to day operations, and servicing the accounts in the asset collection, those are all things that you have policies and procedures in place to do. And those are the things that now, when the system is either being modified or stretched, you need to make sure that your system, your compliance management system, and your policies and procedures are also up to the task and have been updated and are in shape in place to do either the newer business model, or making sure that you're doing what you're supposed to be doing. And I think it's going to be a challenge. Going forward. I think the industry is up for the challenge. You know, these are, as Colin and Jeremy both pointed out items that have already been in the book. So we just need to continue to work with our clients to adopt 2020 and 2021 realities to 1970s laws and those types of situations and, and, you know, keep the business going in a new normal. So we we really appreciate the opportunity to have been with you today. And Amanda, thank you for hosting us. Absolutely. I think you summed up right there perfectly everything we're talking about and hopefully this will help your creditors have a little bit more preparedness going into 2021 which Fingers crossed won't be as crazy but we'll just leave it at that I don't want to jinx anything. Amanda Harris 34:55 Okay, well thank you again, each of you for joining us. That will conclude today's webinar. For all of our viewers, please check back to auto finance news for leading industry insights. And we'd also love to hear your feedback on our new series. So what market trends are you most interested in? What do you think of this episode? If you want to share feedback with us, just shoot us an email at info at auto finance news dotnet. And again, thank you all for joining us and we'll see you next time. Thank you. Thank you. [/toggle]
