Traditionally, non-bank lenders looked to the states and the FTC for industry regulations. But, this has changed with the introduction of the CFPB. Recent reports show that the federal government is stepping up efforts to regulate and review auto finance companies, many of whom have never been subject to bank-style examinations.
“The CFPB has created a new layer of regulation,” according to John Redding, Counsel in the Southern California office of BuckleySandler. “Auto lenders have to be alert and aware of their fair and responsible lending risks.”
Redding says one of the ways to minimize these risks is to be proactive when reviewing a company’s policies, procedures, discretionary underwriting and pricing practices. The CFPB is likely to conduct statistical reviews for loans that the company has made or purchased to ensure there is no unexplained or improper disparity between protected and non-protected classes , so companies should consider performing such analyses in advance of the regulator conducting such an analysis.
“This will help mitigate risks for the companies by identifying areas that may present risk and allowing them to proactively take steps to modify policies and practices. When the regulators are conducting an exam, companies will have to explain why the business is conducted as it is, including steps taken to ensure fair and responsible lending to all consumers, regardless of status, and address any issues that may arise,” says Redding.
The bottom line: Recognize that there are new regulators and more scrutiny on the industry and begin taking steps to perform these important reviews now.
Redding suggests the following steps auto finance companies can take to prepare for the CFPB:
- Evaluate the institution’s risk profile and prepare an operations and compliance strategy
- Update policies and procedures (review CFPB exam guidelines)
- Monitor, address, and retain records regarding consumer complaints
- Monitor third-party sources of complaints
- Appoint an ombudsman
- Conduct internal audits
- Consider patterns and practices that emerge regarding operations
- Focus on areas that may lead to consumer harm, as well as technical violations
- Include the compliance team to monitor, analyze and advise on specific proposals