OUT WITH THE OLD AND IN WITH THE NEW?
The year’s end is a time of reflection. When it comes to auto finance and compliance challenges, the story can sound similar from year to year. There are usually a handful of new regulations facing dealers and lenders that have made a big impact on the industry over the previous 12 months. But this year doesn’t really fit the mold. That’s because 2012 arguably hasn’t been as much about new regulation as about the additional scrutiny of regulators enforcing laws that have been in place for some time. That has been particularly evident in the areas of state-specific forms, model language and loan documentation. Some recent examples suggest a trend that state regulators are taking a closer look at existing motor vehicle retail sales financing authority and transaction documentation: New Mexico: Since 2009, a New Mexico attorney general’s regulation has required creditors to provide a summary or a translation of English-language transaction documents in consumer sales negotiated in a language other than English. Its coverage is very broad and somewhat difficult to understand. This year, the New Mexico attorney general proposed additional changes to the regulation. After receiving comments, the
AG acknowledged issues with the proposed changes and with the existing regulation itself. As a result, it pulled back the changes and repealed the existing regulation to allow for further study. Michigan: Years ago, the Michigan Department of Licensing and Regulatory Affairs, Office of Financial and Insurance Regulation (OFIR) said bad check charges are not allowed in motor vehicle retail contracts in spite of statutory authority that seems to allow it. This year, the OFIR published a letter saying bad check charges cannot be collected on retail motor vehicle sales contracts unless the contract contains a bad check charge provision, indirectly reversing its prior position. The OFIR now holds that bad check charges are allowed as long as they are specifically authorized in the retail contract. Montana: The Montana late charge authority is a bit ambiguous and has been that way for many years. Because of the ambiguity, there were vastly different interpretations in the marketplace. In response to a request, the Montana Division of Banking and Financial Institutions recently published a letter clarifying its interpretation of the state statute. The apparently heightened state scrutiny might be just a coincidence. It could also be that states are demonstrating their diligence and control to the public and to the new federal Consumer Financial Protection Bureau (CFPB). The CFPB regulates dealers who don’t routinely assign their financing contracts to unaffiliated third parties. For the most part, that means the CFPB regulates Buy Here-Pay Here dealers. The Federal Trade Commission (FTC) continues to regulate the rest of the auto sales and finance industry. The net result is there are two federal regulators in the auto finance marketplace. It’s possible states are more actively clarifying and enforcing their existing laws and regulations in an effort to maintain a level of control over the auto finance industry – hoping to minimize federal oversight. In addition to reflecting on the year that has been, it’s also time to think about what might lie ahead. What will the new regulatory environment look like in 2013? Many thought the CFPB would have done a lot of regulatory change in auto financing by now, but that hasn’t been the case. One reason is it has been focused on real estate financing practices and disclosures. The CFPB also seems to be carefully studying the consumer finance marketplace – and even consumers – to lay a solid foundation for its regulatory oversight. The CFPB’s strategic plan for 2013-18 notes one of its strategies is to “develop and maintain an efficient fact-based approach to developing, evaluating, revising and finalizing regulations.” “Fact-based” is a key term. We have seen the CFPB asking good questions and conducting extensive research on areas it is
tasked with overseeing. For example, the CFPB tested draft real estate disclosure documents with consumers in shopping malls. The Dodd Frank Act requires the CFPB to research and provide policy guidance on whether arbitration provisions should be allowed in consumer credit (non-real estate) transactions. To start that process, the CFPB published a request for suggestions, data sources and strategies to study the issue. It’s also clear the CFPB is not afraid to take a fresh approach to presenting transaction information to consumers. For example, the CFPB published a proposed rule in July regarding integrated mortgage disclosures under RESPA and the Truth in Lending Act. Leading up to the proposed rule, it published a number of drafts trying various new disclosure formats and designs. That was one of the first significant proposed rules from the CFPB, and the planning process involved extensive research and solicitation of industry and consumer feedback. As a result, the proposed rule and explanatory materials are more than 1,000 pages. The upside is the CFPB is trying practical, consumer-tested ways to present information so average consumers can understand key transaction terms. The downside is the volume of information in the proposal is overwhelming. It’s hard to know when the CFPB will complete its foundation-building and begin proposing new regulations or revising existing ones that affect the consumer auto finance industry. It’s likely big changes will come to the market. It’s just unclear when. While we’re in this waiting period, dealers might feel there are a lot of variables out of their control, but the focus needs to be on the areas you can control. Since a number of states seem to be focused on clarifying and enforcing existing requirements, dealers should review and button down compliance documentation and processes to make sure they are satisfying those requirements. Additionally, reviewing and tightening transaction standards and communication within the dealership is key. Make sure your sales and finance teams are describing financing terms and options, vehicle features, and add-on products and services in a correct and consistent manner. Educate your buyers and be direct and honest about each element of a transaction and the risks each party is assuming. Investing in those areas can go a long way toward maintaining compliance now and preparing for what lies ahead.
BY CHIP ZYVOLOSKI
CHIP ZYVOLOSKI IS A SENIOR ATTORNEY FOR INDIRECT LENDING AT WOLTERS KLUWER FINANCIAL SERVICES. FOR MORE INFORMATION, VISIT WWW.WOLTERSKLUWERFS.COM/INDIRECT.
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11/16/12 3:22 PM