Complexities of Compliance

It’s no secret compliance is a hot topic in the auto-finance space.

For three years the Consumer Financial Protection Bureau has worked to regulate dealerships through lenders. This also has caused other regulatory bodies such as the Federal Trade Commission to look closer into dealership practices.

With these increased sensitivities and frustrations due to the ambiguity of the CFPB, now is the time to brush up on F&I practices. As a start, ask this: When a dealership sells a car and secures financing, who is the creditor at the time of sale?

Many think the lender is the creditor; however the correct answer is the dealer. Misunderstanding this fact opens the door for noncompliant behavior, as the F&I manager could think his actions have fewer repercussions.

To avoid legal pitfalls, ensure you have an informed staff that takes accountability for their actions. This requires training. Even a small investment in compliance training now can save you thousands in legal fees later. And you will have increased comfort knowing everyone in the dealership, from sales to accounting, has a baseline understanding of the regulations.

Clarifying Regulation B

Because dealerships are considered the creditor at the time of sale, their F&I transactions fall under Regulation B, which was created to prevent discrimination against applicants for consumer credit. While many aren’t familiar with Regulation B, they are familiar with the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA). Both fall under Regulation B.

Passed in 1974, the ECOA outlines how creditors can evaluate creditworthiness to eliminate discrimination. The ECOA regulates what and how information can be used to evaluate credit.

The FCRA, passed in 1970, works hand-in-hand with the ECOA, regulating notices that must be given to consumers about the credit decision.

Under the FCRA, once F&I managers run a credit report, they must provide a risk-based pricing/credit disclosure, designed to educate consumers on how their credit score affects their ability to borrow at attractive terms. To help dealers stay compliant, the National Automobile Dealers Assn. also created a standard form for this purpose called the Credit Exception Notice, which should be given to all customers to disclose their credit score and the options available to them.

Lastly, dealerships must give every customer who applies for credit an exception notice. If two customers apply jointly for credit, each applicant should be provided a separate notice.

These notices are designed to help create visibility into a credit decision for consumers. If a consumer has a good credit score, which is disclosed to them by the dealership, they can expect a rate that reflects that score. So, how does this tie into the topic of discrimination?

The CFPB’s Stance

The CFPB says it’s possible for dealers to “unknowingly” violate the ECOA, creating a loophole for the industry to exploit. They call this disparate impact, or practices that seem neutral but result in negative impact to minority customers.

The CFPB has various, unproven ways to determine when this occurs. While the CFPB does not have jurisdiction over dealers for disparate impact, it raises the question of whether dealers are knowingly acting in a biased or discriminatory manner, resulting in FTC involvement.

If your team knowingly violates the ECOA, your dealership could accrue civil penalties up to $3,500 per violation. Then, a federal lawsuit is filed, which could result in fines of up to $16,000 for each future violation.

Your dealership also could be found liable for state lawsuit claims, including class-action claims under state “unfair and deceptive acts or practices (UDAP statuses).” These claims permit the recovery of actual and punitive damages, including attorney’s fees and costs.

As dealers can expect more scrutiny in this area, take the time to avoid costly mistakes and ensure your team is operating in the most compliant manner possible. Equipping them with the skills and processes to ensure compliance, while maintaining dealership profitability, will help drive personal accountability and continued dealership success.

John Stephens is senior vice president of Dealer Services at EFG Companies. He can be reached at 972-445-8910 and [email protected]