Attorney Gerald Sachs, who formerly worked for the Consumer Financial Protection Bureau, offers advice on how to keep off its bad side.
The federal agency directly oversees lenders and, as such, indirectly affects auto dealer financing practices.
Sachs was in the CFPB enforcement unit. He’s now in private practice. He recalls being told as a young lawyer, “Everyone makes mistakes.” But the CFPB is relatively unforgiving. It's on something of “a mission,” he says.
The bureau has extracted settlements from two major auto lenders, Ally and Honda Financial, over alleged unintended discrimination. The CFPB claims that occurred because lenders let dealers add to the percentage rate of an auto loan as compensation for arranging it.
That’s called dealer reserve. Although the CFPB indicates it wants the lending industry to switch from dealer reserve to something like flat fees, no major financial institution has done that.
“I don’t see how the CFPB can have an effect on the marketplace unless it pushes ahead with 20 to 30 more cases,” Sachs says at the annual Automotive Resource Network conference here.
But the CFPB faces pressure of its own.
A dealer-backed Congressional bill would hold the CFPB more accountable and require it to say more about how it determined alleged lending discrimination against minorities.
The bill has bipartisan support, and the National Automobile Dealers Assn.’s top lawyer, Andrew Koblenz, expresses cautious optimism about its success in Congress.
Sachs offers lenders and dealers “three simple principles” to avoid unwanted attention from the CFPB, a creation of 2010's Dodd-Frank financial reform act:
- Transparency. Do consumers understand the terms of their financing. “The acid test is whether a Millennial can explain it to a friend on Facebook,” Sachs says.
- Fairness. “Do you succeed if the consumer fails?” he asks. If so, that’s a CFPB problem. Some buy here-pay here dealerships have been accused of setting unreasonably high auto-loan rates, repossessing cars when the customer defaults, then repeatedly selling the car again under the same circumstances.
- Suitability. Do your F&I products meet consumer needs, or are they just a way to pile on aftermarket charges? If dealers sell questionable add-on products and a lender readily finances them, “the finance company could be on the hook.”
Sachs also recommends dealers designate a compliance person who reports directly to senior management and makes sure employees follow rules and regulations.
Dealerships should maintain compliance programs with clear policies and procedures, train employees regularly, take corrective action when errors are discovered and forthrightly handle consumer complaints, he says.
