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Auto Lenders Beware: State Regulatory Enforcers Step In Where Federal Enforcers Back Off

Auto lenders should guard against complacency engendered by the Trump Administration’s noticeable easing of regulatory enforcement, rules, and regulations. 

While the Consumer Financial Protection Bureau conspicuously has retreated from an enforcement posture, many state attorney generals have aggressively picked up the pace against auto lenders. This isn’t to say that the CFPB and the others have not brought enforcement actions—it’s just that they haven’t brought many.

Looking ahead it is clear that if the 2020 elections displace a Republican administration for a Democratic administration, the federal agencies nominally charged with overseeing auto lending likely will resume aggressive enforcement. Add to this the fact that there are 27 states with Democratic attorney generals, many of whom aspire to the governorship of their respective states. These senior law enforcement officials no doubt will embrace hard lines against unfair, deceptive, and abusive acts or practices—including those related to auto lending. This stance has a natural appeal for the constituencies that these potential candidates must attract.

Like it or not, auto lenders now should proactively adopt and/or boost the use of automated proxy analyses, such as Bayesian Improved Surname Geocoding (BISG), and others. Today’s industry-sympathetic federal abeyance of this particular proxy will likely change if a Democratic administration returns.

Federal enforcement actions

What have federal agencies done recently regarding auto lending enforcement? A scan of the CFPB’s records finds just three 2017 enforcement actions involving auto lending, and only one in 2018. 

The U.S. Department of Justice, in 2018, entered into a consent order with a subprime auto lender and its affiliate. As for the Federal Trade Commission, it recently returned more than $3.5 million to consumers who were subjected to UDAAP tactics by a California auto lender. The FTC continues to be relatively aggressive regarding auto lending enforcement.

State enforcement actions

The New Jersey Attorney General recently filed a lawsuit targeting unscrupulous used-car dealers. Similarly, the California Department of Business Oversight filed an action against an auto title lender.

Many states, including Pennsylvania, New Jersey, New York, and Maryland have created divisions within their respective attorney’s general offices devoted to consumer financial protection issues—sometimes referred to as mini-CFPBs.

Recently, Linda Lacewell, the new superintendent of the New York State Department of Financial Services, was quoted in The Wall Street Journal: “Where CFPB steps down, [the Department of Financial Services] has to step up.”

More broadly, at least five states have hired former prosecutors and investigators who once worked for the CFPB to come work in their states’ mini-CFPB. These are good, sound, committed career people who are going to do their job.

The ability for states to do this derives from the Dodd/Frank Act which created the CFPB. The law specifically provides states with the authority to use the new UDAAP standard. The law also added “abusive” to the acronym. So far, the CFPB has yet to formally define what “abusive” means, which partially has led to that agency’s backing off on enforcement. Many of the states, in the meantime, have taken the Dodd/Frank wording at its face regarding what is abusive, and have run with it.

Looking forward

Despite the soft enforcement stance currently being taken by the federal government, the pressure on auto lenders is greater than ever.

Historically, auto-lenders have been hampered by a statutory mandate not to collect data on protected classes, such as race and gender—unlike mortgage lenders who are required to collect this data under the Home Mortgage Disclosure Act (HMDA).

Instead, auto lenders must rely on the use of proxy systems. Some of these may be extremely basic, such as inferring race from an individual’s last name or by inferring gender from an individual’s first name.

Such a system has been criticized as being inadequate, leading to the development of the BISG method. This combines geography- and surname-based information into a single proxy probability for estimating protected classes. Moreover, it, along with other methods, can be merged together in automated analytic software.

As reluctant as auto lenders may be to adopt such systems, the political tide is turning. It behooves lenders to use analytic software that incorporates such systems, and to reflect that into their policies, procedures, and practices, to prepare for the future crackdown on enforcement that’s sure to come.

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Ed Kramer

Senior Advisor

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