Compliance Regulations in the Spotlight

At the recent NABD Conference and seminar, one of the key messages communicated was the importance of providing additional and necessary training to Buy Here Pay Here (BHPH) dealers across the country due to a change in regulatory environment. For many BHPH dealers, they have taken it upon themselves to put their own money on the street when they are unable to get a consumer financed.

In March 2013 the Consumer Financial Protection Bureau (CFPB) released a bulletin outlining its intent to hold indirect dealers responsible for compliance with fair lending requirements of the Equal Credit Opportunity Act related to dealer interest rate mark ups, participation and reserves. This comes after several lenders came under investigation for being discriminative with their markups.

As a result, the CFPB is turning a bright light on car dealers, notably BHPH dealers, and upping the scrutiny of certain unscrupulous practices, which include:

  • Collections violations
  • Disparate lending violations
  • Predatory lending violations

What is most concerning is that the majority of dealers within the BHPH space are not aware of these changes or the increased government focus on the industry. Dealers found to be non-compliant could face fines or possibly criminal charges.

According to David Bafumo, president of FNI Incorporated, some issues that the CFPB are most concerned about include:

  • Product value
  • Terms & Conditions are disclosed
  • Product cost is accurately explained
  • Marketing materials are accurate
  • All consumers are treated equally – opportunity and cost
  • Products are optional
  • Products are cancellable

Sellers have processes to a) track product and provider performance and b) help customers with products
One of the best ways for a dealer to make sure they are not violating any compliance regulations is to develop a clear Compliance Management System (CMS) to follow. While a CMS is often an integral part of financial institutions, many dealers do not include one in their dealership’s compliance guidelines.

Here are four simple steps a dealer can make to incorporate a CMS into their dealership.

1) Appoint a compliance officer

Depending on the size of the dealership, this could be the owner or someone on the staff. This person is charged with making sure all compliance policies are being followed.

2) Develop a fair-lending policy

Set-up a policy that states you will not act discriminate towards any ethnicity, sexual orientation, demographic or nationality.

3) Have a few loans reviewed

Take the time to hire an attorney who specializes in this area and have them look over a random sample of your loans to make sure you are federally compliant. Ask for feedback on any red flags they notice and where you could be doing a better job.

4) Create a distinct applicant review

Dealers need to take a step back and look at who it is they are lending to. Are you targeting a certain demographic? You need to be consistent in all your lending operations to maintain compliance, so taking time to review to make sure you are following your fair-lending policy will assist you in this.

By following these steps, dealers can provide a consistency to their operations and thus follow their CMS.

For more information, check out the some of the resources and information available on the BHPH website.

This article is not to be considered legal advice. To better understand the CFPB, the Equal Credit Opportunity Act, fair lending requirements or other regulations facing BHPH dealers, please consult a licensed attorney.