Former CFPB Assistant Director Rick Hackett Shares How New Federal Oversight of Large Non-Bank Auto Lenders will Affect All Industry Players

Joining Hackett at the 7th annual Innovate conference, hosted by AutoStar Solutions, a panel of auto industry attorneys and regulators reveal five secrets to minimize regulatory headaches.

FORT WORTH, TX -- Oct. 24, 2014: Rick Hackett, former Consumer Financial Protection Bureau assistant director focusing on auto lending regulation and current partner at Hudson Cook, has revealed his thoughts on the far-reaching effects of the CFPB's latest proposal to supervise non-bank auto lenders who purchase more than 10,000 contracts per year.

"Just because you're not an auto finance company or your volume is well below the threshold doesn't mean you're off the hook," Hackett said after delivering a Q&A-style keynote address to more than 600 attendees at the 7th annual Innovate conference, hosted by AutoStar Solutions last month.

Hackett shared how he believes the CFPB's increased oversight will affect four key groups in the industry:

Small- to medium-size buy-here-pay-here auto dealers – Even though they won't be under direct supervision, the CFPB can still levy enforcement actions against buy-here-pay-here dealers. This group may risk exposure if they sell contracts to a purchaser supervised by the CFPB. Dealers' data will show up in the purchaser's reporting, so anything strange would likely be detected.

Large buy-here-pay-here auto dealers – Financing processes of the largest dealers in this category will soon be under direct supervision of the CFPB. However, those companies should also take note of how that relationship can open them up to enforcement actions related to sales procedures. "Sales and financing go hand in hand at a dealership," Hackett said. "During the course of supervising the financing process, a CFPB examiner may discover something amiss in sales. That would give the bureau cause to pursue an investigation of the dealer, which could ultimately lead to an enforcement action complete with public announcements and significant fines."

Retail auto dealers – Increased regulatory supervision of retail dealers' lender partners can restrict access to credit. For example, if the bureau determines that lenders are approving too many borrowers who will likely default (another "subprime bubble"), the bureau may push lenders to re-examine underwriting guidelines. The new law will also give the CFPB visibility into the operations of retail dealers, based on the contracts they send to finance companies. In the past, the same type of indirect visibility led to scrutiny of dealer markups.

Non-bank auto finance companies – The largest players in this category will soon be directly supervised by the CFPB. Hackett said lenders absolutely must adopt and execute a comprehensive compliance management system. "If you don't already have one underway, you're behind," he said. "You must hire the right people and give them the authority to execute the system. You should also audit the business units to make sure their operations accurately reflect the written procedures."

Hackett compared CFPB supervision to the relationship a lender would have with an internal auditor – that is, a close partnership with frequent communication. He said it differs substantially from CFPB enforcement, which is typically an arms-length, adversarial relationship.

"The regulators will see more with supervision, no doubt, and that could be negative. But they will also understand more," he said. "Because supervisory examiners spend a lot of time in one subject matter, you won't need to spend all your time educating them. It can be a collaborative relationship with mutual respect and non-punitive solutions – as long as you're honest and demonstrate a real effort to do the right thing."

Hackett said there's no time to waste getting prepared though. "The CFPB will start knocking on doors in a year or less. It will take at least a year to fully prepare your operations, depending on what stage you're in now. So you do the math."

Elsewhere, at the Ask the Lawyers Panel, Hudson Cook Partner Nikki Munro shared her top two pieces of advice for buy-here-pay-here dealers to fly under the CFPB radar. "First, handle your complaints with good customer service so that those complaints don't escalate beyond your dealership management," she said. "Track those complaints and their resolution."

"Second, whatever you do, don't sell – or offer to sell – a vehicle at a lower cash price than your financed price," she said, echoing Hackett's advice in his keynote address. "The CFPB has already stated they are on the lookout for hidden finance charges, which violate the Truth in Lending Act. They will argue that the difference between your financed price and your cash price is an undisclosed finance charge."

At another compliance session, "The CFPB, FTC and State Regulators, Oh My!: What Every Dealer Needs to Know," a panel of auto dealer attorneys and former government regulators included:

Terrence O'Loughlin, Director of Compliance at Reynolds & Reynolds, and a 16-year veteran of Florida's Office of the Attorney General, where he investigated and prosecuted non-compliant auto dealers and lenders

Shaun Petersen, Partner at auto industry law firm MacMurray, Petersen & Schuster, Compliance Counsel to the NIADA, and former attorney with Ohio's Office of the Attorney General

Eric Johnson, Partner at auto industry law firm Hudson Cook who also worked many years at his family's car dealership

Steve Levine, Chief Legal Officer at AutoStar Solutions and a former dealer attorney

The group advised dealers that perception is reality when it comes to regulatory agencies. They recommended that every dealer make an authentic effort to become compliant, because dealers who appear apathetic will likely receive harsher punishments than those who really try.

They also shared five tips for minimizing regulatory headaches:

Document anything that can be used in your defense. For example, if you leave the collection notes field blank, you're not doing yourself any favors. Make it a habit to complete all fields, forms and notes that legally justify your actions.

Get to know your regulators. If you develop a positive relationship with your assigned regulators, you may be surprised at the courtesies they pay you – such as a heads-up phone call when they receive a complaint.

Hire a specialized attorney. Just because you share a long history with your current attorney doesn't mean he or she is the right person for automotive regulatory issues. Are car dealers his or her specialty, or just one of the many types of clients in his or her practice? Regulatory compliance is a highly detailed, ever-changing area of the auto industry. As a result, some attorneys who don't fully understand the car business have unknowingly implicated their clients. Is that a risk you want to take? If you decide to switch, consider an attorney who is an active member of the National Association of Dealer Counsel.

Audit your deal jackets before turning them over. If you receive an auditor letter asking for a certain number of deal jackets in various categories, by all means, ask your attorney to hand-pick the ones without compliance issues. And only turn over what's legally required. Miscellaneous handwritten notes or other extraneous documents can implicate you and cause further action unnecessarily.

Implement progressive discipline for rogue employees. Never, ever turn a blind eye to employees who break compliance rules. If you don't discipline (and document it), regulatory agencies will hold you accountable for your employees' mistakes.

Interviews and full-length videos of select general sessions at the Innovate conference are now available on AutoStar Solutions' YouTube channel at AutoStarDMS.