For those that attended the 2012 NARS event in Texas last month, you would have heard Michael J Dougherty, Managing Partner of Weltman, Weinberg and Reis in Philadelphia as one of the speakers of the event that in my opinion, covered a vital subject of the Consumer Financial Protection Bureau – CFPB and how this will impact the repossession industry. This impact means change – Michael explains in his article more about the ‘knock-on’ effect that the CFPB has on the repossession world as a whole.
4/18/2012 On July 21, 2010 President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, “the Dodd-Frank Act”. With the passage of the Dodd-Frank Act came the creation of the Consumer Financial Protection Bureau, “CFPB”. The stated purpose of the CFPB is to ensure that consumers have timely and understandable information to make responsible decisions about financial transactions; protect consumers from unfair, deceptive or abusive acts or practices; to reduce outdated, unnecessary and unduly burdensome regulations; promote fair competition and consistent enforcement of consumer protection laws; and, encourage markets for consumer financial products and services to operate transparently and efficiently.
To accomplish this goal, enforcement of most consumer protection statutes were consolidated in the CFPB. Among the statutes now under the purview of the CFPB are: the Fair Credit Reporting Act; the Fair Debt Collections and Practices Act, the Truth in Lending Act and The Equal Credit Opportunity Act, to mention a few.
In the very short time since its origination the CFPB now has over 750 employees and has a fiscal funding level of 498 million dollars for FY 2011 and 547.8 million for FY 2012. The CFPB can also request an additional 200 million dollars of funding with congressional approval.
So the $64,000,000 question becomes: how does the creation of this governmental oversight agency affect the repossession industry? The most direct affect will be in the relationships the lenders have with their repossession companies. Most banks that are lenders in the auto and marine markets will be under the direct supervision of the CFPB. As a supervised entity the lenders are expected to manage relationships with their third party service providers, i.e. the repossession companies, to ensure that these providers effectively manage compliance with Federal consumer financial laws applicable to the product or service being provided. As a result, risk management which was always stressed by the lenders, will now be even more a priority and the repossession industry will now have to more squarely focus on compliance in order to remain in good standing with the lenders.
The CFPB has not given any direct guidance to the lenders as to how they expect them to manage and oversee their third party vendor relationships, but they have referenced the guidance given by the FDIC. Under the FDIC risk management process the lenders will need to focus on risk assessment, due diligence in selecting third party vendors, contract structuring and review, and oversight.
Under the risk assessment rubric, the lenders need to ask themselves if the proposed relationship is consistent with the institution’s strategic planning and overall business strategy. They must then identify performance criteria, internal controls, and reporting for their third party vendors. For the repossession industry this means that once the lender has decided to subcontract out the repossession function, the lenders must actively oversee the work of the repossession contractor.
The second aspect of the FDIC oversight guidance relates to the lenders due diligence in selecting a repossession company. In this regard the lender will be looking very closely at the repossessors business including its financial condition, relevant experience, knowledge of applicable laws and regulations, reputation, effectiveness of its operations and controls, management of information systems, and knowledge of consumer protection laws. The fact that the repossessor may have a positive twenty year relationship with the lender will no longer be enough. The lender must be able to demonstrate that it did its due diligence and looked into all aspects of the repossessors business. The repossessor must be able to show not just tell the lender that it complies with consumer protection laws. In this regard written compliance procedures and practices must become the norm. Polices and procedures must be written down and affirmatively disseminated to your staff to ensure that real documented compliance is occurring.
Next, the contract between the lender and the repossessor will now be more in depth as the lender must ensure that its third party repossessor is fully complying with all relevant consumer laws. When signing these contracts the repossessor must assure the lenders that it fully complies with all relevant consumer laws, and they have policies and procedures in place to ensure their enforcement.
Finally, the oversight required of the third party repossessor by the lenders will be more actively managed. Oversight has always been a top priority of the lenders, as all repossessors know, but this oversight will grow even more as the CFPB becomes more a part of the daily life of the lenders it oversees.
A new day is coming upon the repossession industry with the creation of the CFPB. In the past just doing things the right way was in most cases sufficient. Now you must be able to document through written policies and procedures that you are doing things the right way. The CFPB will require it of the lenders and the lenders will require it of the repossession industry. Those companies that realize this early on and make the necessary changes to ensure that consumer protection procedures and policies are appropriately documented will be those best suited to work and partner with the lenders in this new age of the CFPB.