Biden administration signals change of direction for subprime auto regulation

June 17, 2021 – Joseph Cioffi and Nicole Serratore of Davis + Gilbert LLP consider the likelihood of greater enforcement of consumer protections in auto loans as well as the uncertainty that could arise with new regulatory activity.

Auto loans and subprime securitization are rolling as little as possible at the start of the pandemic. The catalyst for positivity has been the strength of the underlying auto market and collateral values.

Despite the unemployment and economic uncertainty caused by the COVID-19 crisis, the automobile itself enjoys unprecedented importance in everyday life. It is no longer just about freedom, sport or luxury; it now helps meet the most basic human health and safety needs and the ability to earn an income. This level of importance and ease of foreclosure translates into a high payment priority for consumers over other debt, and the Asset Backed Securities (ABS) market linked to auto loans and rentals recognizes this.

In addition, due to the shortage caused by disruptions in manufacturing and technology, the market has essentially drunk in its own right to meet the demand for vehicles. This pulling on supply and pent-up demand could last for some time even after the end of the pandemic. Combine the factors of scarcity and high payment priority, and it all makes a bet on car loan and ABS a good hedge against the economic crisis.

But there is a cloud on the road ahead in terms of regulatory uncertainty and more enforcement activity expected under the Biden administration. While the concerns could lead to better quality bundled loans, it could also lead to additional costs in the system. Ultimately, if there are significant concerns about enforcement or new regulations, they could curb new origins and emissions of ABS.

With eyes on the road ahead, there are five main areas to watch for new regulatory activity from the Consumer Financial Protection Bureau (CFPB), Department of Justice (DOJ), Federal Trade Commission (FTC) and prosecutors. General of States (States GA):

1) Equal treatment. There will likely be more enforcement from the CFPB and potentially the DOJ regarding fair lending and disparate impact issues under the Equal Credit Opportunity Act, which prohibits the discrimination in credit matters on the basis of race, color, religion, national origin, sex, marital status, age or perception of public assistance. The disparate impact law enforcement will address situations where business practices lead to racial disparities, even if they are unintentional.

Although Congress overturned CFPB’s efforts to prosecute indirect auto lenders / dealer discriminatory pricing in 2018, the CFPB may issue new guidelines or rules regarding fair lending. While at the FTC, Commissioner Rohit Chopra, now appointed CFPB director, noted several concerns within the auto market, including questionable takeover and financing tactics, which could become the focus of the CFPB.

2) Unfair practices. The market should expect broader enforcement against Unfair, Deceptive or Abusive Acts and Practices (UDAAP) by the CFPB and Unfair and Deceptive Acts and Practices (UDAP) by State AGs, which prohibit such activities related to a consumer financial product or service or the offering of a consumer financial product or service. The guidelines on what constitutes “abusive” conduct have changed with the new administration.

The CFPB repealed the 2020 guidelines on “abusive acts and practices” of the previous administration. In the first post-Kathy Kraninger lawsuit filed by the CFPB in late February 2021, he sued an immigrant surety company, calling it “abusive” to use an English-language agreement in a situation where clients did not understand. not English. Acting Director Dave Uejio, CFPB is already suing other service providers under “abuse” standards.

3) Fair recovery. The Fair Debt Collection Practices Act, which prohibits debt collection companies (not the original creditor) from using abusive, unfair or deceptive collection practices, is expected to see a revival under the Democrats-led CFPB and the FTC divided in part.

After years of preparation, the CFPB debt collection rules were due to come into effect on November 30, 2021 (although the CFPB is now preparing to postpone the implementation of the rules until January 2022) and submit the new ones. technologies and social media to regulation. In addition, the economic stress of the pandemic has placed maintenance practices under tighter control and could lead to more regulation and enforcement in this area. It’s even possible that the Obama-era CFPB’s desire to extend restrictions to first-party creditors will be reconsidered under the Biden administration, but new regulations won’t happen quickly.

4) Fair relationships. The market may see more enforcement activity from the CFPB and FTC under the Fair Credit Reporting Act (FCRA) and the credit reporting elements of the Coronavirus Aid, Relief, and Economic Security Act of 2020 ( CARES Act). Given the heightened sensitivity to the plight of the unemployed during the pandemic, creditors will need to pay close attention to the CARES Act credit report requirements for accommodation or delinquent accounts and ensure they contact them. precision with consumers.

Separately, there could be more actions similar to the CFPB Consent Order ($ 4.75 million fine) against Santander in late 2020 for an FCRA violation related to providing incorrect information to tax agencies. ” assessing credit, failing to update incomplete information, failing to disclose direct delinquency, and failing to establish and implement reasonable written policies and procedures regarding information provided to credit bureaus credit assessment.

5) Wear limits on interest. State usury caps have come back to the fore in recent years, especially in the marketplace and online lending, forcing financial institutions and fintechs to understand local restrictions that may apply to models. loan in banking partnership.

While usury laws are as old as the alphabet (and not so straightforward to follow), one should expect the new, updated laws to better address current consumer protection concerns. For example, in an effort to address predatory lending issues, Illinois recently passed new law that places an interest rate cap on all new consumer loans, including indefinite and closed payments. , payday payments and RICs (retail contracts) for motor vehicles, unless these are made by banks, savings and credit unions, credit unions or insurance companies .

The new law sets up an “all-inclusive” APR rate cap of 36%. The “all-in” component requires the calculation to include finance charges, handling charges, premiums or credit insurance charges, all charges for an ancillary credit related product sold as part of the credit transaction . This essentially brings state law into line with federal military loans law.

In the area of ​​auto loans, it will come as no surprise that increased regulatory control has arisen from the increased importance consumers place on their vehicles. A major goal for government agencies and state AGs will be to protect the most vulnerable consumers, represented in large part by the subprime credit class. The question is, how far will consumer protection go?

We have already seen at least one State AG suing a major lender for making loans which it claimed the lender knew borrowers could not repay. Wider application of this “ability to pay” standard, a requirement in the mortgage lending space, could have a chilling effect on subprime lending, all at a time when consumer demand is so strong for them. advantages of owning a vehicle.

Clear regulations and enforcement policies will be needed to provide clarity to lenders and other market players. Access to credit among the most underserved consumers can be severely affected if lenders fear legal exposure under uncertain new standards.

Joseph Cioffi is a partner at Davis + Gilbert LLP in New York, where he is Chairman of the Insolvency, Creditors’ Rights + Financial Products practice group. He has experience at all stages of the credit and market cycles, including subprime loan investments, transactions and litigation. He can be reached at JCioffi@dglaw.com. Nicole Serratore is a lawyer in the Insolvency, Creditors’ Rights + Financial Products practice group at the firm in New York. She can be reached at NSerratore@dglaw.com.