Compliance

It’s Time for an Auto Lending Compliance Tune-up

Auto-loan uptick provides opportunity for review.

July 27, 2012
KEYWORDS auto , credit , dealer , lending , loan
/ PRINT / ShareShare / Text Size +

While the economy certainly isn’t humming along, we have seen an uptick in auto lending.

Through April 2012, auto lending has been positive overall on an annualized basis for the first time since 2005, driven by used car lending. New car lending is still down, but improving, according to CUNA Mutual Group and CUNA’s economics and statistics department.

Given these hopeful economic signs, this is a great opportunity to review compliance issues related to auto lending. Making this discussion a little more complex is that most credit union auto loan portfolios are broken down into direct and indirect loans.

Let’s look at each of these loan types.

Direct loans

Direct loans come in two varieties:

1. The member contacts the credit union directly to finance a car purchase. There’s some communication between the dealer and the credit union, but only to obtain security information, loan amount, and other information to close the loan.

2. The credit union and the dealer have an arrangement whereby the dealer provides opportunities to the credit union to make auto-secured loans.

Likely, there may be other lenders “bidding” on the loan. The closing occurs at the dealer, but the loan is written on credit union loan papers.

For the first type of transaction, the compliance issues are relatively straightforward. Basic rules regarding the Truth-in-Lending Act (TILA), Equal Credit Opportunity Act (ECOA), and state lending laws will apply.

The second type of transaction involves these compliance issues and two others:

  • The dealer may be your agent. You should have solid due diligence and a strong hold-harmless agreement with the dealer.
  • The holder in due course rule will likely apply. Make sure you have appropriate documents that provide for the holder in due course rule.

Indirect loans

Let’s define an indirect loan as one in which a credit union purchases a loan from the initial lender, which is often the auto dealer.

These loans often are written on a document called a retail installment contract (RIC). This includes not only details of the loan transaction, but also the purchase agreement between the dealer and the borrower/purchaser.

All of the compliance issues with direct loans also apply to indirect loans. In other words, TILA, ECOA, state lending laws, agency law, and holder in due course may be issues.

Credit unions need to be aware of additional risks with indirect lending:

  • When buying a RIC, TILA liability may still apply, especially for obvious violations. Credit unions will need processes in place to review documents for obvious violations.
  • Regulators and trial attorneys are scrutinizing dealer compensation programs that involve marking up interest rates for possible violations of ECOA’s disparate impact test for lending discrimination.

These compensation programs need a thorough review and ongoing due diligence to lessen the possibility of ECOA problems.

It’s a great time to review your auto-secured lending programs. Direct and indirect lending have similar compliance issues, but they’re not the same. They require different policies, processes, documents, and review.

BILL KLEWIN is the director of regulatory compliance at CUNA Mutual Group.

Post a comment to this story

heroes

What's Popular

Popular Stories

Recent Discussion

Great article! Unfortunately, most employees don’t feel valued or appreciated by their supervisors or employers. In fact, research has shown that the predominant reason team members quit their jobs is because they don’t feel valued. This is in spite of the fact that employee recognition programs have proliferated in the workplace – over 90% of all organizations in the U.S. has some form of employee recognition activities in place. But most employee recognition programs are viewed with skepticism and cynicism – because they aren’t viewed as being genuine in their communication of appreciation. Getting the “employee of the month” award, receiving a certificate of recognition, or a “Way to go, team!” email just don’t get the job done. How do you communicate authentic appreciation? We have found people have different ways that they want to be shown appreciation, and if you don’t communicate in the language of appreciation important to them, you essentially “miss the mark”. Additionally, employees need to receive recognition more than once a year at their performance review. Otherwise, they view the praise as “going through the motions”. A third component of authentic appreciation is that the communication has to be about them personally – not the department, not their group, but something they did. Finally, they have to believe that you mean what you say. How you treat them has to match the words you use. If you are not sure how your team members want to be shown appreciation, the Motivating By Appreciation Inventory (www.appreciationatwork.com/assess) will identify the language of appreciation and specific actions preferred by each employee. You then can create a group profile for your team, so everyone knows how to encourage one another. Remember, employees want to know that they are valued for what they contribute to the success of the organization. And communicating authentic appreciation in the ways they desire it can make the difference between keeping your quality team members or having a negative work environment that everyone wants to leave. Paul White, Ph.D., is the co-author of The 5 Languages of Appreciation in the Workplace with Dr. Gary Chapman.

Your Say: Who should be Credit Union Magazine's 2014 CU Hero of the Year?

View Results Poll Archive