Forecasting Tomorrow's Compliance and Regulatory Environment

MINNEAPOLIS and BATON ROUGE, La. — Top executives from Wolters Kluwer Financial Services and AppOne recently looked ahead to some of the challenges that will face the indirect lending arena and dealers in 2008.

When asked what the biggest regulatory and compliance issue that the auto finance industry faces today, Lee Domingue, chief executive officer of AppOne, told SubPrime Auto Finance News, "The biggest obstacle facing the auto industry is the sheer complexity of the various legal and regulatory requirements.

"Ensuring compliance can be a time-consuming and difficult task, especially for small- and medium-sized lenders, such as community banks," he said.

As for Kevin Kopp, director of indirect lending with Wolters Kluwer Financial Services, he indicated, "With a complex legal and regulatory environment, dealers and lenders need to make sure they are interpreting and implementing new requirements correctly, which takes education and training, as well as additional time and resources.

"However, outside compliance sources can help," he pointed out. "Dealers and lenders need to look for those that can provide key benefits, such as early fraud detection and complete compliance loan packages, while helping to maintain an expeditious funding process."

Looking ahead at some of the challenges that may face the industry next year, Kopp went on to say, "Our federal and state governments continue to consider and craft consumer-oriented legislation related to auto finance and particularly the indirect lending process."

Basically, he stressed that lenders and dealers need to take specific actions. They must not ignore the potential risk and liability that comes from being passive with regards to compliance.

"During the past year, the industry has seen a definite trend toward federal and state consumer protection law enactment relating to the auto finance process. For example, there are currently several states that are, at a minimum, considering Consumer Bill of Rights legislation, which could mean greater disclosure requirements for dealerships," Kopp indicated.

Another hot topic he mentioned was documentation fees, saying, "In some dealerships this will have an effect on their bottom line. Based on recent activity, it appears this trend of introducing consumer-focused legislation will not change soon."

Domingue characterized the current regulatory environment as "very volatile," saying he doesn't see this trend ending any time soon.

"It's only getting more intense. While there are a growing number of requirements affecting the automotive finance industry, they will likely not serve their purpose, which is protecting the consumer, if there is no real enforcement," he explained. "Little or no enforcement sends a wrong message and only offers a false sense of security."

Particularly at risk from compliance and legal issues are independent dealers, Kopp noted.

"Compliance and legal issues continue to have a weighty effect on the business of independent auto dealerships. A good example of this is the recent steps some states have taken to cut down on fraudulent titles, which impacts disclosures," he said.

"This increases the risk of error, which could slow the sales and finance processes," Kopp added. "It also adds time to the administrative process at the dealership, which leaves less time to market and sell vehicles, which is the dealership's primarily business purpose."

Domingue brought to light the issue of more lenders passing increased costs on as the compliance and regulatory burden grows.

"The direct effect on dealers is added documentation, but more indirectly is the never-ending compliance burden placed on the lending community," he explained. "The increased cost and exposure has caused some lenders to charge more and require more information from the dealer, which puts operational pressure on the dealer to be productive in an area where they typically have little or no expertise."

Returning to the topic of Consumer Bill of Rights legislation, the executives voiced their concern for the future.

"I think the general consensus is that the California Car Buyers Bill of Rights will set the standard throughout the country for the next three to five years. But this is another example of consumer-driven regulation that will only work if there is true enforcement at the state level," Domingue said.

Kopp was a bit more specific, saying that two states have passed or are considering legislation similar to what California has implemented — Minnesota and Massachusetts.

"Minnesota passed a less stringent version of the California Car Buyers Bill of Rights recently," he reported. "Meanwhile, Massachusetts has proposed Bill of Rights provisions in the past that would cap dealership markups and compensate dealers by replacing the markup with a fee of 0.5 percent of the loan amount, or $150 (whichever is less)."

He went on to say that Massachusetts is looking to require more detail in contract disclosures, particularly itemization of trade-ins.

"This type of legislation requires lenders and dealerships to be more diligent and educate themselves, which can take resource time away from their core business purpose," Kopp indicated.

In conclusion, Domingue said, "When looking ahead at the regulatory environment, it really comes down to preparation and protection. Dealers and lenders can benefit greatly from relationships with strong compliance partners who can help them avoid potential legal and regulatory land mines.

"There also needs to be better collaboration between dealers and lenders, and continuous improvement in finding ways to monitor and streamline industry requirements," he concluded.

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