Today's Trends in Credit Regulation

The Times They Are A-Changin’
By Eric L. Johnson

Recently, I left my old firm of 12 years and opened up the Oklahoma office of Hudson Cook. I was very excited to make the change, but, as my wife tells me, I’m a creature of habit, and change can be difficult for me. When I told one of my friends at my old firm that I would be leaving, his response to me was, “Change is always difficult, but almost always for the better.” Well, as I look around my new office, with my diplomas still on the floor instead of on the wall, the new boxes of supplies from Staples, and the boxes and boxes of books I brought with me, I’m thinking about my friend’s comment about change and what I see coming for the automotive finance industry. I’d like to share a few of these changes with you.

One of the first changes I’ve noted at the state level is the speed at which some of the state regulators appear to be moving. They seem to have a “shoot first, ask questions later” type of approach. For example, I was called on by a client recently to help it resolve a Cease and Desist Order it had received from a state regulator. The regulator had received a consumer complaint about this creditor, which had been doing business in the state for more than 10 years. The investigator reviewed the complaint and searched the agency’s licensing records to determine if the creditor was licensed by the state agency. Finding no such license, the investigator then contacted the creditor. The creditor thought it had been operating under some type of exemption from licensure, but couldn’t properly articulate the exemption to the investigator. Fearing an unlicensed creditor operating in its state and harming consumers, the agency promptly fired off a Cease and Desist Order to the creditor, effectively shutting down its operations. No business could be conducted at the unlicensed location, and the employees were sent home.

I was able to speak with the regulator, explain the client’s exemption from licensing, and, by the end of the day, get the Cease and Desist Order dismissed. I’ve worked with that agency for many years and have noticed an appreciable shift in its attitude toward dealing with consumer complaints. Maybe the shadow of the Consumer Financial Protection Bureau looming over the agency has prompted it to take this “shoot first, ask questions later” type of approach. Just as the CFPB shadow looms over this state agency, you can bet it’s also looming over your state regulator as well, so be on the lookout for this change in attitude and actions by your state regulator.

Another change I’m sure you’ve read about or heard discussed recently is how you should be monitoring your business relationships with service providers in a way that ensures compliance with federal consumer financial services laws. The far-reaching impact of the CFPB’s Bulletin (2012-03), at the time it was issued, hadn’t quite been realized by everyone. As you may know, the CFPB expects nonbanks to have effective processes for managing the risks of service provider relationships and to take several steps to ensure that the service provider relationships do not present risks to consumers. These steps include

  • conducting due diligence to verify that the service provider understands and can comply with federal consumer financial law;
  • reviewing the service provider’s policies, procedures, internal controls, and training materials to ensure that the service provider conducts the appropriate training and oversight of its employees or agents who have compliance responsibilities or contact with consumers;
  • including in the service provider contract clear expectations about compliance and enforceable consequences for violating any compliance-related responsibilities, including any unfair, deceptive, or abusive acts or practices;
  • establishing internal controls and monitoring to determine if the service provider is complying with federal consumer financial law; and
  • taking prompt action to fully address any problems identified in the monitoring process, including termination of the service provider relationship when appropriate.

If you haven’t started taking these steps, you really should – quickly.

Finally, another change of significance you should be thinking about is what your compliance management system looks like. I’m now a part of our firm’s team effort to develop a robust and effective CMS template for auto finance companies. The CFPB doesn’t currently have supervisory authority over auto finance companies, but it’s expected that the Bureau will issue a “larger participant” determination for auto finance companies within a few months – and probably not until 2014.

You might remember that, at the end of October last year, the CFPB released a report – “Supervisory Highlights: Fall 2012” – that described the problems its examiners discovered through the Bureau’s supervision process. The CFPB stated that a “critical component of a well-run financial institution is a robust and effective compliance management system (CMS), designed to ensure that the financial institution’s policies and practices are in full compliance with the requirements of Federal consumer financial law.”

The Bureau expects compliance management activities to be a priority for the financial institution’s consumer business. Each entity supervised by the CFPB is expected to “develop and maintain a sound CMS that is integrated into its overall framework, and applied to its entire product and service lifecycle.” The CFPB considers an effective CMS program to include these components: internal controls and oversight; training; internal monitoring; consumer complaint response; independent testing and audit; third-party service provider oversight; recordkeeping; product development and business acquisition; and marketing practices. If you don’t have a “sound” CMS, then you better get started. As I mentioned above, the CFPB has now finalized most of its mortgage rules, and it has turned its attention towards auto finance.

These are but a few of the changes I’ve been thinking about recently as I unpack. In the immortal words of Bob Dylan, “Gather ‘round people, wherever you roam, and admit that the waters, around you have grown, and accept it that soon, you’ll be drenched to the bone, if your time to you, is worth savin’, then you better start swimmin’, or you’ll sink like a stone, for the times they are a-changin’.”

It’s time to get the swim trunks on and start swimmin’.

Eric L. Johnson is a partner in the Oklahoma office of Hudson Cook, LLP. Eric can be reached at 405-602-3812 or by email at

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