How to Handle New CFPB Rules in 2017

Editor's Notes

• #7: My notes (do you want me just to talk to the slide? Do you want me to show anything in our system to demonstrate the things noted below?) I should probably also state up front that I’m not the expert in compliance?? That this is what we have seen from the originations standpoint – a little worried they will ask me questions I don’t know!: For years all the fun NEW compliance conversations have revolved around backend processes and systems. The handful of usual suspects in originations remain of course. But this year, the CFPB gives us something to think about in regards to your originations process. So we are going to do a quick review of the usual suspects and then jump into the new Military APR requirements. Usury & Reg Z. It would be great if usury by state was easily defined. Just a clear table of max APR. But it’s not. So each lender is left to review the state rules and determine the max APR they can assign upfront in Underwriting. Even if you sign up with various services that will give you their opinion, ultimately it is still on the lender to get legal approval for the max APR they charge. So the key thing in Usury remains having a system that 1) let’s you enter your max APR based on your legal interpretation and the variables you need (like model year and term) and 2) ensuring that NO user can approve an APR above the max for that deal. If you are on a system that would for any reason allow an override of the Usury Max, you put yourself at risk. If you are on a system that has the max APR tables hidden or hardcoded, unable to update easily, or is lacking the variables you use to determine max rate, you put yourself at risk. You should not rely on your software provider to tell you what the Max APRs are but rather to provide you the security of entering your interpretation as well as making it a black and white rule. Reg Z on the other hand, is not a formula left up for interpretation. Once the deal is approved and it comes in for funding, there is a very black and white calculation that must be done to ensure the lender is in compliance. Bc this is such a critical component for a lender, we personally do not do the calculation ourselves. We focus on what we are good at and we partner for the rest. So for our lenders, once the deal is in Verifications, if they opt in, and they should, there would be a call made to Carleton Smart Calcs who is an expert in this arena. Carleton would then send back a thumbs up or down. B/c Carleton is the expert in this area, they keep up with the laws and any changes that might be made to this calculation to ensure lenders are compliant. If you have built your own system and checks, you are responsible to do this. If you are using a system that built in the calculations themselves, make sure they have the right resources to stay up with this. Adverse Action Like Usury, each lender may have their own interpretation of Adverse Action. First would be the verbiage of the adverse action reasons and which ones each lender wants to use. Obviously this should be something each lender should be able to set and adjust themselves. You should not rely on your software provider to provide the list. Even if an initial list is provided, the lender should ultimately review and sign off on it or make changes to it. Then who to send the letters to. Some lenders choose to send to everyone – just in case. Others send them to only declines and counter offers/conditionals. However, each lender may have a different definition of conditional. Some follow the more traditional (if amount financed or term is lower than requested). Others consider it conditional if any variable changes in any direction. Then what letter to send. Some lenders send a “first letter” or a generic letter that states “if you want more info on specific reasons, call us” and then when they call, they give the more specific letter. Other lenders, send the specific letter right away. Then there is when to send. Some lenders might want to be more conservative and send them 10 days after the decision, others 20, others 30. Then is the verbiage within the letter. While there are definitely templates provided, not everyone uses them as is. So even if your originations system provider has an out of the box setup and suggests a certain way to do your adverse action letters, the lender should still a) review and sign off and b) stay up to date on any legal changes rather than be dependent on your software provider who may or may not interpret them the same and c) ensure that the system you have is flexible enough for you to make the changes quickly when you need to. Consistency of Decisions As everyone has learned over the last decade, the key to showing that you aren’t discriminating in your decisioning process is to actually have a system that works as an audit trail for you. To show that when an application comes in, consistent decisioning logic is applied. Transparency around rules used, decision status and terms. The only real change we have seen here is the CFPB becoming more broad about who they might go after. So it is now more than ever critical that lenders of every size have a system that can do what were traditionally things only large lenders could afford. For lower volume lenders, it is a tough mind-shift change to think of entering every application the dealer shows them through a system so all data is trackable versus eye-balling applications first before deciding which ones to enter. From a compliance standpoint on the originations side, if you fear that your system puts too much power in your hands, you shouldn’t. Ultimately it is your responsibility as a lender anyhow. So what you want is a software provider that can let you adjust quickly and that when new laws come around, like the one we are about to talk about, the system can be enhanced rapidly to ensure you stay in compliance.
• #8: Who does it impact Direct Lenders Anyone else??? Kristin didn’t Dawn mention something else or no? Steve might be able to confirm for sure. When does it go into effect October 3rd Impact in Underwriting It is our understanding that on every application that comes in or at least prior to funding, the lender should determine if the applicant is impacted The bureaus offer a product that can be added on to the lender subscriber code and sent back with the bureau XML. This product checks the DOD database and returns a yes for military and a no if not. If the answer is yes, the max APR that can be charged is 36%. If the answer is yes, the lender may want to notify the customer that they are aware they are military and that the max rate is 36%. Impact in Verifications/Funding The Reg Z check or APR calculation is different for customers where the flag = yes. Carleton is updating their formula to calculate correctly on military applications. To our understanding it is calculated without charging interest on sales tax, warranty and gap (warranty and gap are the lenders choice). Since we are integrated with Carleton for this check, our lenders will get the benefit of this calculation change. What did defi have to do to prepare for this change: Bc the new yes/no field comes from the bureau, it is passed through to defi automatically as our customers can access any field the bureau sends for use in rules. We did have to enhance our integration with Carleton to send a few new fields to them for their calculation. 
• #10: Largest industry for consumer complaints -85,000 last year-25% of all consumer complaints Debt don’t owe Harrassment Making false or misleading statements Threaten legal action or take illegal action Improper contact Disclosing debt to 3rd parties
• #11: Largest industry for consumer complaints -85,000 last year-25% of all consumer complaints Debt don’t owe Harrassment Making false or misleading statements Threaten legal action or take illegal action Improper contact Disclosing debt to 3rd parties
• #15: Repossession- Lien verification upon assignment a form of verification and substantiation of debt
• #16: Repossession- Lien verification upon assignment a form of verification and substantiation of debt
• #18: Appendix E