CFPB Update and Discussion

Randy Henrick Associate General Counsel | Regulatory and Compliance

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Compared to a year ago, how would you characterize the CFPB’s activities with respect to investigation and enforcement of alleged credit discrimination in the auto finance market? No change. They are continuing to pursue investigations and enforcement actions actively at about the same rate

36% 35%

I am not sure They are being more aggressive in trying to push settlements, possibly fearing the effect of an adverse (to them) ruling by the Supreme Court

13%

They are essentially in a holding pattern, awaitng the U.S. Supreme Court's ruling on disparate impact credit discrimination under the FHA

10%

They are moving on to other areas in auto discrimination and are less active on the credit discrimination front They are being more reasonable on settlement demand terms and more open to settling confidentially on less onerous terms than at first

4% 1%

0% Copyright © 2015 Dealertrack, Inc. All rights reserved.

20% 2

40%

60%

80%

100%

The CFPB will probably look to focus its enforcement authority on ________ (pick all that apply) Finance Companies

56%

Captive Lenders

55% 32%

Aftermarket Providers

21%

Leasing Companies

10%

Other

n=115

0% 20% 40% 60% 80%100% Copyright © 2015 Dealertrack, Inc. All rights reserved.

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The CFPB – Under Fire on Indirect Auto Finance No auto finance credit discrimination consent decrees announced since September 2014 2014 CFPB Fair Lending Report: states “the CFPB has a number of authorized lawsuits.” -

But no lawsuits have been brought. Why not?

AFSA commissioned the Charles River Associates study which shows the illegitimacy of the CFPB’s BISG proxy methodology Not one check has been issued to consumers from the December 2013 $98MM settlement on “disparate impact” credit discrimination

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The CFPB – Under Fire on Auto Finance U.S. Supreme Court is about to rule on the legitimacy of a “disparate impact” cause of action under the Fair Housing Act Bipartisan bill was introduced in Congress to repeal the 2013 Auto Finance Guidance Congressional bill to limit CFPB funding has been reported out of Committee in the House Bills pending to head the CFPB with a panel and provide for Congressional appropriations funding

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Recent Lawsuit: Refusal to Adopt CFPB Position on “Flat Fees” for Disparate Impact U.S. v. Evergreen Bank Group: “disparate impact” auto finance consent decree approved by U.S.D.C. for the Northern District of Illinois in May, 2015 DOJ-negotiated consent order gave the bank the following option to comply: 1. Require a standard dealer markup of 100-130 BP depending on credit term 2. Establish DOJ-approved exceptions to permit lowering the markup to individual customers 3. Document circumstances justifying the exception in each deal

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CFPB Focusing on Other Areas Indicated it is looking closely at aftermarket products Takes the position that: -

If consumers finance it, it is a consumer financial services product They have jurisdiction at the lender and provider level

Rumors that fair lending audits are drilling down on aftermarket products for unfair, deceptive, or abusive sales practices (“UDAAPs”) -

With no jurisdiction over dealers, how will the CFPB try to impute this to lenders in indirect auto finance?

-

Previous CFPB aftermarket provider settlements have been with the financial institution that marketed the product

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CFPB Focusing on Other Areas (cont.) Recent credit discrimination cases have involved redlining (disparate treatment) Planning to allow consumers to publish unstructured narrative complaints on their Consumer Complaint Web Database - Includes complaints about auto finance

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The FTC – Son of CFPB for Auto Dealers Announced Operations “Steer Clear” and “Ruse Control” - Polices deceptive dealer advertising and sales practices - Partnering with 32 law enforcement agencies in U.S. and Canada Entered into 28 twenty-year consent decrees on dealer advertising since 2012 Settled a deceptive aftermarket payment product claim - Included the dealer and the service provider - Dealer paid $184,000 in penalties and rebates Recently sent a letter on Michigan bill encouraging states to to allow manufacturer-direct sales to consumers Copyright © 2015 Dealertrack, Inc. All rights reserved.

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Other Regulatory Issues On the Horizon Subprime auto finance: a bubble waiting to burst? Regulators are concerned A recent study found 25% of 11MM subprime households spend 50% of income on rent. Of these, 1.8MM spend 70% or more of income on rent Delinquency levels for subprime borrowers have grown: -

from 4.2% in 3Q 2012 to 5.3% in 3Q 2014

Repossessions are up, too. The repossession rate jumped 70% from the second quarter of 2013 to the second quarter of 2014

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Other Regulatory Issues On the Horizon Subprime auto finance – a bubble waiting to burst? Regulators are concerned But a Q1 2015 Experian Automotive Report found: -

Subprime automotive loans made up only 19.7 percent of the auto finance market Its lowest quarterly share since 2012.

Regulators are investigating underwriting criteria and subprime credit practices at several large financial institutions

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Growth of Subprime Auto Securitizations

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Other Regulatory Issues on the Horizon CFPB Arbitration Study: - May portend the writing of a rule limiting mandatory consumer arbitration or class action waivers - Probably 2 years away from taking effect CFPB “first party” debt collection enforcement activity: - Essentially making the FDCPA applicable to lenders collecting their own debts - Uses the CFPB’s UDAAP authority to do so ACE Cash Express – a payday lender cited for UDAAPs (FDCPA violations) for its collection activity and that of a collection agency it used - Effectively circumvents CFPB’s notice of proposed rulemaking on debt collection

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Other Regulatory Issues (continued) Sales of loans without original loan documentation are being scrutinized -

Especially sales of written-off loans to tertiary collection agencies

CFPB has declined to provide guidance on the standards under which creditors may be held liable for the acts of their third-party service providers - In ACE Cash, violations consisted of activity both by ACE and debt collectors hired by ACE as service providers without giving a legal standard for ACE’s liability - Assume you will be held responsible for misdeeds of service providers

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Thank you. [email protected] 516.734.3644

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