A New Day in the Consumer Leasing World – The Effect of the Consumer Protection Bureau on the IndustryBy Michael Dougherty Partner, Weltman, Weinberg & Reis Co., LPA
On July 21, 2010 President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, “the Dodd-Frank Act”. With the passage of the Dodd-Frank Act came the creation of the Consumer Financial Protection Bureau, “CFPB”. The stated purpose of the CFPB is to ensure that consumers have timely and understandable information to make responsible decisions about financial transactions; protect consumers from unfair, deceptive or abusive acts or practices; to reduce outdated, unnecessary and unduly burdensome regulations; promote fair competition and consistent enforcement of consumer protection laws; and, encourage markets for consumer financial products and services to operate transparently and efficiently.
To accomplish this goal, enforcement of most consumer protection statutes were consolidated in the CFPB. Among the statutes now under the purview of the CFPB are: the Fair Credit Reporting Act; the Fair Debt Collections and Practices Act, the Truth in Lending Act and The Equal Credit Opportunity Act, and the Consumer Leasing Act.
In the very short time since its origination the CFPB now has over 750 employees and has a fiscal funding level of 498 million dollars for FY 2011 and 547.8 million for FY 2012. The CFPB can also request an additional 200 million dollars of funding with congressional approval.
So the $64,000 question becomes: how does the creation of this governmental oversight agency affect the consumer leasing world and its relationship with its third party vendors? The most direct affect will be in the relationships the leasors have with their subcontracted parties and in particular their repossession companies. Most institutions that are lenders in the consumer auto and marine markets will be under the direct supervision of the CFPB. As a supervised entity the lenders are expected to manage relationships with their third party service providers, i.e. the repossession companies, to ensure that these providers effectively manage compliance with Federal consumer financial laws applicable to the product or service being provided. As a result, risk management which was always stressed by the leasing industry, will now be even more a priority and the leasors obligation to ensure the compliance of its third party vendors, including the repossessors, will be an issue squarely at the forefront of compliance.
The CFPB has not given any direct guidance to leasing institutions as to how they expect them to manage and oversee their third party vendor relationships, but they have referenced the guidance given by the FDIC. Under the FDIC risk management process leasing companies will need to focus on risk assessment, due diligence in selecting third party vendors, contract structuring and review, and oversight.
Under the risk assessment rubric, leasors will need to ask themselves if the proposed relationship is consistent with the institution’s strategic plan and overall business strategy. They must then identify performance criteria, internal controls, and reporting for their third party vendors. As it relates to the selection and use of a third party vendor, it means that once the leasor has decided to subcontract out any function related to the leasing contract, the leasor must actively oversee the work of that subcontractor.
The second aspect of the FDIC oversight guidance relates to the leasors due diligence in selecting a qualified subcontractor. In this regard the leasor will be looking very closely at the subcontractor’s business including its financial condition, relevant experience, knowledge of applicable laws and regulations, reputation, effectiveness of its operations and controls, management of information systems, and knowledge of consumer protection laws. The fact that the subcontractor may have a positive twenty year relationship with the leasor will no longer be enough. The leasor must be able to demonstrate that it did its due diligence and looked into all aspects of the subcontractor’s business. The subcontractor must be able to show, not just tell, the leasor that it complies with consumer protection laws. In this regard written compliance procedures and practices must become the norm.
Next, the contract between the leasor and the subcontractor must now be more specific especially as it relates to how the third party vendor handles consumer complaints. When signing these contracts the third party vendor must assure the lenders that it fully complies with all relevant consumer laws, and they have policies and procedures in place to ensure their enforcement.
Finally, the oversight required of the third party subcontractor by the leasors needs to be actively managed. Oversight has always been a top priority in the consumer leasing industry, but this oversight will grow even more as the CFPB becomes more a part of the daily life of the leasors it oversees.
Effective and active third party vendor management was important in the leasing industry in the past but it will be a requirement in the future. Establishing, implementing and enforcing an active, robust and comprehensive third party vendor management system is not only good business practice but is a necessity to remain compliant under the CFPB’s rules and regulations. With this new age of CFPB oversight, those leasors who take steps early to establish these oversight programs be the ones best suited to work with the CFPB and be in compliance with their guidance on third party vendor management.