Ballooning Compliance Burden & Shrinking Customer Patience
With ever-increasing oversight and regulation, lenders are having a tough time keeping pace with regulatory requirements (Truth in Lending Act just being one of them). Endless compliance and legal team hours are spent ensuring that all business processes are in step with the latest requirements. However, with auto buyers more distracted, and more mobile than ever, the challenge in completing all requirements has grown.
Truth in Lending Act requires the origination fee to be added to the interest charge, and then that Finance Charge is annualized. The origination fee does not reduce the principal of $200.
— Katie Porter (@katieporteroc) March 11, 2019
Lenders are now faced with a daunting challenge of managing a growing compliance burden with dated tools and processes in front of distracted, mobile customers. Here are a few of the elements in the Truth in Lending Act, TILA, that lenders must manage, and some guidance for efficiently managing the burden.
The Truth In Lending (TILA) – The Basics
As a lender, you often arrange financing for your customer’s purchases. Besides the obvious convenience of this service and the benefits of closing the sale quicker, lender financing is an important profit center for your business. However, if your financing practices do not comply with TILA, you may be liable for lending fraud, or compromise your own ability to pursue legal action against a delinquent borrower.
TILA was passed in 1968 to protect consumers in their dealings with lenders, including car lenders, by requiring full disclosure of the cost of credit. Full disclosure allows consumers to shop around for the best deal. The Act is implemented by the Federal Reserve Board via Regulation Z, which has effect and force of federal law.
Car Sales and RISC
With the cost of new cars often exceeding $30,000, consumers are relying increasingly on credit to purchase their vehicles. In fact, more than 80% of new car shoppers are financing or leasing their new cars. When a customer chooses to arrange financing, you will prepare a Retail Installment Sales Contract (RISC) which outlines the credit terms. The RISC sets forth the details of how the financing is to work. For example, the interest rate, the finance charge, amount financed, total payment, total sales price, and the number and amount of payments.
The majority of dealers do not extend credit directly to their customers in the sense of holding the RISC and charging and accepting the payments outlined within. Rather, they rely on sales finance companies, banks, or other lenders who are willing to extend credit to the customer and sell the RISC to them.
Nonetheless, because the dealer was the one who initially offered the credit, TILA defines him as the “creditor” and he must provide his customer with disclosure of how the financing is to work as outlined in the RISC. These disclosures must be made before the customer becomes legally obligated to buy the vehicle on credit. Among the necessary disclosures is “An itemization of the amount financed.”
It is here where most TILA violations occur in the form of hidden or disguised charges that should have been disclosed as finance charges. TILA requires any charge that is “incidental to the extension of credit” to be disclosed as a finance charge. In other words, any penny that a borrower pays that he wouldn’t otherwise be paying if he were buying the same car with cash, is a finance charge, and has to be disclosed as such.
TILA helps consumers fight back against collection lawsuits and lending fraud. So where exactly must dealers be careful in their disclosures?
- The sale price of the car: They may not raise the agreed upon cash price after a credit check returns a poor rating. This is considered a hidden charge and is therefore in violation of TILA.
- Down Payment or Trade-In Value: Any changes in the agreed upon down payment or trade-in value are considered hidden charges and are therefore in violation of TILA.
- Monies Paid to Third Parties on Behalf of the Borrower: Any withholding of the total amount due is considered a hidden charge. In the case of negative equity on a previous car loan, any increase to the balance is considered a hidden charge and is therefore in violation of TILA.
- Government & Recording Fees: Overcharging for “out of state” borrowers is considered a hidden charge and is therefore in violation of TILA.
- Doc Fees: Some states place no limits on these fees, but if your state has such limits, you must abide by them. Any amount beyond the limit is considered a hidden charge. Charging a higher doc fee for a borrower, as opposed to a cash buyer, is also considered a hidden charge and is in violation of TILA.
- Service Contracts, GAP Insurance, and Credit Insurance: These are completely optional for the borrower and the contract he signs must state that he is not required to buy them. You may not insist on raising the sales price of the vehicle if no such “extras” are purchased. Doing so is considered a hidden charge and is in violation of TILA.
TILA violations entitle a borrower to sue for actual damages, statutory damages of $1,000, plus attorney’s fees. Action may be brought in any U.S. district court or in any other competent court within one year from the date on which the violation occurred.
This limitation does not apply when violations are asserted as a defense, set-off, or counterclaim, except as otherwise provided by state law. If a creditor is found guilty, enforcement agencies can issue cease and desist orders or hold hearings pursuant to which creditors are required to make adjustments to the borrower’s account.
Citibank must pay $335 million to credit card customers for violating Truth in Lending Act restrictions on annual percentage rates. https://t.co/OOmey5rVHc
— ICBA (@ICBA) July 7, 2018
If the Federal Trade Commission determines in a cease and desist proceeding against a particular individual or firm that a given practice is “unfair or deceptive,” it may proceed against any other individual or firm for knowingly engaging in the forbidden practice, even if that entity was not involved in the previous proceeding. Willful and knowing violations of TILA permit imposition of a fine of $5,000, imprisonment for up to one year, or both.
Most cases however, end in arbitration. As a lender you are required to provide your customer with TILA disclosures prior to his signing of the loan contract. Often, disclosures are included as part of the loan contract itself. Disclosures must be made:
- “Clearly and conspicuously”
- In meaningful sequence,
- In writing, and
- In a form the consumer may keep.
Layers of Regulation Created A Heavy Compliance Burden
Part of the challenge in managing layers of regulation are the numerous processes, people and technologies they impact. Because each regulation applies to a certain subset, it becomes a challenge to restructure and simplify the layers of compliance, as a result, lenders often compensate with ‘bandaid’ like solutions to adjust for each nuance. The result is a cobbled and fragile web of compliance documentation, procedures appended to match each circumstance. This is fragile and risky.
Paths to Simplify Compliance In Lending
Thankfully, new solutions enable digital workflows to automatically piece together and deliver the exact regulatory package to meet each customer need. Moreover, these packages can be simply executed by the customer using streamlined, mobile-first technology.
Real-Time Collaboration platforms, like Lightico, enable lenders to instantly supply customers with itemized and standardized disclosure forms. In addition, electronic records of what was sent, to whom and when it was completed, ensure that lenders have the transparency and accountability to simplify compliance audits. Thanks to agile technology solutions, lenders can now streamline regulatory compliance for TILA and all its associated regulation.