By Ray Birch
SAN FRANCISCO—More than ever, credit unions need to be carefully reviewing the auto loan contracts they receive from dealers as the CFPB will hold the lender responsible for any “junk” fee that’s charged.
“One of the things that's really interesting about auto lending is that these are very large documents,” said Tom Oscherwitz, VP of legal at Informed.IQ. “All these products and charges being made by the dealer, the credit union is being held accountable for them, even if they weren't the folks who initiated the charges. For example, if there is an add-on contract, maybe there's a warranty, maybe additional coverage for the tires, all these are getting put into the loan and the credit union is responsible for them.”
Oscherwitz reiterated that while the credit union doesn’t necessarily control all the pieces of the indirect lending puzzle, it is accountable for what the puzzle looks like.
Targeting Junk Fees
“For the last several years, both the Biden Administration and some of the federal agencies, including the CFPB and the FTC, have been targeting what they considered to be junk fees,” said Oscherwitz. “The concern here is that consumers are getting charged for things that are either too expensive or they don't want. At a high level, the CFPB is focused on charges they think have no value or are worthless. If you're a company, you need to understand what things are worth and the value inherent in your products.”
But how does a credit union closely monitor dealer loan contracts to be certain they include proper and fair pricing so they don’t get “burned” by the CFPB?
“You have to know the contract. You have to understand the terms of the contract,” Oscherwitz said. “For example, the contract might have certain late fees. It might have a fee related to repossession, and have all these different requirements. You need to understand what those terms are and that requires some way to actually read that contract.”
Tom Oscherwitz
Can’t Sideline the Issue
Oscherwitz contended that, historically, credit unions and all lenders have just pushed that task to the side, saying those fees are not their responsibility.
“But now, with this focus on fees from the CFPB, it is your responsibility,” he said. “You are responsible for all that information, all that pricing, all of the charges in the contract. You have to be able to glean out all that information in the contract. You need to be able to calculate refunds correctly—which means you have to understand all the requirements.”
How to Do It?
How are credit unions doing that effectively?
“The ones that are starting to pay attention here are using automated solutions that leverage AI so they can pull that information out in a digestible format and evaluate it,” accordingto Oscherwitz.”
The other option, noted Oscherwitz, is the traditional method of staff manually combing through contracts.
“You have to dig and dig. Pull out the PDFs. Read the PDFs. That’s a lot of labor-intensive work. It's money, and it’s error prone,” he said.
What about the so-called “hallucinations” of AI in whih the technology generates false or misleading information presented as fact.
“AI is making sure you have proper model governance, and there are ways to monitor AI so you can ensure accuracy,” he said.
Upping the Game
As anyone who has been following the news knows, Oscherwitz said fees included in all lending contracts are becoming a bigger issue today.
“We're entering a world in which the expectations are getting higher from regulators,” he said. “And, regulators are also using AI. Back in the day, when I was at the CFPB, we did a sampling of transactions. We would look at a small number of transactions. But with the capabilities now, they can do much more global monitoring. Lenders have to up their games. The CFPB is now able to get through a much larger amount of data, which means they can find more violations and hold you accountable.”
The game is being raised across the financial services ecosystem, said Oscherwitz.
“Lenders are going to be expected to have the technology to monitor contracts better to spot unfair charges and avoid violations the regulators today are more likely to find,” he said.