By Michael Gordan, defi SOLUTIONS VP, Compliance
As secured transactions, auto loans are typically guided by the Uniform Commercial Code. The UCC is a model code that each of the fifty states can adopt, or not, as they see fit. The group that oversees the UCC periodically updates it as business realities change or as areas where the Code could be improved become evident. Although states’ enactment of changes to the UCC is haphazard, given the subject matter it’s rarely a point of high drama.
The announcement by South Dakota a few days ago that it had adopted the latest revisions to the UCC seems to fit that pattern but note that it followed an unusual veto of a very similar bill last year. At the time, Governor Kristi Noem in her veto message alluded to the bill opening the door “to a potential future overreach by the federal government.”
The issue at the time was the professed concern about the potential for a CBDC. This is not a marijuana-derived product, but a “central bank digital currency” – a sort of federal bitcoin. Without wandering too far into the internet underbrush, the fear seems to be that the UCC was drafted to enable a CBDC, which in turn might allow the government to perpetually monitor Americans’ financial activities. In South Dakota and in Florida, this concern was enough to impact legislation.
Ultimately, business is business, and the South Dakota government approved the UCC changes at the end of February 2024 – along with a bill barring the state government from accepting a CBDC (which still, to be clear, does not exist). This feels like political theater, since the existence of a now notional federal e-currency would presumably preempt any restrictive state laws, but it was theater enough that it delayed adoption of the amendments to the UCC by a year. The lesson for those of us whose business practices are subject to the UCC is that in addition to all the risks that we might name, in the current political climate there’s also the risk that one faction or another makes an issue out of something we never imagined could be controversial, and that laws that are the underpinning of our businesses are pulled into the fray.
Good-bye Data Pilot, Hello Market Monitoring?
Of course, not all fears of relentless government surveillance are baseless. The CFPB, for example, an entity we expect to appear frequently in these posts, recently issued a follow-up to last year’s market-monitoring request order. That order, you may recall, sought an exhaustive amount of information from nine major auto lenders in both their originations and servicing functions. The CFPB now seeks permission to collect similar information from all market players which originate more than 20,000 loans in a year. The request for permission is submitted to the Office of Management and Budget and can be seen in the Federal Register. It turns out that the February 2023 request was the “initial Auto Finance Data Pilot” project, which will now be institutionalized across the industry on an annual basis. Even smaller lenders are not exempt, with originators in the 500-20,000 tier having to submit a smaller data set each year focused on repossessions and loan modifications.
It’s not the end of the world, but it is an obvious harbinger of things to come. For many years now the CFPB has seemed on the verge of caring deeply about the auto loan and lease market, and this data collection will certainly enable them to get a better understanding of the market, perhaps allowing the agency to establish benchmarks or areas of interest for future compliance exams.
The good news is that lenders have some warning about the information that the CFPB will be expecting. Obviously good recordkeeping is crucial to success in the industry and will be needed now more than ever in order to remain in the CFPB’s good graces.
Industry participants would be well-advised to ensure their servicing and originations platforms are capable of easily extracting the information in which the CFPB has demonstrated an interest. defi’s new and long-established originations and servicing platforms allow lenders to configure their document retention in the manner best-suited for compliance purposes. They also provide easy access to documents and data through queries that can retrieve information without interrupting day-to-day business operations. The CFPB is signaling a new interest in the auto loan and lease sector, and companies can anticipate the regulatory challenge by taking steps now to ensure their data storage houses are in order.
This blog is not meant to be a comprehensive listing of compliance challenges the industry faces, nor a source of legal advice. Instead, we address trends in vehicle loan and lease compliance and illuminate some of the issues on the minds – or in our view, should be on the minds – of industry players.
