RALEIGH, N.C. — FNI president David Bafumo recently studied
what he believes are the three most important sections relevant to auto finance
companies and dealers from the examination manual issued by the Consumer
Financial Protection Bureau.

Bafumo dissected more than 900 pages and drilled deeper into
the three segments that focus on unfair, deceptive or abusive acts or
practices (UDAAP), the CFPB's consumer risk assessment template and the agency's
compliance management review template.

"Nobody likes to have to read the manual — whether it's for
the television, the lawnmower or, especially now, when it's for the CFPB,"
said Bafumo, who runs a compliance agency for dealers and lenders.

"This is not a project for everyone, particularly the busy executive
running a finance company," he continued. "So, here are the first sections I
focused on and a brief summary of my thoughts about their application to the
kind of subprime auto finance companies FNI works with in conjunction with
F&I products and product compliance.

"Disclaimer: This is just for starters, folks. Take action,"
Bafumo went on to say.

UDAAP According to the CFPB

Bafumo indicated lending executives won't need much guidance
to realize that UDAAP is where much of the "action" will be when it comes to
scrutiny on products like GAP insurance, vehicle service contracts, car clubs
and other products commonly offered in conjunction with auto finance.

He explained the important considerations for finance
companies funding dealer products or with a captive/preferred product array of
their own:

—Do the products have value for the consumer?

—How are the products presented to the consumer?

—Are dealers trained to sell the product compliantly?

—Are product marketing materials compliant?

—Are finance company due diligence efforts, product policy
and training fully documented?

—Does the finance company have a process for monitoring
product performance/consumer complaints?

CFPB'S Consumer Risk Assessment Template

Bafumo indicated this template is used by CFPB examiners to
determine the level of risk to consumers in a supervised entity's business and
to identify the sources of the risk.

"The assessment is based on ‘inherent risk' in the business
like the potential for UDAAP or other federal consumer protection law issues,
balanced against the quality of controls the entity has in place to manage
those risks," Bafumo said.

Bafumo went on to point out five elements that he thinks are
most relevant to finance companies in this section of the CFPB document,
including

—Product pricing matters.

—The traditional "protected classes" list is expanded
for the purpose of the analysis to add consumers with FICOs below 620,
consumers on any type of public assistance and consumers with limited education
amongst other things.

—Compensation structures must be justified and documented.

—Compliance training and documentation is critical.

—An effective consumer complaint management process seems
like it would go a long way to preventing problems in the first place and
mitigating risk in the formal bureau analysis.

CFPB'S Compliance Management Review Template

Bafumo contends that it is clear the kind of "compliance management
system" considered by the CFPB applies to very large businesses, raising the
concern of "scalability" for smaller institutions.

Boiling down the CFPB's template, Bafumo came away with four
basics for finance companies of any size including:

—Have a formal policies and procedures company manual

—Provide (and document) consumer protection compliance training
regularly for employees.

—Manage and monitor service providers for compliance

—Document consumer complaints, follow-ups and resolutions.

After making his final points, Bafumo wanted to leave
finance companies with one final thought.

"The biggest takeaway in just one word? It appears in the manual
too many times to count (OK, it actually appears 80 times. Documentation: because
just doing the right thing isn't enough anymore," Bafumo said.

For more details on FNI's services, visit myfni.com.

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