In 2014, the Consumer Financial Protection Bureau (CFPB) began taking actions to address the rising number of defaults, vehicle repossessions and questionable lending practices surrounding the auto finance industry. As a consequence, major lenders are being highly scrutinizedŠcompelling them to take a proactive approach to CFPB compliance and better utilize their people, processes and technologies.

1. Managing the Impact of CFPB Regulations
Auto lenders must overhaul their IT systems and operations to prepare for
increasing scrutiny around their practices and policies.
Executive Summary
At US$934B, auto-loan debt is the third
largest household debt in the U.S., with no signs
of decreasing. This shows an increasing demand
for vehicles among consumers. The concern is that
most of the growth is in the subprime auto loan
market. Default rates in auto loans and vehicle
repossessions have also increased significantly in
recent years. Furthermore, there are indications of
discrimination and unfair lending practices, and a
lack of transparency. These issues have prompted
an intervention by the Consumer Financial Protec-
tion Bureau (CFPB), which has taken action in the
form of fines, stricter implementation of consumer
protection laws, and steps to prevent unfair prac-
tices and ensure transparency.
In May 2014, the CFPB announced plans to target
the auto finance industry for enforcement of fair
lending laws. The regulatory body plans to moni-
tor the top players in the industry by defining a
facing such stringent scrutiny for the first time –
posing significant challenges for them.
In this white paper, we provide a brief background
on the auto finance industry and CFPB laws, and
list the major reasons why the CFPB has had
to step in. We also touch on existing consumer
financial laws that affect the industry. Finally, we
will present a high-mid-level analysis of the cur-
rent process deficiencies on the lenders’ end, and
suggest solutions to overcome these obstacles by
improving the performance of supporting pro-
cesses, people and technologies.
The State of Auto Loan Debt
As of Q3 2014,2
total auto loan debt in the U.S.
stood at $0.934T3
– coming in third after mort-
gages ($8.131T) and student loans ($1.126T), and
ahead of credit card debt ($0.68T). Banks and
other lenders issued $105B in new auto loans in
Q3 2014. Banks have the largest share of the auto
finance market share, followed by captive finance
companies, credit unions, independent finance
companies and Buy Here Pay Here (BHPH) lenders.
Auto loan debt grew significantly in Q3 2014 – over
10% when compared with Q3 2013, and over 3%
when compared with Q2 2014.4
This growth has not
been uniform. Subprime auto loan debt has dou-
bled since 2010 (see Figure 1, next page), whereas
prime auto debt has increased by only a third.
cognizant 20-20 insights | april 2015
• Cognizant 20-20 Insights
“Larger Participant”1
rule, similar to its regula-
tion for the student loans sector. Direct lenders
(banks) have already gone through several cycles
of regulatory changes, such as the Making Home
Affordable (MHA) program, CFPB rules, etc.,
and have managed the impact of regulations on
their processes, people and systems. While most
of these institutions will find it easier to comply
with the new laws, the top indirect lenders will be

2. cognizant 20-20 insights 2
Captive finance companies such as Honda
Finance, Toyota Financial Services, Ford Motor
Credit and BHPH, for example, have contributed
to most of the growth in the subprime market; the
dollar value of their subprime loans was almost
three times that of banks in Q3 2014.
The Industry Structure
The U.S. auto finance industry encompasses
direct lenders, indirect lenders and Buy Here
Pay Here (BHPH) lenders. Direct lenders are
usually banks and credit unions that lend directly
to consumers. In indirect lending, consumers
approach dealers, who coordinate with various
lenders to obtain auto loans for the consumers.
Indirect lenders are made up of captive finance
companies, banks, credit unions, independent
finance companies and other investors. BHPH
lenders generally cater to the subprime market,
and finance most of their loans through captive
(affiliated) finance companies.
Regulatory Compliance
The auto finance industry is regulated by broader
consumer financial laws that govern other
consumer financial industries, such as mort-
gages, student loans and credit cards. All auto
lenders and dealers have to comply with acts
such as the Equal Credit Opportunity Act, the Fair
Credit Reporting Act, and the Truth in Lending
Act, among others. The Dodd-Frank Act made the
Consumer Financial Protection Bureau (CFPB)
responsible for enforcing these laws.
Why CFPB Intervened
In response to the financial and housing crisis of
2008, the Dodd-Frank Wall Street Reform Act and
Consumer Protection Act of 2010 (Dodd-Frank
Act) was enacted. The Dodd-Frank Act includes
16 titles. The Consumer Financial Protection
Bureau (CFPB) was formed as part of Title X. Auto
dealers that have an unaffiliated financing source
fall under the Federal Trade Commission’s jurisdic-
tion and not the CFPB’s. However, CFPB has inves-
tigative and enforcement rights over indirect auto
lenders and other auto dealers. Direct lenders
such as banks are under the CFPB’s jurisdiction.
As shown in Figure 2 (next page), the main
drivers behind the CFPB’s intervention in the auto
lending industry include:
• Discrimination against consumers due to their
sex, color, religion or origin – which violates
the ECOA and Fair Lending Act. This is based
on reports of dealers selling loans at higher
interest rates to consumers from minority
groups. Dealers can do this by changing the
markup on interest rates offered by lenders.
• An increase in 60+ days past due account
volume from $4.07B in Q3 2013 to over $5.38B
in Q3 2014. Auto lenders reported $355M in
non-performing auto loans in Q3 2014 – stating
an increase of 8% YoY. Since March 2012, the
CFPB has been accepting customer complaints
across various consumer finance categories,
including auto loans. The complaint categories
specific to auto loans are Billing and Credit
Reporting (44%), New Loan and Modifications
to Loan Terms (23%), Default Management
(22%) and Loan Marketing and Sales (11%).
• Repossession of vehicles was at a record high
in 2013.
The total balance of newly originated subprime
loans as of Q3 2014 was $81.2B – an eight-year high
representing 28% of all new auto loans in 2014.5
Size and Scale Key Players
• $0.934T as of Q3 2014.
• Consumers, direct lenders, indirect lenders,
dealers and regulators.
• $105B in new loans in Q3 2014.
• Top 20 direct and indirect lenders account
for 47.9% of all retail loans.
• Banks and captive finance companies have a
63.4% share of the auto finance market.
• Allys is the largest lender, with a share of 5.56%,
followed by Wells Fargo at 5.32% and Toyota
FS at 4.49 %.
The Auto Lending Landscape
Source: Experian.com
Figure 1

3. cognizant 20-20 insights 3
In 2014, the CFPB announced that the auto
finance industry would be a fair lending enforce-
ment target. Both direct and indirect auto lenders
had been passing on the onus of complying with
various regulations to the dealers. The CFPB’s
steps placed the burden back on the lenders to
ensure that they are held accountable for the
credit processes and practices of the dealers. The
regulator has already taken actions against some
large auto lenders, and penalized lenders for
failure to comply with ECOA and FCRA.
Key Timelines
The CFPB began its campaign in March 2013 –
asking indirect auto lenders to comply with
ECOA, Regulation B, and the Fair Lending Act,
and to ensure controls for dealer markups and
compensation policies. In December 2013, CFPB,
along with the Department of Justice (DOJ),
imposed a stiff penalty on a top auto lender for
discriminatory lending practices.6
In May 2014,
CFPB officially confirmed that it would be creat-
ing new rules for auto lenders.
Currently, the bureau supervises large banks
in auto finance, but not non-bank auto finance
companies. CFPB is proposing to extend its super-
vision authority to these institutions by defining
a “larger participant” rule. This rule is likely to
affect 50% of the auto lending market, which
could include up to 20 top auto lenders. Similar to
the mortgage market, the CFPB plans to impose
reporting requirements on auto lenders to spot
unfair practices. The regulator also intends to
The CFPB Intervention Timeline
Figure 2
• The rule is likely to impact at
least the top 20 auto lenders,
including banks and non-banks.
• The CFPB to target auto
lenders’ compliance-managing
systems or methodologies, as
well as their complaint-handling
systems.
• The CFPB to present rules
for auto lending that would
be built around “large
participants,” similar to
student loan servicing.
• The “large participant“
threshold from the CFPB is
expected to include major
players in the market, based
on market coverage and
number of consumers impacted.
March 2013:
CFPB on Indirect
Auto Lending
• Ensure that lenders comply
with ECOA and Regulation B.
• Lenders to set in place
controls related to dealer
markup and compensation
policies.
• Lenders must comply with
the Fair Lending Act.
May 2014:
CFPB Rule-Making Agenda
• The CFPB officially confirmed
it would proceed with creating
rules for auto lenders.
• The CFPB began developing
a proposal to identify “larger
participants” in the market
for auto lending. The CFPB
had defined larger participants
in consumer debt collection,
student loan servicing and
credit reporting.
December 2013:
Action against Ally Bank
• The CFPB and the Department of
Justice announced an enforce-
ment action and consent order
that required Ally Bank to pay
$80M in damages to consumers
who were harmed by discrimina-
tory dealer markups and
compensation policies between
April 2011–December 2013.
• The discriminatory policy
affected 235,000 African-
American, Hispanic, Asian
and Pacific Island consumers.
• Ally was also required to pay an
additional $18M penalty to
CFPB’s Penalty Fund.
May-August 2014:
CFPB Action Against Auto Lender
• The CFPB took action against
six auto lenders, including three
banks and three non-banks, for
violating fair lending practices.
• American Honda Finance Corp.
and Toyota Motor Credit Corp.
received notice from the CFPB
and the Department of Justice.
• Texas-based First Investor
Financial Services Group has
been fined $2.75M by the
CFPB for knowingly providing
inaccurate information to
credit-reporting agencies for
years.
What to Expect

4. cognizant 20-20 insights 4
provide advisory services and feedback channels
to consumers, similar to home ownership coun-
seling for mortgages.
The Impact on the Auto Finance
Industry
The CFPB’s actions point to a stronger regula-
tory environment for the auto finance industry.
Through these regulations, the CFPB is looking
to bring greater accountability, improvements
in customer service, a reduction in defaults and
the elimination of unfair practices. The bureau
has not indicated that it plans any amendments
to existing consumer financial laws, or is aiming
to introduce new laws for auto lenders. Rather, it
seems to be focused on ensuring compliance by
all industry participants, several of which were
hitherto not covered by the CFPB.
Companies in the auto finance industry will need
to make significant changes to their processes
and systems, and train associates to comply with
the stricter regime. The change will be harder
to manage for indirect auto lenders, such as
captive finance companies and BHPH lenders,
than for banks, since these organizations do not
have experience in handling similar regulations.
Based on our experience and analysis, we believe
that the auto finance industry should focus on
five key areas when analyzing their processes,
people and systems, and preparing for CFPB
supervision, examination and reporting require-
ments expected in the near future (See Figure 3).
Preparing for CFPB Regulations: Five Key Areas
Figure 3
Complaint
Management
System
Credit
Bureau
Reporting
Pricing &
Disclosures
Compliance
Monitoring
Markup &
Compensation
Policies
Impact Analysis
Using our knowledge and experience, we conducted a high-mid-level analysis of the typical process challenges,
corresponding process improvements and technology changes in the five focus areas cited above:
table continued...
Process Challenges Proposed Process Improvements Proposed Technology Changes
Markup&Compensation
Policies
Limited controls and policies
on dealer interest rate markup
on top of lender-provided rate
could lead to a significant in-
crease in interest rates.
Dealer compensation policy.
Lenders usually provide a
percentage on above markup
as compensation.
Develop policy, controls and
reporting for dealer interest
rate markup.
Implement alternative compen-
sation mechanisms that can be
proven to be non-discriminatory.
Monitor dealers for compliance.
Dealer ratings should be based
on monitoring and incentives for
compliance in the form of
preferential rates.
Enhance dealer-facing
systems to:
• Implement new rules-based
compensation policies and
controls on markups.
• Provide reporting and alerts
for dealer activities on
markups.
• Develop dealer compliance
reports on various regulations,
such as ECOA.
Challenges, Improvements and Changes

5. cognizant 20-20 insights 5
Process Challenges Proposed Process Improvements Proposed Technology Changes
ComplianceMonitoring
Limited reporting and analysis
of dealer compliance with CFPB
regulations.
Limited controls on marketing.
Lenders have delegated the mar-
keting of loan products to dealers
without ensuring compliance.
Limited oversight to ensure
compliance. Lenders have been
passing on the onus of comply-
ing with fair lending laws to the
dealers. Dealers have not focused
on regulatory compliance as they
are regulated by FTC, not CFPB.
Robust compliance framework.
Many lenders, especially captive
units, BHPH, etc., lack a robust
compliance framework.
Lack of institutionalized UW
policies. Subjective
underwriting decisions that are
not documented/noted lead
to unfair lending practices.
Build separate team and process
for regulatory compliance
analysis, monitoring and report-
ing on various activities, such as
adverse actions, loan marketing.
Lenders should train associates
at the dealership on and practice
fair lending principles.
Provide regular fair lending
training on principles, documents
and process to dealers.
Provide evidence of compliance
to prove fair lending practices
have been followed.
Implement UW policies in an
objective, rules-based manner
so UW decisions are process-
based rather than people-based
and are reportable.
Create new database and
reports for various compliance
reports on fair lending.
Develop e-learning modules
to train and track associates’
learning.
Build rules-based, flexible
systems to quickly incorporate
regulatory compliance changes.
Enhance systems to:
• Define and implement
UW rules based on fair
lending laws.
• Manage, log and record
UW exceptions.
Pricing&Disclosure
Vehicle pricing transparency.
Currently, dealers do not provide
breakup (by each component) of
total price like vehicle sales price,
additional equipment price, ad-
ditional warranty price, taxes and
title costs, and trade-in values.
Guaranteed Asset Protection
(GAP) Insurance. Dealers cur-
rently provide limited information
on GAP pricing, corresponding
terms and conditions, and the
refund process.
Spot delivery. In a spot delivery,
the customer signs the lending
contract and takes delivery of
the vehicle before financing is
approved. This can cause issues
if the contract terms or rate
change later.
Truth in Lending (TIL) disclo-
sure. Customers are not edu-
cated about the components not
covered in the TIL, such as GAP.
Train associates to itemize and
explain each product/service sold
to the consumer.
Train dealers on explaining GAP
coverage, terms, costs and refund
process to consumers.
Create a process to educate
consumers on GAP benefits,
premium and refund process.
Lenders should ensure that
dealers educate end consumers
on spot delivery risks/conditions
and obtain their consent.
Develop a process/forms to
disclose/explain all the fees/
payments not included in TIL.
Enhance systems to:
• Create new mechanisms for
documenting, delivering and
tracking to ensure the cus-
tomer understands all costs
associated with the contract
terms, products and services.
• Calculate GAP refund amount
and assist dealers in explain-
ing GAP terms and refund.
• Capture GAP waiver forms
signed by customers.
• Provide counter-offers so
customers can choose from
various options.
CreditBureauReporting
• Reporting payments and
overdue amounts. Some
lenders have understated
customer payments reported
to credit reporting agencies.
• Reporting delinquencies.
Some lenders incorrectly re-
port dates of first delinquency.
• Mischaracterization of vehicle
surrender. In some cases, even
if the customer voluntarily sur-
rendered the vehicle, lenders
reported it as a repossession,
which adversely impacted the
customer’s credit report.
• Provide reporting, analysis
and exception management
on credit reporting by lenders.
• Dispute management team
and process for resolving
customer concerns about
credit reporting.
• Develop process and forms
to record voluntary surrender
by consumers.
• Enhance customer credit
reporting. Dispute handling
and tracking system with cus-
tomer notification features.
Equip systems to:
• Send copies of credit report
to customers post-correction.
• Build reports to pre-emptive-
ly catch customer reporting
exceptions.
• Capture and track voluntary
surrender information.
table continued...

6. cognizant 20-20 insights 6
Conclusion
While auto loan debt in the U.S. has increased
rapidly in recent years, most of this growth is in
the subprime segment. There is also a noticeable
surge in defaults and repossessions, and evidence
of unfair lending practices. Consumer complaints
to the CFPB related to auto finance are lower
compared to complaints related to mortgages,
student loans and credit cards. However, the
CFPB believes the auto-lending sector should be
better monitored to prevent another subprime
crisis and protect consumers from unfair lending
practices. In fact, in 2014 the bureau fined some
auto lenders and announced that auto finance
was its target for enforcing fair lending in 2014.
The CFPB plans to define a “Larger Participant”
rule similar to the one it specified for student
loan servicers, and bring most large auto lend-
ers under its domain. If the rule for the student
loan servicing market is any indicator, the new
directive for auto lenders could at the very least
impact the top 20 players.
To manage regulatory monitoring, oversight and
reporting, direct and indirect auto lenders need
to focus on and invest in retooling processes,
improving employee training, and enhancing and
building new systems and reports that can handle
compliance requirements. Lenders will not only
need to remain compliant; they will also have to
provide evidence of such with various fair lend-
ing laws, and supply data/reports on compliance,
non-compliance and actions taken to ensure
compliance – even for their dealers. CFPB’s moni-
toring of auto lenders will test the latter’s resil-
ience. The adaptation and upgrade process, which
could take several months, will strengthen auto
lenders’ capabilities to meet future regulatory
requirements.
Based on our research, we believe that com-
panies that adopt a proactive, comprehensive
approach to CFPB compliance will learn how to
make the most of their internal resources (peo-
ple, processes and technologies). They will also
look to external resources, such as the Software
as a Service (SaaS) model, and call on consulting
and technology organizations with the expertise
to needed to successfully manage the impact of
CFPB regulations on a sustainable basis.
Process Challenges Proposed Process Improvements Proposed Technology Changes
ComplaintManagement
System
Complaint handling. Lack of
well-defined process, SLAs,
dedicated resources and system
to handle customer complaints.
Recordkeeping. Maintain audit
trail of all complaints handled.
Build a strong complaints-
management process with SLAs
and infrastructure.
Set up a complaints-
management team that will
identify, monitor, analyze and
resolve complaints.
Use SPOC concept for
complaints management and
resolution.
Develop a multi-channel
complaint system to streamline
the complaint intake process.
The system should be able to
record, categorize, track and
manage customer complaints.
Figure 4
Footnotes
1
http://www.consumerfinance.gov/newsroom/cfpb-proposes-new-federal-oversight-of-nonbank-
auto-finance-companies/
2
http://www.newyorkfed.org/householdcredit/2014-q3/data/pdf/HHDC_2014Q3.pdf
3
www.ycharts.com
4
http://www.experian.com/assets/automotive/white-papers/experian-auto-2014-q3-presentation.
pdf?WT.srch=Auto_Q22014FinanceTrends_PD
5
http://www.consumerfinance.gov/newsroom/cfpb-and-doj-order-ally-to-pay-80-million-to-consumers-
harmed-by-discriminatory-auto-loan-pricing/

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References
• http://www.consumerfinance.gov/
• http://www.cfpbmonitor.com/
• http://www.treasury.gov/
• http://www.autonews.com/
• http://www.experian.com/
• http://www.ibisworld.com/
• http://www.mortgagenewsdaily.com/
About the Authors
Saurabh Parakh is a Consultant with Cognizant Business Consulting. He has over seven years of
experience working with leading banks in product management and business process optimization
across geographies. He can be reached at saurabh.parakh@cognizant.com.
Sivaraj Lakshmanan is a Senior Consultant with Cognizant Business Consulting. He has over 10 years
of experience working with leading banks in project management, product management, and business
process optimization. He can be reached at sivaraj.lakshmanan@cognizant.com.
Ashish Shreni is a Principal Consultant with Cognizant Business Consulting and has worked for over
14 years in the banking and insurance space on projects spanning business and IT strategy, business
process optimization and complex project execution. His core focus area is Consumer Finance. He can
be reached at ashish.shreni@cognizant.com.
http://www.consumerfinance.gov/newsroom/consumer-financial-protection-bureau-to-hold-auto-
lenders-accountable-for-illegal-discriminatory-markup/
6
http://www.consumerfinance.gov/newsroom/consumer-financial-protection-bureau-to-hold-auto-
lenders-accountable-for-illegal-discriminatory-markup/