Compliance Considerations: The Power of Disruption (Part 1)

Phillip Bohi, Vice President, Compliance Education

As AFSA considers how members’ compliance efforts will be tested in 2018, it seems likely that even with new leadership at the CFPB, laws and regulations will continue to arise that challenge the traditional norms of consumer finance compliance.  In some respects, this seems like a natural consequence of the impact of disruption on business and society.

The impacts of economic and technological disruption are all around.  Where the business of providing on-demand auto transportation was once a regulated and licensed taxi industry, innovators acted by decoupling the dispatch and payment functions from the fleet operations and driving functions.  Likewise, with the paid overnight lodging industry.  Where arranging a short term paid lodging was once the hotel industry, innovators acted by decoupling the reservation, marketing, and payment functions from the real estate and operations functions. 

For consumers, the arrival of these disruptive services has offered greater choice, convenience, and savings.  From the perspective of the hotel proprietor or taxi operator, the arrival of these new models brings difficulty.  The new rivals compete without a level playing field in regulation, tax treatment, zoning restrictions, etc.

So how does this compare to consumer finance regulation?  Consider this:  is it possible that legislators and regulators have become so accustomed to the notion of technological disruption that they are indulging in legislative and regulatory disruption?  Here is a recent example:

  1. Military Lending Act and Interpretive Rules

The Military Lending Act (“MLA”), along with the Service Members Civil Relief Act have always been somewhat unusual, as they (and state counterparts) impose special substantive and procedural protections to consumer financial products and services based on the military status of the customer.  The MLA Interpretive Rules provide an example of disruption by providing that purchase money contracts may be exempt from the MLA based on what the customer financed.  For a contract that financed a stove and installation, the contract is exempt.  For a contract that financed a stove and a credit-life policy, the contract is covered by the MLA.

The disruption in this law comes from the Government requiring creditors to decouple how they originate and service a type of consumer credit (e.g., retail installment sales contracts) based on new and narrower factors, such as what the customer financed.  MLA compliance always required knowing whether the customer was covered based on his/her status as military member, dependent, or civilian.  Now the creditor has to consider what the customer financed.  Compliance with these rules requires business processes and systems that both identify all the permutations reliably, but also deliver suitable treatment at every phase for the contracts that are covered and not covered.

For another example of disruption with origination and credit reporting implications, watch this space for Part 2.