Topic: Automobile Lending
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A small number of our auto and installment loan customers signed a note that stated a post-maturity rate of 18%. However, our system actually calculates the post-maturity rate for these loans by adding 5% to the loan’s interest rate. All of the loans had fixed rates, the highest of which was just under 10% (so the system would never apply a post-maturity rate higher than 18%). Do we need to have the customers sign new notes to fix this discrepancy?
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We are not aware of any laws or regulations that would require you to ask your customers to sign new notes in this situation. In our view, the fact that your bank will be declining to exercise its right to charge an 18% post-maturity rate does not necessitate the issuance of new notes or disclosures.…
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We are purchasing a portfolio of indirect auto loans from another bank, which permitted discretionary dealer markups for the loans’ interest rates. What due diligence do you recommend from a fair lending perspective? Could we be held liable for fair lending issues from the purchased loans? Should we perform statistical analysis on the loans before purchasing?
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We believe it would be prudent to perform a statistical analysis as part of your institution’s decision to purchase the auto loan portfolio to help assess the potential legal and reputational risks involved. Purchased auto loans could pose fair lending risks to your institution, even though your institution did not originate the loans. The Equal…
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A customer has applied for a car loan, and he wants his grandson, who is a minor, to cosign the loan. Both are named on the car title. Our loan agreement provides that both debtors are jointly and severally liable for the loan amount. Will the minor’s signature be binding? Is the loan agreement void because one of the debtors is a minor? What if all payments are made by the grandfather only?
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No, the minor’s signature will not be binding on the loan agreement or the security agreement until the minor reaches the age of eighteen and ratifies the agreements. However, the loan agreement will not be void, as the grandfather’s signature is binding, and you have told us that he is liable for the entire loan…
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Five years ago, we repossessed a car and sold it without contacting the borrower’s father, who had cosigned the loan. The sale resulted in a deficiency balance. Do we have to provide a default notice to the father before attempting to collect the deficiency balance from him?
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Yes, you must provide notice to the cosigner before attempting to collect the deficiency balance from him. The Illinois Consumer Fraud and Deceptive Business Practices Act requires you to notify a cosigner before taking any action to collect from the cosigner, and it describes the information that must be included in this notice. Since you…
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We made a vehicle loan to a minor, who is the sole owner of the vehicle. We required a co-borrower due to the minor’s age. However, can we use the vehicle title as collateral, and will that be binding?
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Yes, you can use the vehicle as collateral, but be aware that the minor’s age adds some risk that the security agreement could be challenged — at least until the minor reaches the age of eighteen and ratifies the security agreement. In Illinois, the general rule is that an agreement with a minor is voidable…
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Does Illinois law require an ink signature on loan documents? We would like to use digital signatures for our consumer auto loan documentation.
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Disclaimer: The Electronic Commerce Security Act (ECSA) was repealed and replaced with the Uniform Electronic Transaction Act (UETA), effective June 25, 2021. Please note that this change may affect the continued accuracy of this guidance as it pertains to the ECSA. No, Illinois law does not require an inked signature on loan documents, although heightened requirements…
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Based on the recent CFPB guidance on fair lending and indirect automobile lending, what steps should a smaller regional bank take to lessen our fair lending risks? Do we need to switch to a flat rate of compensation for dealers, or are there other options?
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While the CFPB’s Indirect Auto Lending Bulletin does not directly apply to your institution, since you are not supervised by the CFPB, we agree that all financial institutions should be taking the CFPB’s guidance seriously. While the other federal banking regulators have released some helpful materials on discrimination and auto lending, which we discuss below,…
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One of our customers has taken out a car loan, and his father agreed to pledge his car as collateral for the loan. Can we provide loan information to the father, such as balances and late payments?
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Yes, we believe that you can disclose information about the loan to a party who pledged collateral for the loan. There are two exceptions to the privacy requirements of Regulation P that may apply here. First, Regulation P permits banks to disclose account information to “persons holding a legal or beneficial interest relating to the…
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If we have a blanket lien in place, but a borrower purchases new vehicles, do we need to amend the financing statements to reflect our liens on the vehicles?
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We believe that if a security agreement includes a collateral category that would include the vehicle, it would not be necessary to specifically list the vehicle in the security agreement. First, we note that vehicles covered by a certificate of title must be perfected under the Illinois Vehicle Code; they are not perfected by financing…