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A Tale of Two Agencies

Do you know who your regulator is? The answer may not be as clear-cut as you think. The magazine’s legal wiz weighs in.

October 2011, F&I and Showroom - Feature

by Michael A. Benoit

Many of my clients have been asking me what to expect from the new regulatory environment we find ourselves in. With the passage of the Dodd-Frank Act, it’s truly a brave new world. More surprising is how many clients are asking me who their federal regulator is. Believe it or not, that’s not a stupid question, especially for dealers who have always been regulated by the Federal Trade Commission (FTC).

By this time, all of you should have gotten the memo regarding the new Consumer Financial Protection Bureau (CFPB). The agency’s job is to write and enforce new and existing federal consumer financial protection laws, including the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and just about any other federal law that touches your F&I business. It pretty much has authority over all providers of consumer financial products or services.

At this point, you might be asking yourself, “Didn’t auto dealers get a pass on CFPB jurisdiction? Isn’t the FTC still our regulator?”

The answer to those questions depends on what kind of dealer you are. Are you a duly licensed dealer who sells and/or leases motor vehicles, services motor vehicles and routinely sells retail installment sale contracts to unaffiliated third-party finance companies? If so, then you’re an FTC-regulated dealer.

The CFPB can’t write a rule that applies to FTC dealers, nor can it enforce your compliance with rules. For you, it’s the FTC all the way. But it’s not business as usual. The FTC can now write and enforce rules applicable to FTC dealers that define and prohibit unfair and deceptive acts and practices.

If any of the three criteria are absent, you fall under the CFPB’s jurisdiction. And if you are such a dealer, you are subject to the agency’s rulemaking powers, including its definitions on what it deems unfair, deceptive and abusive acts and practices.

“Abusive” has become the new standard, but we haven’t yet figured out an objective way to determine whether an abusive act is unfair or deceptive, or whether an unfair or deceptive act is, per se, abusive. Nor have we figured out why CFPB dealers may have rules prohibiting abusive acts but FTC dealers will not. Anyone confused yet? But wait, it gets better.

The CFPB can make amendments to existing regulations that currently apply to all dealers, but those amendments won’t, on their own, apply to FTC dealers. Nor can the CFPB enforce rules against FTC dealers. This leaves the door open for a situation where universal consumer financial protection laws apply to some entities and not to others, even if they are offering the same financial product or service. That problem occurred to Congress, so they made a patch.

What Congress did was get the Federal Reserve Board involved in the rulemaking process. So, if an amendment is made to Regulation Z, it will be jointly published by the FRB and the CFPB. The amendment will look the same, but it will be codified in two different places so it can apply to different entities. In the case of dealers, this patch will allow that amendment to apply to both CFPB and FTC dealers.

Obviously, this knuckle-headed and bifurcated regulatory system isn’t going to work, at least not well. It wouldn’t be the first time Congress did something knuckle-headed, but unlike Congress, we all live in the real world. So the question becomes, how do we reconcile this dual system?

I don’t know what the CFPB and the FTC will do, but they must see the inefficiency of this awkward regulatory scheme. If I had to read the tea leaves, I would guess that they would find a way to vest primary authority over all dealers in one agency or the other. In this case, it would make sense to vest that authority in the FTC. Congress was pretty explicit about the CFPB keeping its hands off of FTC dealers and it was clear-sighted enough to give the FTC concurrent jurisdiction over CFPB dealers.

So will the FTC be your federal regulator? I don’t know, but that’s what would make sense to me. The irony is that if they go this route, the FTC was the primary federal regulator for auto dealers before all this financial reform drama, and we’ll have to come full circle back to where we started. How rich is that?

Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. He is a frequent speaker and writer on a variety of consumer credit topics. He can be reached at michael.benoit@bobit.com. Nothing in this article is legal advice and should not be taken as such. Please address all legal questions to your counsel.

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