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Reading the Tea Leaves

The industry has been waiting for signs on how the CFPB would approach anything auto. The magazine’s resident legal wiz says the agency has finally tipped its hand.

February 2012, F&I and Showroom - Feature

by Tom Hudson

For centuries, people have tried to divine what the future holds. Reading tea leaves, gazing into crystal balls and searching the heavens for divine messages — all have had their adherents.

When the subject is the future agenda of a federal agency, however, none of those methods seem to work very well. If you want to know where an agency like the Consumer Financial Protection Bureau (CFPB) is headed, you look for pronouncements, announcements, planned events and the agency’s website to try to figure out what its next move will be. This is especially true when it comes to auto finance and leasing.

Until recently, the bureau had been pretty quiet about auto-related stuff. We saw a flurry of housekeeping announcements — some significant mortgage disclosure movement, some credit card activity and some student loan noise — but not much about cars. Then, last November, a couple of CFPB staffers showed up at the National Alliance of Buy Here, Pay Here Dealers (NABD) event in Atlanta, and it didn’t take long for them to react to what they heard.

The first clue of the bureau’s approach came from Richard Cordray, the bureau’s new director. He said the CFPB was interested in finding out more about the buy-here, pay-here (BHPH) industry. That announcement followed a series of articles published in the Los Angeles Times about BHPH dealers. Unfortunately for that segment, the writer appeared to make no distinction between the industry’s bad apples and the large majority of reputable BHPH dealers. 

Penned by Ken Bensinger, the articles claimed that BHPH dealers made direct loans, which is generally incorrect. What they really do is enter into retail installment sales transactions with their customers. The article also played up the fact that some BHPH dealers charge rates as high as 30 percent, which is legal for most car finance transactions in California. Strangely, Bensinger never indicated that rates that high are common. But nothing gets in the way of a good story, right? 

Cordray claimed that his interest in this topic came, in part, from Holly Petraeus, wife of CIA Director and retired General David Petraeus. She also heads up the CFPB’s Office of Servicemember Affairs, and, evidently, she gave Cordray an earful about sharp practices of BHPH around military bases.

January 12 brought yet another Cordray announcement. This time, he set forth the bureau’s top three priorities at a media briefing. Cordray identified them as the Bureau’s “Know Before You Owe” project, which deals with real estate finance disclosures, the policing of “nonbanks,” a term that will include many auto finance companies, and (drum roll, please) “cracking down on lawbreakers.”

But the CFPB wasn’t done yet. The agency’s next announcement detailed the approach it will use in examining nonbanks. Basically, the CFPB will be able to directly supervise “larger participants” (after they make a determination about who they are) and any finance company that they identify as doing bad stuff to consumers. When the bureau has identified the finance companies it will directly supervise, it will use the nonbank examination procedures on them.

From these sources, we can begin to see where the bureau is likely to flex its muscles first. The initiative involving nonbanks might pick up some of the larger auto sales finance companies. Cordray’s comments about BHPH dealers and his emphasis on enforcement actions as one of the bureau’s top three priorities, however, point to a storm brewing for BHPH dealers, especially for those who do business near military bases.

If you’re a BHPH dealer, it might be time to put on your helmet and flak jacket.

Thomas B. Hudson Esq. is a partner in the law firm of Hudson Cook LLP and the author of several books, available at CounselorLibrary.com. ©CounselorLibrary.com 2011, all rights reserved. Based on an article from Spot Delivery. Single print publication rights only, to F&I and Showroom magazine. HC# 4820-9557-3006 (2/12).

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