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The CFPB’s Spirit Lives On

Attorney Eric Johnson offers a wake-up call to dealers and F&I pros who thought the industry won a decisive victory over the CFPB when the federal agency’s auto finance guidance was rescinded in May.

August 2018, F&I and Showroom - Feature

by Tariq Kamal - Also by this author

Pictured is President Trump during the May 21 signing ceremony at the White House for S.J. Res 57, the resolution of disapproval of the Consumer Financial Protection Bureau’s dealer participation guidance. The signing marked the end of the industry’s more than five-year battle to protect a key source of dealer income.
Pictured is President Trump during the May 21 signing ceremony at the White House for S.J. Res 57, the resolution of disapproval of the Consumer Financial Protection Bureau’s dealer participation guidance. The signing marked the end of the industry’s more than five-year battle to protect a key source of dealer income.

The repeal of the Consumer Financial Protection Bureau (CFPB)’s dealer participation guidance and how it impacts dealer compliance going forward was the focus of “CFPB Defanged: Be Careful What You Wish For,” a June 6 webinar presented by Gregory Arroyo, editorial director of F&I and Showroom, and Eric L. Johnson, a partner in the law firm of Hudson Cook LLP.

Arroyo set the stage by giving a quick recap of the industry’s multiyear effort to protect a key source of dealer income, which culminated in the Consumer Financial Protection Bureau’s much-maligned dealer participation guidance being rescinded on May 21 with a stroke of President Donald Trump’s pen.

“So the good news is we no longer have to worry about the CFPB,” Arroyo said. “The bad news is there is still a ‘BCFP’ — or the Bureau of Consumer Financial Protection, as Acting Director Mick Mulvaney now calls it — and, of course, state regulators and the Federal Trade Commission.”

Johnson agreed, pointing out that, while there is some reason for excitement among dealers, it should be tempered. The agency itself is still around, he said, operating under a new name but the same mandate to protect consumers from fraud.

The attorney noted that state attorneys general across the country are also getting more aggressive about prosecuting cases in which financial fraud or discrimination are suspected, he added, and state regulators are beginning to look at passing CFPB-like legislation that will pick up where the federal laws are pulling back.

“There were 16 Democrat AGs that sent a letter that expressed their support for the bureau’s mission,” Johnson said. “They pointed out that they do have express authority under Dodd-Frank to enforce federal consumer protection laws as well as state consumer protection laws. … And they also stated that, regardless of what happens at the bureau leadership or the bureau’s agenda, that they are going to continue to enforce those laws.

“And the kicker is, if the bureau leadership prevents bureau staff from aggressively pursuing consumer abuse or financial misconduct, then the AGs are going to redouble their efforts to root out this misconduct and hold those [violators] responsible.”

Acting CFPB Director Mick Mulvaney was a featured speaker at the National Association of Attorneys General’s 2018 Winter Meeting in Washington, D.C., this past February. During his address, he said the bureau would be looking to state regulators and attorneys general for leadership when it comes to enforcement.
Acting CFPB Director Mick Mulvaney was a featured speaker at the National Association of Attorneys General’s 2018 Winter Meeting in Washington, D.C., this past February. During his address, he said the bureau would be looking to state regulators and attorneys general for leadership when it comes to enforcement.

Johnson noted that a number of states are creating their own consumer financial protection units and staffing them with former CFPB enforcement attorneys. He stressed that dealers and F&I professionals will feel the effects as these “mini-CFPBs” begin to flex their muscles.

In states such as Pennsylvania and New York, where attorneys general have specifically targeted dealerships, Johnson said it could be even stricter. It could also get confusing; Johnson warned that dealerships that sell across state lines may face a patchwork of guidance and enforcement standards.

Johnson then turned to the Federal Trade Commission, which has operated without a full staff for the last few years. So far this year, however, five members have been nominated by the president to seven-year terms and four have been sworn in — the final chair belonging to a holdover commissioner who has said she won’t step down until her term expires. When that happens, the fifth will take her place and the FTC will have sworn in an entirely new panel in the same calendar year.

The new group is not likely to try to make an immediate splash, Johnson said, particularly since the FTC also has a new director of its Bureau of Consumer Protection: Andrew Smith, a former FTC staff attorney. Johnson believes they will shift the commission’s focus to another topic that is getting far more press in recent months: privacy and data security.

Johnson said he believes illegal debt collection practices will also be a priority, along with issues involving military consumers and unfair or deceptive acts or practices (UDAP). For the latter, he said the FTC, along with states, “could take a more active role than we’ve seen probably ever before.”

Johnson said he didn’t expect any new regulations, guidance, or mandates to focus on F&I products, but he predicted renewed interest among regulators in how products are offered to the consumer, including at what point in the transaction each product is introduced and whether disclosures are properly explained. That said, he added, it is not out of the question that regulators question the value a given product brings a given car buyer.

Arroyo and Johnson also took questions from the audience during the hour-long webinar. The following are their answers to questions they were unable to address during the program.

Gregory Arroyo, editorial director of F&I and Showroom.
Gregory Arroyo, editorial director of F&I and Showroom.

Question: Regarding the Ally settlement, did all the money get returned to the affected borrowers of its dealer participation policy?
Arroyo: I came across a Jan. 29, 2016, blog post by Patrice Ficklin, who serves as assistant director for the CFPB’s Office of Fair Lending. In it she notes that not only did Ally return $80 million to consumers who took out an auto loan between April 2011 and December 2013, the finance source paid an additional $38.9 million to consumers it determined were both eligible and overcharged on auto loans issued in 2014. So Ally returned more than the $80 million the settlement called for.

Hudson Cook LLP Partner Eric Johnson.
Hudson Cook LLP Partner Eric Johnson.

Question: What do you think the attorneys general will be looking for? Will it be discriminatory markups like the CFPB? Will it be F&I products?
Johnson: Yes on rate markups and yes on F&I products. The state attorneys general could be looking at rate markups, disparate treatment, disparate impact, F&I products and whether the product provides a true “benefit” to the consumer.

Right now, the world of auto finance is an oyster to a state attorney general, particularly those with Democrat-leaning tendencies. They could look at a dealer’s advertising and marketing, all aspects of the transaction, the products being sold, and the servicing and collection of the contract.

Question: Will the state attorneys general have access to the data previously collected by the CFPB?
Johnson: Yes, they will, provided the attorney general signed an information sharing agreement with the bureau. This is likely to continue unless and until the CFPB decides to keep certain information private, like it’s currently considering with its customer complaint information.

Question: Do you recommend dealerships continue using the Fair Compliance & Policy Program the National Automobile Dealers Association developed with two other trade organizations?
Johnson: Yes, even though President Trump recently signed into law a bipartisan Congressional Review Act resolution disapproving the CFPB’s guidance, I recommend dealerships continue using the NADA-created compliance program.
Arroyo: The NADA has even taken out advertisements in trade publications that advise dealers who implemented the program against scrapping it.

Question: Do you suspect the FTC will start investigating dealers now that the CFPB’s claws have been clipped?
Johnson: Yes, I believe so. Remember, the FTC has primary enforcement authority over dealers that are exempt from the CFPB’s authority, which are primarily franchised dealers. They’ve exercised this authority fairly regularly — and quite painfully to those affected dealers — over the past few years. Do a Google search on “FTC sues dealer” and you’ll see what I mean.

Question: What is the Holder Rule?
Johnson: The Holder Rule is a shorthand reference for the Federal Trade Commission’s Trade Regulation Rule titled “Preservation of Consumers’ Claims and Defenses.” The Holder Rule permits a buyer under a retail installment contract, or a debtor under a purchase money loan, to assert against the holder of the contract or loan (i.e., the bank, credit union or finance company) certain claims and defenses the buyer/debtor has against the selling dealer.

The point I made during the webinar is that states like Delaware and Massachusetts have been pursuing finance companies for actions of dealers. There are other states, including Maine, which have a Holder Rule state attorneys general can and will use.

Question: What leads you to believe the FTC will have a renewed focus on the areas you discussed during the webinar?
Johnson: Just to recap, I said the FTC would probably have a renewed focus on data security, data breaches, data access and other privacy concerns. Remember, under the Dodd-Frank Act, the FTC’s privacy jurisdiction was transferred to the CFPB, but the data security authority remained with the FTC.

"The FTC also has a fully staffed commission for the first time in many years, as well as an extremely sharp new director of its Bureau of Consumer Protection. With the perception that the CFPB is backing off of consumer protection, the FTC is anxious and more than willing to increase its role in protecting America’s consumers."

The FTC also issued a recent “Staff Perspective” document that indicated the regulator’s renewed attention on several more areas of fair lending compliance, as well as Military Lending Act issues and other issues that affect military consumers. Illegal debt collection practices and UDAPs were also listed.

The FTC also has a fully staffed commission for the first time in many years, as well as an extremely sharp new director of its Bureau of Consumer Protection. With the perception that the CFPB is backing off of consumer protection, the FTC is anxious and more than willing to increase its role in protecting America’s consumers.

Question: If “value” becomes a key focus for regulators when it comes to F&I products, will it be based on price vs. benefit or cost vs. the selling price?
Johnson: If “value” of an F&I product becomes a key focus for regulators and/or state attorneys general, it could be based on both.

Question: With the talk of Dodd-Frank being repealed or changed, what is the forecast for what the new version will look like? And what does this mean to the dealer, especially for those of us charged with compliance here at the dealership level?
Johnson: We already know what the new version looks like and it didn’t mean much to the dealer. On May 24, 2018, President Trump signed Public Law 115-174, the “Economic Growth, Regulatory Relief, and Consumer Protection Act.” It includes some revisions to the Dodd-Frank Act, but it didn’t repeal Dodd-Frank in its entirety. The public law revised bank systemic risk standards, eased certain regulations for community banks, and added consumer protections, but it really didn’t do anything for the dealer.

Question: Regarding the Department of Defense’s interpretive rule under the Military Lending Act, what was the reasoning behind not being able to sell GAP to military personnel?
Arroyo: My understanding is the DOD’s stance on credit-protection products is rooted in the CFPB’s review of the payday lending markets. Bureau examiners found servicemembers were falling into payday debt traps to pay off auto loans that included F&I products. When the CFPB expanded its examination to indirect auto finance sources and their debt-collection practices, I’m told it discovered that some finance sources weren’t canceling F&I products and taking chargebacks when loans ended up as repossessions.

It is also my understanding that finance sources that specifically serve military servicemembers and operate separate insurance arms told regulators that military consumer didn’t have to buy GAP from dealers — that they could buy it after the point of sale from insurance companies.

Question: Any updates on the Military Lending Act?
Johnson: Yes, I’ve heard the DOD has signed off on the change and whatever “fix” is being proposed is currently sitting at the Office of Management and Budget. I’m hopeful we’ll have some resolution by the time this issue is published.

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