We already know the Consumer Financial Protection Bureau (CFPB) isn’t comfortable with the discretion dealers are allowed under rate participation programs. What we don’t know is if the bureau’s review of the indirect finance channel will extend to F&I product sales.
Under the Dodd-Frank Act, the CFPB has certain kinds of authority over providers of consumer financial products and services. In addition, the bureau has the ability to supervise the vendors those companies use to provide consumer financial products and services.
The law defines “service providers” as any vendor that provides a material service to a covered person in connection with a consumer financial product or service. The term “financial product or service” includes extending credit and servicing loans. However, there are at least two conditions that may cause other products and services to come under the CFPB’s jurisdiction. The first one is if a product or service is used to evade any consumer finance law. The second is if a product or service falls under any provision of federal law or regulation and will have a material impact on the consumer.
So, again, the question that looms for F&I product providers is whether the CFPB will attempt to stretch its jurisdiction beyond typical products that are credit related. Or will it confine its authority to traditional financial products, leaving alone products that are, by design, nonfinancial?
Although some questions regarding the bureau’s jurisdiction over serviceproviders have answers that are fairly black and white, there’s still plenty of gray area here. And wherever there’s gray, you can expect the bureau to push its jurisdictional arguments to the maximum.
It’s clear the CFPB can exercise jurisdiction over aftermarket products that are financial in nature, such as GAP. When the products are “nonfinancial,” as is the case with service contracts, things get more complicated.
Based on what has come out of the bureau so far, it looks like the CFPB will take the position that a nonfinancial product offered in connection with a financial product or service falls within its jurisdiction. Arguably, this approach goes beyond what it is legally permitted to do under its governing law.
Because “nonfinancial products” should not become “financial products” when offered with the credit sale of a vehicle or a loan secured by personal property, these products should be outside of the CFPB’s jurisdiction. So while it’s easy to concede that debt cancellation is a product the CFPB can regulate, products like paintless dent repair, tire-and-wheel protection, key replacement, auto clubs, and, as stated above, service contracts should not be subject to the bureau’s oversight.
Although outside of its statutory authority under the Dodd-Frank Act, there is a risk, possibly a significant risk, the CFPB might reach beyond its “financial products and services” jurisdiction and look at the nonfinancial products anyway. In that situation, it’s likely the CFPB will look to the marketing of the nonfinancial product in connection with the provision of a financial product or service. The CFPB might consider whether that marketing is done in a manner which is unfair, deceptive or “abusive.”
We’ve already seen the CFPB focus on the marketing of ancillary products in its enforcement action against U.S. Bank and its non-banking partner, Dealers’ Financial Services, charging the companies with engaging in unfair, deceptive or abusive marketing practices. What remains to be seen is whether the CFPB will look beyond marketing practices and into the components of the product if they see bad behavior.
It’s a pretty good bet the bureau will claim jurisdiction over a product if one of the federal consumer financial laws addresses how the product or service is provided, or imposes any statutory or regulatory duties on the creditor regarding the provision of the product or service. And if there is some type of bad behavior associated with the product or service, you can bet the CFPB will stretch its long jurisdiction arm to ensure consumers are protected.
What happens next is up to the industry, but unless an individual industry participant has the stomach and treasure for a turf battle, I’d put my money on the CFPB.