Eric Johnson, partner at Hudson Cook LLP

Eric Johnson, partner at Hudson Cook LLP

On June 6, Gregory Arroyo, editorial director of F&I and Showroom and Auto Dealer Today, was joined by Eric L. Johnson, a partner in the law firm of Hudson Cook LLP, for “CFPB Defanged: Be Careful What You Wish For.” The hourlong webinar was the first in the “F&I Think Tank” series, which will delve into the F&I industry’s leading topics.

To set the stage for the dealers, F&I professionals, and industry executives who tuned in, Arroyo gave a quick recap of the history of the Dodd-Frank Act and the agency it created. He noted that the Consumer Financial Protection Bureau’s much-maligned automotive financing guidance was officially rescinded with a stroke of President Donald Trump’s pen — exactly five years and two months since it was published.

“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 regarding rescinding of the bureau’s guidance on dealer participation, it should be tempered. The agency itself is still around, operating under a new name but the same mandate to protect consumers from fraud.

A number of state attorneys general have also vowed to take up the CFPB’s torch. “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 the 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 responsible,” he added.

We’ll Take It From Here

Johnson noted that a number of states are creating their own consumer financial protection units and staffing them with former CFPB enforcement attorneys or other regulators. 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 added, it could be even stricter. It could also get confusing: Dealers who sell across state lines may face a patchwork of guidance and enforcement standards.

Remarkably, state-level control appears to have a proponent in the BCFP’s acting director. Johnson noted that, at the National Association of Attorneys General winter conference, Mulvaney told attendees that his bureau wouldn’t be regulating by enforcement anymore. He said the feds would rely on states to pick up the slack in that regard. He wants the attorneys general more engaged and active in this process, rather than operating under a central, federal mandate.

The FTC Stays in the Picture

Johnson then switched gears to another major piece of the compliance puzzle: the Federal Trade Commission (FTC). He pointed out that, for the past 100 years since the commission was founded, the goal was to have five commissioners on the panel, nominated by the current president, serving a seven-year term. According to the rules, there is supposed to be a split: No more than three of the five can come from a single political party, in an effort to maintain a bipartisan composition.

In the last few years, however, the cycle has been broken, Johnson said. The FTC has been running without the full five-panel commission; so far this year, five members have been nominated and four have been sworn in. The final chair belongs to a holdover commissioner who has said she won’t step down until her term is served out. Once that happens, the fifth will take her place — meaning the FTC will have sworn in an entirely new panel in the same calendar year.

A new group is not likely to try to make an immediate splash, Johnson said, particularly since there is also a new director of the 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.

“I think what we’re going to see is a possibly renewed focus … on data security, and that might be data breaches or sharing or access, or privacy practices with the recent Facebook issues and Equifax — all the things that have been in the news about privacy,” Johnson said.

That said, Johnson added, illegal debt collection practices will also certainly be a priority, along with unfair and deceptive acts and practices (UDAP) issues. “The key here is ‘deceptive.’ … Again, not looking at the product itself, but the activity at issue — in this case, possible deception — and then also possible negative equity issues,” Johnson said. “I think the FTC, along with the states, could take a more active role than we’ve seen probably ever before.”

Johnson did say he did not expect any new regulations, guidance, or mandates to focus on F&I products. He predicts renewed interest 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.

Johnson and Arroyo both mentioned that many lawmakers continue to cite two recent studies: the Consumer Federation and North American Protection Investigator’s 2016 consumer complaints survey and “Auto Add-Ons Add Up,” an October 2017 report from the National Consumer Law Center. Both looked at how dealers price F&I products, how those products are marked up, and even what responsible financing might look like.

Should a customer, attorney, or regulator bring these reports up, Johnson said, the dealer body must be prepared to answer.

“If nothing else, read through them and find ways to either discredit them or to distinguish those reports from the facts. What is reality? What is not reality? I think the problem here is that those reports are out there, and until somebody has taken steps to discredit them, you’re going to have organizations like the FTC looking at them. … And unless you have something that can contradict the statements and positions they’ve taken, it’s a real big uphill climb that you may be faced with.”

Subhed: The Baby and the Bathwater

Arroyo concluded the webinar by noting that no dealer should dispense the compliance practices and policies they established with the CFPB guidance in mind, including the Fair Credit Compliance Policy and Program the NADA issued in early 2014 along with two other trade groups. He noted that even the NADA has urged members not to scrap its program.

“Basically, don’t throw those away,” Arroyo said. “I think if the NADA has seen that, I think it’s safe to say that those are still in play. We should keep them.”

“I couldn’t agree more,” said Johnson. “I think it’s still too early to just jettison and abandon your policy on that front, because even though the bureau, even though what happened with the guidance — and I know the bureau has said that they’re going to reexamine the requirements of the code — I would go with the NADA’s recommendation on that front.”

With so many factors in play and in the midst of a critical election season, Johnson added, there is no way to know whether the auto finance industry’s victory over the CFPB will prove to be decisive or pyrrhic.

“It’s kind of one of those ‘Be careful what you wish for’ situations. Now, instead of looking to one master, possibly the CFPB, now we would need to look at the individual states as well, and make sure they are comfortable with things,” he said. “And looking at the activities of the state AGs to see what they are attacking — whether it’s the products themselves or the practices behind the products — it’s a real interesting time.”

Don’t miss Part Two of the magazine’s compliance series, when gvo3 & Associates Gil Van Over enters the F&I Think Tank to share a compliance defense plan to help dealerships prepare for the next wave of compliance. The webinar, "CFPB Defanged: Rise of the eDealership," is scheduled for Wednesday, July 11, at 11 a.m. PT/2 p.m. ET. To register, click here.

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