Vying for ‘Toughest Cop’
The magazine’s legal wiz offers his take on the heated battle for top bad-cop status between the Federal Trade Commission and the Consumer Financial Protection Bureau.
Looking for a shorthand version of what’s going on in Washington, D.C., and with the federal agencies that regulate the car finance and leasing business? Here’s my down-and-dirty take.
Congress passed the Dodd-Frank Act in July 2010. The DFA created the new federal Consumer Financial Protection Bureau (CFPB) and named it the chief protector of consumers’ financial affairs. Alarmed at the possibility of a tough new federal regulator for its members, the National Automobile Dealers Association (NADA) lobbied for, and was granted, an exemption for certain dealers (franchised dealers and independents with car-repair capabilities and who do not hold their own finance contracts). The exemption carried a price, however: In granting it, Congress gave new powers to the Federal Trade Commission (FTC), the policeman for the exempted dealers.
The newly emboldened FTC announced in early 2011 that it would hold so-called “roundtables” on auto finance issues. During the year, the commission held three such events. Officials heard consumer complaints and industry responses on a number of issues, including dealer participation, discrimination, spot deliveries, advertising, credit to members of the military and consumer education.
A little more than halfway through 2011, the bureau came into being. It spent several months buying pencils and legal pads, hiring staff and getting organized. Then, in late fall of 2011, the bureau and the FTC started trying to prove which agency is the tougher cop on the Washington beat.
In December 2011, the CFPB called for whistle-blowers to tell them tales of creditor and dealer illegal practices.
On Feb. 21 of this year, the CFPB announced that it was “declaring war on discrimination.” Of course, anti-discrimination is as wholesome as apple pie, and the bureau’s folks had picked up consumer advocates’ complaints — unsupported by credible data — that discrimination is common in car financing, so this one was predictable.
Not to be shown up, on March 14, the FTC hammered five car dealers for negative equity ads. The ads were typical of ads used by dealers all over the country, and were not misleading to anyone bright enough to know that dealers don’t give away money. But the FTC said they were deceptive, so the dealers caved and settled the charges.
Then on April 24, the CFPB announced it would study the use of arbitration agreements. The study process will likely take a couple of years, after which, I’m pretty sure, the bureau will ban the use of them.
On May 12, the FTC explained its “Holder Rule.” That’s the rule that says consumers can assert against finance companies’ claims and defenses that they have against dealers who sell the finance companies retail installment contracts. Some courts interpreted the rule in a manner that was unfavorable to consumers. The FTC’s announcement was designed to correct what the agency saw as a mistake by the courts.
Then, on June 7, the FTC announced an enforcement action against a dealer for privacy leaks caused by an employee’s use of peer-to-peer software.
Lastly, the CFPB announced on July 18 its first public enforcement action. The bureau ordered Capital One's credit card division to refund approximately $140 million to two million customers and pay an additional $25 million penalty to the CFPB’s Civil Penalty Fund. The action identified deceptive marketing tactics used by Capital One’s call-center vendors to pressure or mislead consumers with low credit scores or low credit limits into paying for “add-on products.”
The CFPB’s press release claimed that Capital One customers were misled about the products’ benefits, deceived about the nature of the products, misled about eligibility, misinformed about the products’ cost, and enrolled without their consent. If you think this development involving credit card operations doesn’t apply to the car business, think again.
The bureau, with its action, is basically holding a creditor responsible for the actions of its service providers, something the FTC could do as well.
This contest between the FTC and the CFPB is likely to continue into the foreseeable future. Each agency will be looking for big headlines and big penalties. If you’ve ever thought about moving your business to, say, Australia, this might be a good time.
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