Most of us in the auto finance industry were very happy to see Consumer Financial Protection Bureau (CFPB) Director Richard Cordray resign his position. Despite Cordray's effort to replace himself with a consumer activist clone, the federal courts have affirmed President Trump's appointment of Mick Mulvaney as the Acting Director pending a successor Director being confirmed by the Senate.
Mulvaney's approach to the enforcement powers of the CFPB is quite different from Cordray's. Most significantly, Mulvaney has expressed strong doubts about Cordray's philosophy of regulation by enforcement, the practice by which a target company doesn't know they violated any law or regulation until the CFPB shows up with an enforcement action claiming they did so. We are more likely to see traditional Administrative Procedures Act rulemaking processes of the CFPB publishing notice of proposed rules, giving an opportunity for all affected constituencies to provide comments, and then issue final rules taking the comments into consideration. There is also no indication that Mulvaney will continue Cordray's active efforts to indirectly regulate franchised auto dealers.
The FTC's More Aggressive Role Against Dealers
But that doesn't mean dealers can ease up on compliance activities. The Federal Trade Commission (FTC) became a much more aggressive agency pursuing auto dealers during the past several years and there is no indication that this trend is going to abate. Last year, the FTC entered two consent decrees with auto dealers, imposing penalties of $2.4 million against one dealer and $1.6 million against another. Penalties for FTC Act Section 5 unfair and deceptive practice violations also increased from $16,000 per violation to $40,654 per violation.
Primary violations cited by the FTC consist of unfair and deceptive advertising. Advertising is perennially at the top of the FTC's list of unfair and deceptive dealer practices. The first thing the FTC typically looks at in an ad is whether "triggered" terms required by federal Truth in Lending or the Consumer Leasing Act are clearly and conspicuously disclosed. For credit sales, among other things, if you advertise payment amount, term of payment, or down payment, then you must disclose the others of these along with the APR (advertising APR alone is not a triggering term). For leases, if you advertise payment amount, lease term, the amount due at signing or any capitalized cost reduction, you must disclose the transaction is a lease, the full amount due at lease inception (all-in except for tax and registration), lease payment amounts, and lease term, along with whether or not a security deposit is required. Scrolling or mouse-type disclosures don't cut it. Required disclosures must be such that a reasonable consumer can read and understand them.
One of these cases also marked the first time the FTC had fined a dealer for what it called "yo-yo financing," a term used by consumer advocates for spot deliveries. The FTC also issued a blog to auto dealers, "Don't toy with yo-yo financing." In the blog piece, the FTC described the practice as "Some buyers told us that they financed a car through a dealership, signed a contract, and drove the car home, only to be told that the financing didn't go through and they had to sign a new deal or lose their down payment. There’s a name for that: it’s called a “yo-yo” financing tactic." It was one of a handful of unfair and deceptive practices in the $2.4 million fine case and, given the absence of any FTC prior rule on spot delivery practices, may indicate that regulation by enforcement is very much alive at the FTC.
Payment packing also was cited by the FTC in dealer enforcement actions in 2017. In one case, the dealer was accused of preprinting contracts or addenda with GAP, extended service contracts, vehicle etch or other aftermarket products and indicating either they were required to obtain credit or were free to the consumers.
The FTC described one dealer's payment packing process as follows:
Information about the add-on products is often included in a stack of lengthy, complex, highly technical documents presented at the close of a long financing process after an already lengthy process of selecting a car and negotiating over its price. Consumers report that Defendants’ employees, in numerous instances, have rushed consumers through the closing process and have simply indicated to consumers where to sign. In some cases, Defendants have obtained consumer signatures purporting to indicate assent to purchase add-on products even though consumers did not, in fact, authorize the purchase. For instance, a third-party audit found that Defendant . . . required consumers to sign for GAP and service contracts regardless of whether the consumers were actually purchasing the add-on products. The third- party audit also found that other dealerships were having consumers sign blank documents.
The FTC has field agents posing as consumers on site to identify unfair and deceptive practices. For example, a dealer in Arkansas was fined $89,000 for not having Used Car Buyer's Guides displayed on all of its vehicles on its used car lots.
The FTC has an excellent Web site that summarizes its policies and positions on auto dealer conduct and is especially valuable in the advertising context. The site is:
https://www.ftc.gov/tips-advice/business-center/selected-industries/automobiles
Check it regularly to make sure your activities are within FTC guidelines.
State Attorneys General - Your Local Regulator On the Scene
State Attorneys General (AGs) have made clear that they intend to take up the activist consumer protection activities established by the CFPB. The state AGs have tools at their disposal to help them fill any void that may be left by scaled-back CFPB enforcement. The Dodd Frank Act grants state AGs the ability to enforce the Dodd-Frank Act and regulations promulgated under the Act’s authority against entities within their jurisdiction. Section 1042 authorizes state AGs to secure the remedies provided by the Dodd-Frank Act, which include civil money penalties of up to $1 million per day for knowing violations of law. While AGs must give notice of their intended actions to the CFPB and any prudential regulators, the CFPB does not have the power to veto any proposed AG action but only the power to intervene. Several other federal laws such as Truth in Lending and the Fair Credit Reporting Act give State AGs the right to enforce certain provisions as well.
State unfair and deceptive practice laws offer another alternative for relief with penalties in some states that vastly exceed those under federal laws and allow for private rights of action as well. A somewhat dated but good starting place to learn the laws of your state is maintained by the National Consumer Law Center, a consumer activist think tank, at the following Web sites:
https://www.nclc.org/images/pdf/udap/analysis-state-summaries.pdf
https://www.nclc.org/images/pdf/udap/report_50_states.pdf
Pennsylvania has effectively established its own mini-Consumer Financial Protection Bureau under its State AG and Maryland is pursuing a similar initiative. Other states have also been active against auto dealers:
· New York: AG Eric Schneiderman has prosecuted and settled with dealers for over $15 million in the past three years for deceptive advertising and aftermarket product selling and has convicted a dealer of felony charges regarding the burial of hazardous waste. The New York AG also settled two payment packing suits in December 2017 for restitution totaling $1.6 million. Since 2015, he has obtained more than $17 million in restitution and penalties as part of his office’s crackdown on the practice of “jamming,” or payment packing.
· Massachusetts: The Massachusetts AG entered into a $13 million settlement regarding GAP.
· Washington: The Washington AG sued and settled with a dealer for discriminating against Spanish consumers, misrepresenting finance terms, interest rates, title branding and warranties. The dealer paid $250,000 in its settlement and was forced to provide Spanish translated contracts in the future.
· Delaware and Massachusetts: The Attorneys General of these two states settled with a major financing source for $26 million regarding purchasing retail installment sale contracts for thousands of consumers who could not afford them. These contracts were all originated by auto dealers.
· Missouri: The Missouri AG settled with a used car dealer for failing to provide titles and complete repair work under service contracts. The dealer will pay $38,067 in restitution to 23 consumers with a potential for an another $46,000 in fines. Additionally, for the next five years, the dealer principal will be prohibited from selling or leasing motor vehicles; accepting any payment for any work selling, leasing or purchasing any motor vehicles; and owning, operating or controlling any businesses engaged in buying, selling or leasing of motor vehicles.
· New Jersey - A New Jersey used car dealer was ordered to pay $693.645.91 in restitution, penalties, and attorney's fees for, among other things, advertising used motor vehicles for sale without disclosing to consumers the vehicle’s prior damage or prior use; selling vehicles “as is” when they qualified for a warranty; and permitting third parties to advertise, offer for sale and/or sell used motor vehicles on Craigslist that were titled to the dealer.
An association of Democratic Attorneys General has made clear that it intends to fill any gap resulting from decreased enforcement by the Trump Administration. DAGA stands for the Democratic Attorney General Association and its statements on its website tell you their goals:
“Our Democratic Attorneys General provide crucial checks and balances on a new federal administration that often refuses to follow the rule of law.”
“Democratic Attorneys General Are The First Line Of Defense Against The New Administration.”
Summary
In case you haven't noticed, the fines and penalties for enforcement violations have multiplied geometrically from years back when $10,000 to $50,000 was more of the norm. Assume six to seven figures plus attorney's fees, management time, and customer ill will as additional costs from a regulatory enforcement proceeding. And the regulator you will probably most often see is your state AG. State AGs have and continue to consider dealer advertising and other misconduct as the "low hanging fruit" to fill state coffers. Consumer complaints, BBB complaints, notices from competing dealers and referrals from the CFPB and FTC who operate online complaint lines are ways that State AGs identify potential targets. Make sure your Compliance Management System (CMS) has a procedure for addressing and resolving consumer complaints and give the consumer the benefit of all doubts. Easier and more reasonable to pay several hundred or even several thousand dollars to an aggrieved consumer than having a regulator question the transaction and poke around for others in a compliance exam.
So make sure you have a comprehensive CMS and audit the processes and procedures so you can demonstrate your good faith compliance to a regulator. The CFPB may be off the board for a while but the FTC and your State Attorney General are more than making up the enforcement of federal and state consumer protection laws. Be forewarned and forearmed.
Mulvaney's approach to the enforcement powers of the CFPB is quite different from Cordray's. Most significantly, Mulvaney has expressed strong doubts about Cordray's philosophy of regulation by enforcement, the practice by which a target company doesn't know they violated any law or regulation until the CFPB shows up with an enforcement action claiming they did so. We are more likely to see traditional Administrative Procedures Act rulemaking processes of the CFPB publishing notice of proposed rules, giving an opportunity for all affected constituencies to provide comments, and then issue final rules taking the comments into consideration. There is also no indication that Mulvaney will continue Cordray's active efforts to indirectly regulate franchised auto dealers.
The FTC's More Aggressive Role Against Dealers
But that doesn't mean dealers can ease up on compliance activities. The Federal Trade Commission (FTC) became a much more aggressive agency pursuing auto dealers during the past several years and there is no indication that this trend is going to abate. Last year, the FTC entered two consent decrees with auto dealers, imposing penalties of $2.4 million against one dealer and $1.6 million against another. Penalties for FTC Act Section 5 unfair and deceptive practice violations also increased from $16,000 per violation to $40,654 per violation.
Primary violations cited by the FTC consist of unfair and deceptive advertising. Advertising is perennially at the top of the FTC's list of unfair and deceptive dealer practices. The first thing the FTC typically looks at in an ad is whether "triggered" terms required by federal Truth in Lending or the Consumer Leasing Act are clearly and conspicuously disclosed. For credit sales, among other things, if you advertise payment amount, term of payment, or down payment, then you must disclose the others of these along with the APR (advertising APR alone is not a triggering term). For leases, if you advertise payment amount, lease term, the amount due at signing or any capitalized cost reduction, you must disclose the transaction is a lease, the full amount due at lease inception (all-in except for tax and registration), lease payment amounts, and lease term, along with whether or not a security deposit is required. Scrolling or mouse-type disclosures don't cut it. Required disclosures must be such that a reasonable consumer can read and understand them.
One of these cases also marked the first time the FTC had fined a dealer for what it called "yo-yo financing," a term used by consumer advocates for spot deliveries. The FTC also issued a blog to auto dealers, "Don't toy with yo-yo financing." In the blog piece, the FTC described the practice as "Some buyers told us that they financed a car through a dealership, signed a contract, and drove the car home, only to be told that the financing didn't go through and they had to sign a new deal or lose their down payment. There’s a name for that: it’s called a “yo-yo” financing tactic." It was one of a handful of unfair and deceptive practices in the $2.4 million fine case and, given the absence of any FTC prior rule on spot delivery practices, may indicate that regulation by enforcement is very much alive at the FTC.
Payment packing also was cited by the FTC in dealer enforcement actions in 2017. In one case, the dealer was accused of preprinting contracts or addenda with GAP, extended service contracts, vehicle etch or other aftermarket products and indicating either they were required to obtain credit or were free to the consumers.
The FTC described one dealer's payment packing process as follows:
Information about the add-on products is often included in a stack of lengthy, complex, highly technical documents presented at the close of a long financing process after an already lengthy process of selecting a car and negotiating over its price. Consumers report that Defendants’ employees, in numerous instances, have rushed consumers through the closing process and have simply indicated to consumers where to sign. In some cases, Defendants have obtained consumer signatures purporting to indicate assent to purchase add-on products even though consumers did not, in fact, authorize the purchase. For instance, a third-party audit found that Defendant . . . required consumers to sign for GAP and service contracts regardless of whether the consumers were actually purchasing the add-on products. The third- party audit also found that other dealerships were having consumers sign blank documents.
The FTC has field agents posing as consumers on site to identify unfair and deceptive practices. For example, a dealer in Arkansas was fined $89,000 for not having Used Car Buyer's Guides displayed on all of its vehicles on its used car lots.
The FTC has an excellent Web site that summarizes its policies and positions on auto dealer conduct and is especially valuable in the advertising context. The site is:
https://www.ftc.gov/tips-advice/business-center/selected-industries/automobiles
Check it regularly to make sure your activities are within FTC guidelines.
State Attorneys General - Your Local Regulator On the Scene
State Attorneys General (AGs) have made clear that they intend to take up the activist consumer protection activities established by the CFPB. The state AGs have tools at their disposal to help them fill any void that may be left by scaled-back CFPB enforcement. The Dodd Frank Act grants state AGs the ability to enforce the Dodd-Frank Act and regulations promulgated under the Act’s authority against entities within their jurisdiction. Section 1042 authorizes state AGs to secure the remedies provided by the Dodd-Frank Act, which include civil money penalties of up to $1 million per day for knowing violations of law. While AGs must give notice of their intended actions to the CFPB and any prudential regulators, the CFPB does not have the power to veto any proposed AG action but only the power to intervene. Several other federal laws such as Truth in Lending and the Fair Credit Reporting Act give State AGs the right to enforce certain provisions as well.
State unfair and deceptive practice laws offer another alternative for relief with penalties in some states that vastly exceed those under federal laws and allow for private rights of action as well. A somewhat dated but good starting place to learn the laws of your state is maintained by the National Consumer Law Center, a consumer activist think tank, at the following Web sites:
https://www.nclc.org/images/pdf/udap/analysis-state-summaries.pdf
https://www.nclc.org/images/pdf/udap/report_50_states.pdf
Pennsylvania has effectively established its own mini-Consumer Financial Protection Bureau under its State AG and Maryland is pursuing a similar initiative. Other states have also been active against auto dealers:
· New York: AG Eric Schneiderman has prosecuted and settled with dealers for over $15 million in the past three years for deceptive advertising and aftermarket product selling and has convicted a dealer of felony charges regarding the burial of hazardous waste. The New York AG also settled two payment packing suits in December 2017 for restitution totaling $1.6 million. Since 2015, he has obtained more than $17 million in restitution and penalties as part of his office’s crackdown on the practice of “jamming,” or payment packing.
· Massachusetts: The Massachusetts AG entered into a $13 million settlement regarding GAP.
· Washington: The Washington AG sued and settled with a dealer for discriminating against Spanish consumers, misrepresenting finance terms, interest rates, title branding and warranties. The dealer paid $250,000 in its settlement and was forced to provide Spanish translated contracts in the future.
· Delaware and Massachusetts: The Attorneys General of these two states settled with a major financing source for $26 million regarding purchasing retail installment sale contracts for thousands of consumers who could not afford them. These contracts were all originated by auto dealers.
· Missouri: The Missouri AG settled with a used car dealer for failing to provide titles and complete repair work under service contracts. The dealer will pay $38,067 in restitution to 23 consumers with a potential for an another $46,000 in fines. Additionally, for the next five years, the dealer principal will be prohibited from selling or leasing motor vehicles; accepting any payment for any work selling, leasing or purchasing any motor vehicles; and owning, operating or controlling any businesses engaged in buying, selling or leasing of motor vehicles.
· New Jersey - A New Jersey used car dealer was ordered to pay $693.645.91 in restitution, penalties, and attorney's fees for, among other things, advertising used motor vehicles for sale without disclosing to consumers the vehicle’s prior damage or prior use; selling vehicles “as is” when they qualified for a warranty; and permitting third parties to advertise, offer for sale and/or sell used motor vehicles on Craigslist that were titled to the dealer.
An association of Democratic Attorneys General has made clear that it intends to fill any gap resulting from decreased enforcement by the Trump Administration. DAGA stands for the Democratic Attorney General Association and its statements on its website tell you their goals:
“Our Democratic Attorneys General provide crucial checks and balances on a new federal administration that often refuses to follow the rule of law.”
“Democratic Attorneys General Are The First Line Of Defense Against The New Administration.”
Summary
In case you haven't noticed, the fines and penalties for enforcement violations have multiplied geometrically from years back when $10,000 to $50,000 was more of the norm. Assume six to seven figures plus attorney's fees, management time, and customer ill will as additional costs from a regulatory enforcement proceeding. And the regulator you will probably most often see is your state AG. State AGs have and continue to consider dealer advertising and other misconduct as the "low hanging fruit" to fill state coffers. Consumer complaints, BBB complaints, notices from competing dealers and referrals from the CFPB and FTC who operate online complaint lines are ways that State AGs identify potential targets. Make sure your Compliance Management System (CMS) has a procedure for addressing and resolving consumer complaints and give the consumer the benefit of all doubts. Easier and more reasonable to pay several hundred or even several thousand dollars to an aggrieved consumer than having a regulator question the transaction and poke around for others in a compliance exam.
So make sure you have a comprehensive CMS and audit the processes and procedures so you can demonstrate your good faith compliance to a regulator. The CFPB may be off the board for a while but the FTC and your State Attorney General are more than making up the enforcement of federal and state consumer protection laws. Be forewarned and forearmed.
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