2017 brought a lot of changes in the compliance landscape and more are likely to come in 2018. Let's review some of the high and low points of the past year and look ahead.
Perhaps the most important development was the Congress' repeal of the Consumer Financial Protection Bureau's ("CFPB") Arbitration Rule. The Rule was published by the CFPB in June and would have prohibited waivers of class action rights in virtually all consumer finance contracts. Fortunately, the Congress used its authority under the Congressional Review Act to repeal the Arbitration Rule in November and President Trump signed the repeal. The CFPB's own studies revealed that consumers fare better in arbitration than class actions, the only beneficiaries of which seem to be trial lawyers.
Richard Cordray stepped down as CFPB Director in November 2017. After his attempt to appoint his successor failed in the courts, President Trump appointed Mick Mulveney, the OMB Director and a frequent CFPB critic, to be the Acting Director until a replacement for Cordray is named and confirmed by the Senate.
Before you get too excited about the coming direction of the CFPB, you should know that the FTC and State Attorneys General took very tough enforcement actions against dealers in 2017 for advertising violations and deceptive trade practices. They will likely continue to do so in 2018.
FTC Activity in 2017
The FTC assessed a $1.4 million penalty against a 12-store California group for violating a 2014 consent decree relating to unfair and deceptive advertising. As with similar two time violators, the penalties were harsh and the violations did not match those for which the initial consent decree was issued.
The FTC's complaint--along with several others it filed in 2017--led with what is becoming its leading charge against dealers which is the failure to disclose terms required by Truth in Lending and the Consumer Leasing Act to qualify misleading headlines in advertisements. To review once more, if a credit ad discloses payment amount, term of obligations, down payment or finance charges, it must disclose all of those (except for finance charges) plus the APR. If a lease ad discloses the lease payment or amount of capitalized cost reduction or payment due at lease signing, it must disclose that the transaction is a lease, lease payment amounts, the number of lease payments, the amount due at lease signing (all-in), and whether or not a security deposit is required. Back-end lease obligations and allowable mileage and excess mileage fees may also be required by federal or state law and should be included as well. Be careful advertising payment amounts as that is the triggering term that seems to catch dealers in most of the cases
State Attorneys General Activity in 2017
Attorneys General come in two varieties: Democrats and Republicans. 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.”
Democratic AGs will maintain many of the policies of the CFPB. For example, California is considering its own disparate impact enforcement. Pennsylvania has created its own mini-CFPB to help consumers deal with claims against auto dealers and other creditors.
DAGA members have taken strong actions against dealers in the past few years:
· 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.
· 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 from thousands of consumers who could not afford them. These contracts were all originated by auto dealers.
The corresponding organization to DAGA is the Republican Attorneys General Association or RAGA. RAGA members are generally supportive of the Trump administration. But all Attorneys General are required to discharge their legal responsibilities which include responding to consumer complaints. Consumer complaints against auto dealers are generally within the top three classes of complaints AGs receive each year.
New Risks to Dealers
Regulatory action in 2018 could also be manifested in new ways:
Autonomous Vehicles and Franchise Dealers: Autonomous vehicles have been attracting a great deal of attention from software companies like Apple and Google that are not traditionally affiliated with the automobile industry. A number of these companies are attempting to fashion artificial intelligence, which will drive vehicles without the need of a human driver.
It is also rumored that these software companies are quietly lobbying Congress to enact legislation, which would allow them to bypass franchise law and sell these vehicles directly to the public. The FTC has already welcomed this idea. If Congress enacted such a law, it could override state franchise law pursuant to the Commerce Clause of the U.S. Constitution.
An “All In” 36% APR: In November 2016, South Dakota voters approved a referendum which bars licensees from contracting for or receiving greater than a 36% maximum finance charge on financing. The finance charge calculation, as in the Military Lending Act APR calculation (MAPR), is an “all-in” calculation, and would include all interest, fees, and charges, including any ancillary products or services.
A violation of the 36% finance charge cap is deemed void and uncollectable, and the financing source could face a criminal misdemeanor charge as well. Adding products such as GAP, service contracts, and other ancillary products very quickly may increase the interest rate beyond the 36% cap. This means that dealers will have less opportunity to sell ancillary products to their customers. Profit opportunities will be lost and consumers will have fewer options.
Creditor Liability in Underwriting: As the Delaware and Massachusetts case showed, regulators may be targeting creditors for not denying credit to those consumers who will, most likely, default on their retail installment sale contracts or lease contracts.
Dealers should recall that they are creditors by law and share in this potential liability. In other words, dealers and financing sources may be liable for advancing sales when the consumer’s ability to discharge their contractual obligations is limited. The law used for these prosecutions is the familiar unfair and deceptive trade practices act (UDAP), which grants federal and state regulators great leeway and flexibility and can provide significant financial penalties such as the $1.4 million levied against the 12-store California group by the FTC.
ADA-Compliant Websites: Groups of consumer lawyers are filing lawsuits against companies whose websites are not compliant with the Americans with Disabilities Act. Courts have held that websites are "places of public accommodation" and despite a lack of regulations from the Department of Justice, websites may have to comply with an industry standard such as the Web Content Accessibility Guidelines (WCAG) 2.0 level AA. This standard is based on four principles. Websites should be: (1) perceivable; (2) operable; (3) understandable; and (4) robust for people with disabilities. Such persons should be able to perceive website content using their available senses and a variety of assistive technologies, understand the content and how to operate the website, and websites should continue to be compatible as technology improves. Courts have gone both ways on this issue and it will be one to watch for in 2018.
What we saw in 2017 included substantial increases in fines for violations, more aggressive enforcement action by the FTC and Attorneys General, and new issues on the horizon. Expect more of the same in 2018
_________________
Perhaps the most important development was the Congress' repeal of the Consumer Financial Protection Bureau's ("CFPB") Arbitration Rule. The Rule was published by the CFPB in June and would have prohibited waivers of class action rights in virtually all consumer finance contracts. Fortunately, the Congress used its authority under the Congressional Review Act to repeal the Arbitration Rule in November and President Trump signed the repeal. The CFPB's own studies revealed that consumers fare better in arbitration than class actions, the only beneficiaries of which seem to be trial lawyers.
Richard Cordray stepped down as CFPB Director in November 2017. After his attempt to appoint his successor failed in the courts, President Trump appointed Mick Mulveney, the OMB Director and a frequent CFPB critic, to be the Acting Director until a replacement for Cordray is named and confirmed by the Senate.
Before you get too excited about the coming direction of the CFPB, you should know that the FTC and State Attorneys General took very tough enforcement actions against dealers in 2017 for advertising violations and deceptive trade practices. They will likely continue to do so in 2018.
FTC Activity in 2017
The FTC assessed a $1.4 million penalty against a 12-store California group for violating a 2014 consent decree relating to unfair and deceptive advertising. As with similar two time violators, the penalties were harsh and the violations did not match those for which the initial consent decree was issued.
The FTC's complaint--along with several others it filed in 2017--led with what is becoming its leading charge against dealers which is the failure to disclose terms required by Truth in Lending and the Consumer Leasing Act to qualify misleading headlines in advertisements. To review once more, if a credit ad discloses payment amount, term of obligations, down payment or finance charges, it must disclose all of those (except for finance charges) plus the APR. If a lease ad discloses the lease payment or amount of capitalized cost reduction or payment due at lease signing, it must disclose that the transaction is a lease, lease payment amounts, the number of lease payments, the amount due at lease signing (all-in), and whether or not a security deposit is required. Back-end lease obligations and allowable mileage and excess mileage fees may also be required by federal or state law and should be included as well. Be careful advertising payment amounts as that is the triggering term that seems to catch dealers in most of the cases
State Attorneys General Activity in 2017
Attorneys General come in two varieties: Democrats and Republicans. 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.”
Democratic AGs will maintain many of the policies of the CFPB. For example, California is considering its own disparate impact enforcement. Pennsylvania has created its own mini-CFPB to help consumers deal with claims against auto dealers and other creditors.
DAGA members have taken strong actions against dealers in the past few years:
· 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.
· 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 from thousands of consumers who could not afford them. These contracts were all originated by auto dealers.
The corresponding organization to DAGA is the Republican Attorneys General Association or RAGA. RAGA members are generally supportive of the Trump administration. But all Attorneys General are required to discharge their legal responsibilities which include responding to consumer complaints. Consumer complaints against auto dealers are generally within the top three classes of complaints AGs receive each year.
New Risks to Dealers
Regulatory action in 2018 could also be manifested in new ways:
Autonomous Vehicles and Franchise Dealers: Autonomous vehicles have been attracting a great deal of attention from software companies like Apple and Google that are not traditionally affiliated with the automobile industry. A number of these companies are attempting to fashion artificial intelligence, which will drive vehicles without the need of a human driver.
It is also rumored that these software companies are quietly lobbying Congress to enact legislation, which would allow them to bypass franchise law and sell these vehicles directly to the public. The FTC has already welcomed this idea. If Congress enacted such a law, it could override state franchise law pursuant to the Commerce Clause of the U.S. Constitution.
An “All In” 36% APR: In November 2016, South Dakota voters approved a referendum which bars licensees from contracting for or receiving greater than a 36% maximum finance charge on financing. The finance charge calculation, as in the Military Lending Act APR calculation (MAPR), is an “all-in” calculation, and would include all interest, fees, and charges, including any ancillary products or services.
A violation of the 36% finance charge cap is deemed void and uncollectable, and the financing source could face a criminal misdemeanor charge as well. Adding products such as GAP, service contracts, and other ancillary products very quickly may increase the interest rate beyond the 36% cap. This means that dealers will have less opportunity to sell ancillary products to their customers. Profit opportunities will be lost and consumers will have fewer options.
Creditor Liability in Underwriting: As the Delaware and Massachusetts case showed, regulators may be targeting creditors for not denying credit to those consumers who will, most likely, default on their retail installment sale contracts or lease contracts.
Dealers should recall that they are creditors by law and share in this potential liability. In other words, dealers and financing sources may be liable for advancing sales when the consumer’s ability to discharge their contractual obligations is limited. The law used for these prosecutions is the familiar unfair and deceptive trade practices act (UDAP), which grants federal and state regulators great leeway and flexibility and can provide significant financial penalties such as the $1.4 million levied against the 12-store California group by the FTC.
ADA-Compliant Websites: Groups of consumer lawyers are filing lawsuits against companies whose websites are not compliant with the Americans with Disabilities Act. Courts have held that websites are "places of public accommodation" and despite a lack of regulations from the Department of Justice, websites may have to comply with an industry standard such as the Web Content Accessibility Guidelines (WCAG) 2.0 level AA. This standard is based on four principles. Websites should be: (1) perceivable; (2) operable; (3) understandable; and (4) robust for people with disabilities. Such persons should be able to perceive website content using their available senses and a variety of assistive technologies, understand the content and how to operate the website, and websites should continue to be compatible as technology improves. Courts have gone both ways on this issue and it will be one to watch for in 2018.
What we saw in 2017 included substantial increases in fines for violations, more aggressive enforcement action by the FTC and Attorneys General, and new issues on the horizon. Expect more of the same in 2018
_________________
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