The Biden Administration represents a fundamental shift in federal consumer protection policy. Nowhere is this more so than in the new heads of the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC). A difficult road may lie ahead for auto dealers.
The CFPB
President Biden nominated FTC Commissioner Rohad Chopra to become the new Director of the CFPB after Trump appointee Kathy Kraninger resigned on January 20, 2021.
Kraninger exercised many of the CFPB’s regulatory powers in behind-closed-doors supervisory examinations. The goal was to effect conduct not inflict punishment. Enforcement actions fell during her tenure and proposed regulations were less favorable to consumer groups. As an example, she attempted to limit prohibited “abusive practices” to situations where the harm to consumers outweighed the benefits and seek monetary relief only when there was a lack of a good faith effort to comply with the law.
Chopra comes at consumer protection and auto finance from a vastly different perspective. Many believe Chopra is reminiscent of former CFPB Director Richard Cordray, who issued Guidance attacking indirect auto finance rate participation as disparate impact credit discrimination. Disparate impact occurs without any intent to discriminate when neutral business practices are determined to have a negative effect on rates and other terms given to protected classes of persons under ECOA.
“He will be at least as aggressive as former Director Cordray, if not more so,” said Lucy Morris, a former CFPB deputy enforcement director who worked with Chopra in the CFPB’s early years and is now a partner at Hudson Cook. “His statements are very hard-hitting, and the language is quite charged.”
The CFPB has ramped up hiring of enforcement lawyers since President Biden took office. On February 9, the Acting Director posted a blog entitled “Calling All Attorneys Interested in Joining the CFPB” at all levels. Pursuing enforcement actions will be a priority for these new lawyers.
Take, for example, his comments in connection with the FTC’s settlement of a disparate treatment credit discrimination enforcement action against a New York auto dealer in 2020. The dealership was charged with credit discrimination based on alleged comments of an f & I manager stating that minorities should be given worse terms.
To settle the FTC’s lawsuit, the dealer agreed to pay $1.5 million in consumer remediation and FTC penalties. Chopra gave his views on rate participation and disparate impact credit discrimination in a separate statement:
"A dealer markup is an undisclosed kickback that dealers earn for convincing prospective car buyers to agree to a higher interest rate than they actually qualify for with a lender. These kickback arrangements are kept secret from car buyers, who end up paying far more for financing.
It is rare to uncover direct evidence of racist intent. That’s why disparate impact analysis is a critical tool to uncover hidden forms of discrimination, not only in this context but throughout the economy. . . . In addition to discriminatory practices, there is growing evidence of widespread fraud and deceit, including the same “liar loans” that fueled the last recession."
The FTC
President Biden’s choice to head the FTC is Democratic Commissioner Rebecca Kelly Slaughter. Under the Biden Administration, Democrats will outnumber Republicans 3-2 on the FTC.
Commissioner Slaughter is also no fan of auto dealers. Writing in the same New York auto dealer case, Slaughter took dead aim at auto dealers:
"The automobile-financing market in the United States is profoundly broken. Although this matter involves extreme conduct that may make it seem like an outlier, the tricks and traps that [the New York dealer] used against consumers are all too prevalent at auto dealerships across the country.
The fundamental problem in the auto-dealing market is that auto dealers no longer make most of their money by selling cars. Instead, they make money by selling credit and add-on products, such as guaranteed asset protection (GAP), window etchings, extended warranties, and anti-rust coatings. Nearly all of these moneymaking strategies can be bad for consumers. . . . I agree with Commissioner Chopra that the time has come for the Commission to commence rulemaking proceedings to tackle both the unfair and deceptive consumer abuses as well as the discrimination too often seen at auto dealerships.
The consumer-dealer relationship is fundamentally unequal, and the dealers have had the upper hand for too long."
Both Chopra and Slaughter also favor a broad interpretation of what an “unfair or abusive practice” is particularly in the auto dealer context. Most analysts believe both will apply legal bans on unfair, deceptive, and abusive practices far more broadly than former CFPB Director Kraninger did. Both also believe that disparate impact credit discrimination, which may not be legally actionable under the Equal Credit Opportunity Act, separately constitutes an unfair trade practice subject to their regulatory enforcement authority.
What’s a Dealer to Do?
With these two in charge, it is time to take a look at your compliance policies and practices in sales and f & i. If you have not already done so, it is time to adopt the NADA Fair Credit and Voluntary Protection Products policies. These policies set firm dealership rate participation and aftermarket product pricing and require a documented legitimate business justification for charging any customer a lower rate markup or price. These are intended to follow FTC precedent for mitigating disparate impact credit discrimination risks. They are really a must.
Also adopt or refine your customer dispute procedures and apply them the same to all customers. The CFPB and FTC will generally act on customer complaints and if you can resolve one before it gets to them, you are well advised to do so, even if it means giving the customer a seeming windfall. Don’t be pennywise and pound foolish.
Schedule training and AFIP certify your sales and f & I people if you have not already done so. You need a good story to tell if your dealership comes under scrutiny. It is going to be a tough four years ahead.
The CFPB
President Biden nominated FTC Commissioner Rohad Chopra to become the new Director of the CFPB after Trump appointee Kathy Kraninger resigned on January 20, 2021.
Kraninger exercised many of the CFPB’s regulatory powers in behind-closed-doors supervisory examinations. The goal was to effect conduct not inflict punishment. Enforcement actions fell during her tenure and proposed regulations were less favorable to consumer groups. As an example, she attempted to limit prohibited “abusive practices” to situations where the harm to consumers outweighed the benefits and seek monetary relief only when there was a lack of a good faith effort to comply with the law.
Chopra comes at consumer protection and auto finance from a vastly different perspective. Many believe Chopra is reminiscent of former CFPB Director Richard Cordray, who issued Guidance attacking indirect auto finance rate participation as disparate impact credit discrimination. Disparate impact occurs without any intent to discriminate when neutral business practices are determined to have a negative effect on rates and other terms given to protected classes of persons under ECOA.
“He will be at least as aggressive as former Director Cordray, if not more so,” said Lucy Morris, a former CFPB deputy enforcement director who worked with Chopra in the CFPB’s early years and is now a partner at Hudson Cook. “His statements are very hard-hitting, and the language is quite charged.”
The CFPB has ramped up hiring of enforcement lawyers since President Biden took office. On February 9, the Acting Director posted a blog entitled “Calling All Attorneys Interested in Joining the CFPB” at all levels. Pursuing enforcement actions will be a priority for these new lawyers.
Take, for example, his comments in connection with the FTC’s settlement of a disparate treatment credit discrimination enforcement action against a New York auto dealer in 2020. The dealership was charged with credit discrimination based on alleged comments of an f & I manager stating that minorities should be given worse terms.
To settle the FTC’s lawsuit, the dealer agreed to pay $1.5 million in consumer remediation and FTC penalties. Chopra gave his views on rate participation and disparate impact credit discrimination in a separate statement:
"A dealer markup is an undisclosed kickback that dealers earn for convincing prospective car buyers to agree to a higher interest rate than they actually qualify for with a lender. These kickback arrangements are kept secret from car buyers, who end up paying far more for financing.
It is rare to uncover direct evidence of racist intent. That’s why disparate impact analysis is a critical tool to uncover hidden forms of discrimination, not only in this context but throughout the economy. . . . In addition to discriminatory practices, there is growing evidence of widespread fraud and deceit, including the same “liar loans” that fueled the last recession."
The FTC
President Biden’s choice to head the FTC is Democratic Commissioner Rebecca Kelly Slaughter. Under the Biden Administration, Democrats will outnumber Republicans 3-2 on the FTC.
Commissioner Slaughter is also no fan of auto dealers. Writing in the same New York auto dealer case, Slaughter took dead aim at auto dealers:
"The automobile-financing market in the United States is profoundly broken. Although this matter involves extreme conduct that may make it seem like an outlier, the tricks and traps that [the New York dealer] used against consumers are all too prevalent at auto dealerships across the country.
The fundamental problem in the auto-dealing market is that auto dealers no longer make most of their money by selling cars. Instead, they make money by selling credit and add-on products, such as guaranteed asset protection (GAP), window etchings, extended warranties, and anti-rust coatings. Nearly all of these moneymaking strategies can be bad for consumers. . . . I agree with Commissioner Chopra that the time has come for the Commission to commence rulemaking proceedings to tackle both the unfair and deceptive consumer abuses as well as the discrimination too often seen at auto dealerships.
The consumer-dealer relationship is fundamentally unequal, and the dealers have had the upper hand for too long."
Both Chopra and Slaughter also favor a broad interpretation of what an “unfair or abusive practice” is particularly in the auto dealer context. Most analysts believe both will apply legal bans on unfair, deceptive, and abusive practices far more broadly than former CFPB Director Kraninger did. Both also believe that disparate impact credit discrimination, which may not be legally actionable under the Equal Credit Opportunity Act, separately constitutes an unfair trade practice subject to their regulatory enforcement authority.
What’s a Dealer to Do?
With these two in charge, it is time to take a look at your compliance policies and practices in sales and f & i. If you have not already done so, it is time to adopt the NADA Fair Credit and Voluntary Protection Products policies. These policies set firm dealership rate participation and aftermarket product pricing and require a documented legitimate business justification for charging any customer a lower rate markup or price. These are intended to follow FTC precedent for mitigating disparate impact credit discrimination risks. They are really a must.
Also adopt or refine your customer dispute procedures and apply them the same to all customers. The CFPB and FTC will generally act on customer complaints and if you can resolve one before it gets to them, you are well advised to do so, even if it means giving the customer a seeming windfall. Don’t be pennywise and pound foolish.
Schedule training and AFIP certify your sales and f & I people if you have not already done so. You need a good story to tell if your dealership comes under scrutiny. It is going to be a tough four years ahead.
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