The proof requirements and liability for violating consumer credit laws such as the Equal Credit Opportunity Act (ECOA) and the Truth in Lending Act (TILA) can make it difficult for a regulator to encompass all the relief it wants against an auto dealer. So, there is an attempt to use a catch-all provision of the Dodd-Frank Act of 2012 to pick up conduct that may not quite rise to an actionable wrong but which may be “not in conformity” with a law:
“It shall be unlawful for--
(1) any covered person or service provider--
- to offer or provide to a consumer any financial product or service not in conformity with Federal consumer financial law, or otherwise commit any act or omission in violation of a Federal consumer financial law; or
- to engage in any unfair, deceptive, or abusive act or practice;”
12 U.S.C. § 5536(a)(1).
For example, the U.S. Supreme Court has ruled that disparate impact credit discrimination liability (no intent to discriminate but the result of otherwise lawful actions is a negative effect on protected persons) arises under laws that have “results-oriented” language. ECOA does not have such language and, as a result, there is some question as to whether disparate impact credit discrimination is actionable under ECOA. But is disparate impact “not in conformity” with a federal consumer protection law? Maybe.
What the FTC and CFPB have effectively done is make disparate impact credit discrimination an action “not in conformity” with a federal consumer protection law or an unfair trade practice, a lower legal standard. An unfair trade practice is any act that “causes or is likely to cause substantial injury to consumers.” So that becomes the liability lynchpin for disparate impact credit discrimination whereas ECOA may not be.
The CFPB has done the same thing with adverse action notices. In a recent complaint filed in federal court, the CFPB alleges that a lender failed to timely issue required adverse-action notices and failed to provide accurate denial reasons on its adverse-action notices to thousands of loan applicants, in violation of the Equal Credit Opportunity Act and Regulation B. The CFPB also alleges that these violations constitute violations of the CFPA as being “not in conformity” with a federal consumer financial law.
The CFPB has also used its authority under Section 5536(a) to declare marketing and advertising statements to be unfair or deceptive. While these cases have arisen in the mortgage context, the lesson for auto dealers is clear. The government is looking for new ways to come after your perceived violations.
The penalties that the CFPB can seek for Section 5536(a) violations are much harsher than what is provided for violations of individual consumer protection laws like the $2,000 per Truth in Lending or Consumer Leasing Act violations:
(A) First tier. For any violation of a law, rule, or final order or condition imposed in writing by the Bureau, a civil penalty may not exceed $5,000 for each day during which such violation or failure to pay continues.
(B) Second tier. Notwithstanding paragraph (A), for any person that recklessly engages in a violation of a Federal consumer financial law, a civil penalty may not exceed $25,000 for each day during which such violation continues.
(C) Third tier. Notwithstanding subparagraphs (A) and (B), for any person that knowingly violates a Federal consumer financial law, a civil penalty may not exceed $1,000,000 for each day during which such violation continues.”
12 U.S.C. § 5565(c).
Another law that has received attention from the Department of Justice is the federal crime of bank fraud. It has an extremely broad and very general prohibition on conduct as follows:
“Whoever knowingly executes, or attempts to execute, a scheme or artifice--
(1) to defraud a financial institution; or
(2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises;
shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.”
18 U.S.C. § 1344
The federal Department of Justice has used this law to police practices such as payment packing, power booking, straw purchases, misrepresenting customer incomes and other information on credit applications, and just about anything else that a dealer states to a financing source that is untrue or incomplete.
Dealer principals and in one case f & I employees have paid heavy fines and gone to jail for deceiving lenders on auto finance credit applications and accounts. In 2018, the DOJ levied a $1.4 million criminal penalty and required more than $730,000 in restitution against a dealer in Pennsylvania for bank fraud. In another case, eight sales and f & iI employees of an Alabama dealership were arrested and criminally charged for bank fraud. Four pleaded guilty and a sales manager of the dealership was sentenced to 30 months in jail.
More investigations are underway. The aggressiveness of the CFPB is likely to ramp up now that Biden nominee, former FTC Commissioner, Rohat Chopra has been confirmed as the new CFPB Director. In a statement last year in connection with an FTC auto dealer consent decree, Chopra stated a desire to use the unfairness prong of federal law to attack disparate impact credit discrimination and expressed his desire for “a systemic approach to protecting Americans from auto market abuses.”
With creative, anti-auto dealer regulators in charge, the increased penalties and possible criminal indictments are coming. Now would be a good time to have us review and audit your compliance practices and make sure you are not engaging in conduct that a regulator could fit under one or more of these federal laws as well as state “unfair and deceptive acts and practices” laws as well.