Possible Changes Coming to the CFPB
At this writing, a three-judge panel of the U.S. Court of Appeals in the D.C. Circuit has ruled unconstitutional the 2010 Dodd-Frank Act's appointment of a single director of the Consumer Financial Protection Bureau ("CFPB") who can only be removed "for cause." The Court ruled that the Director must be subject to termination by the President for any reason. The Court also threw out a CFPB "abusive practices" ruling that reversed prior HUD precedent. U.S. Circuit Judge Brett Kavanaugh, who wrote the appeals court’s primary opinion, said the CFPB erred in retroactively applying the law, violating “the bedrock due process principle that the people should have fair notice of what conduct is prohibited.”
The Court's ruling is currently being held in abeyance pending an appeal to the full D.C. Circuit Court of Appeals, but a new President may agree with the Court on the unconstitutionality and fire CFPB Director Richard Cordray or attempt to remove him for cause. His scheduled term in office does not end until 2018.
With a Republican Congress and a Republican President, we may also see legislation restructuring the CFPB. Texas congressman Jeb Hensarling, the Republican chairman of the House Financial Services Committee, has introduced a bill that would eliminate the CFPB’s power to penalize institutions for “abusive practices.” It would also replace the Bureau’s sole director with a five-member bipartisan commission, repeal the CFPB's Auto Finance Guidance, and make its budget subject to Congressional appropriations as opposed to the CFPB receiving automatically a percentage of the Fed's budget as it does today.
Federal Trade Commission
Also, the Chairperson of the Federal Trade Commission ("FTC") has submitted her resignation effective January 20, which means President Trump will be able to nominate three FTC Commissioners (at least one of whom must be a Democrat as the FTC is required to be bi-partisan) as two additional vacancies already exist. Currently, only two Commissioners (one Democrat and one Republican) are in office. What will this mean for auto dealers?
Both agencies, along with State Attorneys General empowered by the Dodd-Frank Act to enforce federal as well as state consumer financial protection laws, have been operating largely under a mode of "regulation by enforcement." Under this approach, an agency does not put proposed rules out for public comment and make changes before publishing final regulations based on the comments. Rather, it brings unfair and deceptive practice enforcement actions--frequently for matters not previously found unlawful--and the consent decree from the enforcement action becomes the effective regulation for similarly-situated entities such as other auto dealers. Many FTC advertising enforcement actions have adopted this approach and the FTC sued a dealership and its principals in September 2016 claiming spot delivery practices (called "yo-yo" practices) can also constitute unfair or deceptive practices.
While at first glance it may appear that regulation by enforcement may be reigned in, there exist problems for agency-issued regulations such as those the CFPB is preparing to issue to ban class action waivers in arbitration agreements. The Congress has the power under a law called the Congressional Review Act (CRA) to engage in an expedited procedure (no filibusters) to pass a resolution of disapproval of any regulation issued by an administrative agency such as the CFPB or FTC during the prior 60 days during which Congress was in session. If the Congress passes a resolution of disapproval and the President signs it, the regulation becomes null and void and the agency cannot create a substantially similar regulation. President Obama vetoed several CRA disapproval resolutions passed by the Republican Congress but President Trump may be otherwise inclined and could sign resolutions revoking regulations enacted by the CFPB or FTC. For this reason, regulation by enforcement (not technically a resolution subject to the CRA) may continue to be the agencies' preferred way of doing business.
Whatever changes the Trump Administration makes to the CFPB or the FTC and its regulations passed during the last 60 session days (a period that goes back to June 2016), don't expect immediate changes with the possible exception of firing Richard Cordray as the CFPB Director. It will take time for legislation to work its way through the Congress and additional time for proposed Commissioners for the FTC to be nominated and approved by the Congress. In the meantime, don't expect a drastic shift in the approach of state and federal regulators towards dealer compliance issues.
Expect the sale and payment packing of aftermarket products, privacy, data security procedures (especially in the aftermath of a security breach), advertising, Red Flags, and spot deliveries to be areas where the FTC and State Attorneys General focus attention. The CFPB will continue to attempt to indirectly regulate auto dealers until either legislation or a change in Director curtails them. Already, they have done significant work in studying aftermarket product sales and are well positioned to bring enforcement actions against lenders for dealers' unfair, deceptive, and abusive actions in selling or packing aftermarket products.
Change moves slowly in Washington and this is not the time to let down your guard on compliance activities. With regulation by enforcement, theoretically any practice is subject to challenge and you want to document your compliance in every deal. If you have not already done so, appoint a Chief Compliance Officer and adopt a Compliance Management Policy that pulls together all of your individual compliance policies into a working whole. Do regular training and document honesty and transparency with customers. This will best prepare you when the FTC or your State Attorney General come knocking at your door even if down the road, the regulatory intensity of the Obama years begins to abate.
Randy Henrick is an auto dealer compliance expert who offers compliance consulting services to dealers at www.AutoDealerCompliance.net. Randy served for 12 years as Dealertrack's lead regulatory and compliance attorney and wrote all of Dealertrack's Compliance Guides. He presented workshops at the last two NADA national conventions, speaks to dealer associations, and prepares training and other compliance materials for dealers. Because of the general nature of this article, it is not intended as legal or compliance advice to any person but raises issues you may want to discuss with your attorney or compliance professional.