The CFPB's and FTC's Supervision & Enforcement Authority in Auto Finance

Presented by

With

Michael Benoit Richard Hackett Lucy Morris Joel Winston

The CFPB’s Proposed Larger Participant Rule for Automobile Financing

The Proposed Rule

 Purpose  The Larger Participant Test  Leasing  Cost of Supervision

Purpose



Level Playing Field

 87.4 million outstanding finance and lease transactions  Representing < $900 billion in value  Market fragmented between banks and non-banks 

Exert Supervisory Authority over Non-Banks



Bureau mandate

 Enforce federal consumer financial laws consistently without regard to a person’s status as a depository institution

Aggregate Annual Originations = 10,000

 Originations by nonbank entity and any affiliates during the preceding calendar year:  Credit granted for the purpose of purchasing an automobile, plus  Automobile leases, plus  Lease and credit refinancings, plus  Purchases or acquisitions of leases and purchase financing

Aggregate Annual Originations = 10,000

Automobile

means any self-propelled vehicle primarily used for personal, family, or household purposes for on-road transportation. The term does not include motor homes, recreational vehicles (RVs), golf carts, and motor scooters.

Aggregate Annual Originations

 Bureau indicated it did not intend to capture:  Title lending, or  Securitization  But:  Not clear if title lending isn’t a form of refinancing, and  Language of the rule does not sufficiently carve out securitization SPEs (“invest in ABS”).

Leasing

 Two definitions: 

Dodd- Frank

: extending or brokering leases of personal … property

that are the functional equivalent of purchase finance arrangements

, if (I) the lease is on a non-operating basis; and (II) the initial term of the lease is at least 90 days.



CEBA §108

(Competitive Equality Banking Act)

Leasing

 Parsing the DFA definition:  Initial term of at least 90 days  Non-operating  Accounting definition  Permissible non-banking activities for bank holding companies  The functional equivalent of purchase finance arrangements

Leasing

 Is CFPB’s determination that leases are the functional equivalent of purchase finance arrangements sound?

 What impact if applied to other scenarios? (TILA, ECOA, creditor’s rights)

Leasing



CEBA §108: Must be:



A full-payout lease and



A net lease.

Leasing



Full-payout lease:

 Return of full investment in property is reasonably expected, plus the estimated cost of financing the property over the term  From (1) rentals; (2) estimated tax benefits; and (3) the estimated residual value of the property at the expiration of the lease term

.

Leasing



Net lease:

Lessor will not, directly or indirectly, provide or be obligated to provide for: (1) Servicing, repair, or maintenance; (2) Parts or accessories; (3) Loan of replacement or substitute property during servicing; (4) Lessee insurance costs (except force-placed); or (5) Renewal of any license or registration for the property (unless necessary to protect lessor interests).

Costs of Supervision

 Bureau estimates based on its experience with bank examinations.

 On site for 9 weeks  2 weeks of preparation  11 weeks of staff time  Assumes 1 full time compliance person and 1/10 th of an attorney – total labor cost $27,611 (assumption may not align with reality)

CFPB Enforcement in the Auto Finance Market

Big Picture

• Proposed larger participant rule only impacts the Bureau’s supervisory authority.

• The Bureau has enforcement authority over large bank and nonbank auto finance companies.

• Enforcement can occur independent of Supervision or Rulemaking.

• Expect Bureau to be active in this space.

How CFPB Investigations Originate

• As a result of a Bureau examination.

– The “PARR” letter and the decision to pursue public enforcement action.

• By the Enforcement Office, based on: – Consumer Complaints – Whistleblowers – Media Attention – Referrals from Federal/State Partners – Enforcement Priorities

Civil Investigative Demands

• Investigations typically start with broad CIDs for documents, data, and written responses.

• Compulsory process with tight deadlines.

• “Meet and confer” within 10 days of receipt.

• CID modification letters.

• Petitions to modify or set aside the CID must be filed within 20 days of receipt.

What to Expect Next

• Several weeks or months without word • Then: – A closing letter (possible, but not likely yet) – Follow-on CIDs for more materials or investigational hearings – CIDs to third-parties, like banks and vendors – Bureau interviews of customers and former employees

What to Expect Next

• Closing letter; or • Notice and opportunity to respond and advise (NORA).

– Written response will be shared internally, including with Director.

• Pre-complaint settlement negotiations.

• Bureau lawsuit if unable to settle.

CFPB Areas of Interest in Auto Finance Market

• Deceptive practices in the marketing of loans and leases.

• Providing accurate information to credit bureaus.

• Treating consumers fairly when collecting debts.

• Discriminatory pricing and dealer markups.

FTC Enforcement in the Auto Finance Market

Federal Trade Commission

• FTC has jurisdiction over all entities “in or affecting commerce, except: – Depository institutions – Common carriers – Non-profits – Business of insurance

Includes non-bank auto finance companies and their principals

FTC – CFPB

•

CFPB

: exclusive jurisdiction over banks. •

FTC

: exclusive jurisdiction over non-financial services companies.

• But, large areas of overlap, including non-bank auto finance companies. • Memorandum of Understanding - No duplication or inconsistent standards - Coordination and cooperation - May “divide and conquer” • Deception and unfairness standards are the same.

• But, FTC and CFPB don’t necessarily see the world the same way.

Recent FTC Developments

•

Consumer Portfolio Services

(5/14). Subprime auto lender and servicer. Alleged illegal practices included: – Loan servicing • Misrepresenting fees owed • Improper assessment and collection of fees • Improper principal balance increases • Failing to disclose effects of loan extensions • Misrepresenting payment options

Recent FTC Developments

•

Consumer Portfolio Services

(cont). Subprime auto lender and servicer. Alleged illegal practices included: – Debt collection (both FDCPA and first party), including • Disclosing debts to third parties • Calls to consumers’ places of employment • Harassment • Unauthorized debits • False repossession threats • Manipulating Caller ID – FCRA Furnisher Rule violations – failing to have reasonable procedures to ensure maximum possible accuracy of data it reported and to resolve consumer disputes.

Recent FTC Developments

• Operation Steer Clear (1/14) – 10 cases vs. auto dealer advertising for: – TILA and CLA violations – Low-balling – “Teaser” rates – Balloon payments – “No money down” claims – Hidden fees – Limited availability

Recent FTC Developments

•

Timonium Chrysler and Ganley Ford West

(9/13)

–

advertised discounts available only on certain models and with certain qualifications.

The “Typicality” Principle

• An unqualified claim about the performance, efficacy, availability, benefits, or features of a product or service imply that consumers “typically” will achieve that result.

– Consumer testimonials – “Up to” claims (“rates as low as ….”)

If only a minority of the target audience will achieve the advertised results, the claim must be clearly and conspicuously qualified.

“Clear and Conspicuous” Disclosures

Operation Full Disclosure

• FTC reviewed over 1000 magazine and TV ads to identify those with inadequate disclosures. Follow up to

Dot.Com Disclosures.

• Sent 60+ warning letters to advertisers that included potentially misleading statements that they tried to fix with fine print disclosures.

– Prices quoted without adequate disclosure of qualifications or limitations – Accessories offered without adequate disclosure of need to purchase related items – Unrepresentative consumer testimonials without adequate disclosure of average results

“Clear and Conspicuous” Disclosures

Operation Full Disclosure (cont)

• Clear and conspicuous disclosures should be presented: – Close to the claim to which it relates (not buried in footnotes or blocks of text) – In easy-to-read font that is

as large as font used to make the claim

– In a shade that stands out against background – In language that consumers will understand – Video disclosures: on screen long enough to be noticed, read and understood – Oral disclosures: in a cadence that is easy to follow

FTC – Other issues

• Privacy and data security • Debt collection • Fair Credit Reporting Act (furnisher obligations; risk-based pricing; permissible purpose) • Telemarketing Sales Rule • Tracking devices

Questions

Michael Benoit

Hudson Cook, LLP 1020 19 th Street, NW 7 th Floor Washington, DC 20036  202-327-9705  [email protected]

Joel Winston Rick Hackett

Hudson Cook, LLP 22 Free Street Suite 205 Portland, Maine 04101  207-541-9556  [email protected]

Hudson Cook, LLP 1020 19 th 7 th Floor Washington, DC 20036   Street, NW 202-327-9712 [email protected]

Lucy Morris

Hudson Cook, LLP 1020 19 th 7 th Floor Street, NW Washington, DC 20036   202-327-9710 [email protected]

Jack Tracey

NAF Association 7250 Parkway Drive Suite 510 Hanover, MD 21076  410-865-5431  [email protected]