Tag Archive | "CFPB"

Top 5 Legal Musts for Agents

As we all know, in general, the motor vehicle sales business is highly regulated. This is especially true when you focus on the F&I portion of the business. In today’s business and regulatory environment it is important that F&I providers and agents have an understanding of the laws and regulations that impact the industry. While a complete discussion of all the applicable laws is beyond the scope of a single article, below are the top five laws and a brief summary of each that, in my opinion, are a must-know for agents.

Before we jump into my top five, no legal discussion would be complete without addressing the importance of using proper terminology. In general, it is of utmost importance that agents know about and understand the product itself, as well as use the proper terminology when referring to particular products and credit transactions. Unfortunately, it is common practice for key terms to be misused by industry insiders, the media, lawmakers, regulators, attorneys and the courts. As a result, this misuse has resulted in unnecessary increased risk and exposure to dealers, F&I providers and agents. It is important to know and understand the differences between a Retail Installment Sales transaction and a Loan; GAP Waiver and GAP Insurance; Warranty and Service Contract; and Insurance and Non-Insurance Terms. For example, in a Retail Installment Sales transaction the dealer is extending credit to the buyer for the purchase of the vehicle and the dealer is the “creditor.” Contrast this with the Loan scenario where the consumer, through an agreement with a “lender” such as a bank or finance company borrows money (i.e. gets a loan) and uses the proceeds to pay the dealer for vehicle.

The Dodd-Frank Act
The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB) in 2010. The law has resulted in significant reforms in all areas of the financial services industry – including the car business. Under the law, there is an exemption for those motor vehicle dealers that have both sales and service operations. However, even though a dealer may not be subject to CFPB regulation, all of the same rules still apply, and the Federal Trade Commission (FTC) still has authority over those dealers exempt from regulation by the CFPB. In addition, as we are recently seeing, the CFPB is indirectly impacting the dealer through the regulation of those banks and financial institutions they do regulate. For example, the CFPB has issued a bulletin addressing discrimination and rate spread for indirect finance transactions through dealers. In addition, it is believed the CFPB is also looking at the pricing of F&I products sold through dealers.

Magnuson-Moss Warranty Act
Warranties are regulated on both the federal and state level; on the federal level, they are governed by the Magnuson-Moss Warranty Act (MMWA). Under the MMWA, manufacturers and sellers are required to provide consumers with detailed information about the warranty coverage on the product purchased, and the rights and obligations of the consumer and warrantor. The MMWA does not apply to oral warranties and does not require the provision of a written warranty, however, if a written warranty is offered it must comply with the MMWA. For example, the warranty must indicate whether it is “full” or “limited,” must be in a single, easy to read document and must be available to the consumer before buying the product. It is important to note that the requirements of the MMWA and the FTC’s Used Car Rule regarding the Buyers Guide on used vehicles are interrelated as they both address import warranty disclosure requirements. As such, the Buyers Guide cannot serve as the written warranty to comply with the MMWA. In addition, understanding the difference between a Warranty and a Service Contract and using the terms properly is crucial. Basically, a Warranty is included in the purchase price of a product, not sold separately, and comes from either the manufacturer or seller. On the other hand, a Service Contract is purchased separately from the product itself, is often administered by a third-party, only covers those items outlined in the contract and is in addition to any warranty.

Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act (GLB) is the federal law that governs a motor vehicle dealer’s responsibility as it pertains to the non-public personal information that a dealer obtains, possesses and shares. Within the GLB are the Privacy Rule and the Safeguards Rule. The Privacy Rule covers the non-public personal information from customers who apply for, or obtain credit from, the dealer. The Privacy Rule is the source of the dealer requirement to provide the customer with the initial and annual privacy notices that outlines what the dealer will or will not do with the information it obtains. The Safeguards Rule deals with how the dealer protects the non-public personal information provided by the customer. The Safeguards Rule requires a dealer to have a written information security plan to address the various safeguards in place to collect, store and dispose of the non-public personal information it has. Depending upon the dealer’s specific operation, enforcement of the GLB can come from either the CFPB or the FTC. It is also important to know that various states have their own privacy laws too.

Fair Credit Reporting Act
The Fair Credit Reporting Act (FCRA) is the primary law that addresses consumer credit and the gathering, use and sharing of consumer credit information by creditors, consumer reporting agencies and others. The FCRA requires that users of consumer reports have a permissible purpose to obtain a consumer report. The list of permissible purposes is specific in the FCRA, and the best practice to comply with the requirement is to have the written authorization of the consumer to pull their credit.In addition, the FCRA is the law behind the Red Flag Rule, the Risked Based Pricing Rule, the Disposal Rule (requiring the dealer to properly dispose of consumer information) and is also one source of the Adverse Action Notice requirement.

Truth In Lending Act
The Truth in Lending Act (TILA) and its implementing regulations (Reg. Z) requires creditors (i.e. dealers) to provide disclosures regarding the cost and terms of credit to consumers. TILA is not concerned with interest rates, late charges and related fees – that is all governed by state law. However, TILA does specify what fees and charges in a credit sale are considered finance charges. Unless properly disclosed, the cost of F&I products may have to be included in the finance charge calculation. Note that the Dodd-Frank Act increased the threshold for TILA coverage from $25,000 to $50,000, and provides that the threshold be adjusted for inflation every year. For 2013, the threshold amount is $53,000, which means that TILA does not apply when the “amount financed” exceeds this amount. As a result of this threshold increase, more finance transactions will be covered by TILA and Reg. Z

It is impossible to cover every detail of each of these in a single article, but hopefully now you have a better idea of where to start, and why it is important that you educate yourself on these acts and how they effect both your and your dealers’ businesses. For more information on any of these, you can visit the CFPB (consumerfinance.gov) or FTC (ftc.gov) Web sites, or feel free to e-mail me directly with any questions.

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CFPB Orders U.S. Bank, DFS to Pay $6.5M in Restitution

Washington, D.C. — U.S. Bank and one of its nonbank partner companies, Dealers’ Financial Services (DFS), were ordered to pay $6.5 million in restitution to participants in the Military Installment Loans and Educational Services (MILES) auto loans program, the Consumer Financial Protection Bureau announced this week.

The bureau’s examinations found that U.S. Bank allegedly failed to properly disclose all the fees charged to participants in the program, as well as the schedule of payments, a violation of the Truth in Lending Act and the Dodd Frank Wall Street Reform and Consumer Protection Act’s prohibition on deceptive acts or practices.

“Through the course of our oversight examinations, we learned that the MILES program was failing to properly disclose costs associated with both the military allotments system, which it required service members to use in order to participate in the program, and the expensive add-on products being sold to service members,” said CFPB Director Richard Cordray.

Under the military allotment system, service members pay by allotment and the lenders often require service members to use third-party processors that charge one or more fees. If lenders require payments by allotment, military consumers could be left with no choice but to pay this additional processing fee in order to qualify and pay for the loan, the CFPB charged.

The bureau has ordered U.S. Bank to return the undisclosed fees and costs that service members paid as a result of the allotments they were required to use — estimated to be at least $3.2 million. Dealers’ Financial Services has been instructed to return approximately $3.3 million to service members related to the cost of add-on products.

“Notably, we are imposing no civil monetary penalties in this instance in part because of the manner in which U.S. Bank and DFS cooperated with the bureau to resolve these matters,” Cordray added.

Both companies have agreed to halt practices in question, as well as pay restitution to service members, provide refunds or credits, and improve their disclosures to service members regarding the cost and other material terms of add-on products. Both companies will also be required to submit a redress plan that the CFPB must approve.

The MILES program also will be modified so that service members are not required to use allotments in order to participate.

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House Republicans Call CFPB Agenda a ‘Loss to Consumers’

Washington, D.C. — Thirty-five congressional Republicans warned the Consumer Financial Protection Bureau (CFPB) in a letter sent last Thursday that auto finance reforms it seeks could weaken competition and hurt a consumer’s ability to obtain the best financing terms.

The letter also requested information on the CFPB’s use of the disparate impact theory in its review of dealer participation programs auto finance sources offer to dealers. In March, the CFPB issued guidance that said finance sources could be held liable if it determines such programs, which allow auto dealers to mark up the interest rates on retail installment sales transactions in exchange for services rendered, create a bias that causes minority groups to pay higher rates.

“We are all strongly opposed to any discrimination in lending,” the letter stated. “However, it is highly concerning that the agency is issuing such significant new directives without affording the public a proper opportunity to comment on its methodology and analysis for determining whether discrimination has occurred and without addressing the effect of its directives on consumer financing and choice in the intensely competitive auto lending market.

“To allow Congress to evaluate the statistical model that the CFPB used to justify the new directives, we request that the agency provide us with the full set of details concerning its statistical disparate impact methodology.”

Last month, 13 Democrats issued a similar letter to the bureau, requesting background information “about the origination of and investigation into alleged practices within the auto lending industry.” The letter asked that the bureau to respond by June 7.

In the midst of this controversy, the CFPB has also confirmed the departure of Assistant Director Rick Hackett, who was hired in May 2011 to oversee installment lending markets, including auto finance. He’s the fourth top bureau official to depart this month. He was viewed as a key conduit between the bureau and the auto finance industry.

“In my opinion, Rick Hackett represented the best kind of regulator the auto financing industry could hope for,” said Jack Tracey, executive director, National Automotive Finance (NAF) Association. “He systematically set about gathering factual information about industry practices to identify and target areas that needed regulatory attention. He strived to meet with industry leaders to hear their views and gather data so that policy could be focused and would not adversely affect the industry at large. He attempted to identify problems and develop policy directed at the problems and was concerned about any unintended consequences resulting from policy.”

News of Hackett’s departure came 14 days after he made an appearance at the association’s 17th annual Non-Prime Auto Finance Conference, where he confirmed that supervisory investigation of auto finance sources are underway.

“His stay at the CFPB was too short for the industry to see the benefits of this approach,” Tracey added. “Hopefully, his replacement will pick up the flag and carry on the cause.”

To read the full letter, click here.

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House Democrats Question CFPB Probe of Auto Finance

Washington ─ Thirteen Democrats from the United States Congress sent a letter to Consumer Financial Protection Bureau (CFPB) Director Richard Cordray, demanding to know the methods the bureau is using to determine whether auto lenders are creating a disparate impact.

In March, the CFPB said it would hold lenders that offer auto loans through dealerships responsible for unlawful, discriminatory pricing. It alleged that bank policies which allow auto dealers to mark up the interest rates on retail installment sale transactions in exchange for services rendered have caused a disparate impact, meaning that members of minority groups pay higher rates.

“As representatives of both consumers and small businesses (auto dealers), we want to continue our work with you to ensure that lending practices in the auto, mortgage and credit card industries are fair and equitable,” the letter states. “Accordingly, we respectfully ask that you provide us as Members of Congress with any and all background information about the origination of and investigation into alleged practices within the auto lending industry.”

Dealers and industry experts have criticized the bureau for targeting the auto-lending market without being clear on how it identifies discriminatory practices.

The letter also questioned a recent guidance issued by the CFPB to indirect auto lenders intended to help them operate in compliance with fair lending laws as applied to dealer markup and compensation policies. “… we would like to learn more about the compliance expectations contained in the recent guidance,” the letter states.

According to the letter, the CFPB has until June 7 to respond to the requests. To read the full letter, click here.

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CFPB Takes Aim at F&I Products

Via F&I Showroom

Less than two months after the Consumer Financial Protection Bureau (CFPB) confirmed it was watching policies related to dealer participation by issuing guidance to indirect auto lenders, the bureau appears to be targeting the sale of extended warranties and other F&I products.

Reports suggest that the CFPB has issued subpoenas to U.S. auto lenders related to the sale of products such as extended-service contracts and other add-ons. Service Contract Industry Council (SCIC) Executive Director and General Counsel Timothy J. Meenan said the move is “possible and probable” based on media reports, but he has yet to receive confirmation.

“It appears that they are looking at lending practices for sales of automobiles, and also looking at issues involving add-on products,” Meenan said.

In March, the CFPB said it would hold lenders that offer auto loans through dealerships responsible for unlawful, discriminatory pricing. It alleged that bank policies which allow auto dealers to mark up the interest rates on retail installment sale transactions in exchange for services rendered have caused a disparate impact, meaning that members of minority groups pay higher rates. Several banking institutions, including Ally Financial, received letters stating that they could face lawsuits under the Equal Credit Opportunity Act (ECOA).

Groups such as the National Automobile Dealers Association (NADA) and the National Association of Minority Automobile Dealers (NAMAD) have denounced the bureau’s actions, as the CFPB has not revealed how it is conducting its analysis. Using the disparate impact theory, the CFPB has taken the position that violations of the ECOA can be pursued based solely on statistics — meaning a lender can potentially be held responsible for unintentional impacts on minorities.

NADA’s Director of Public Relations, Charles Cyrill, said the organization was not aware of any CFPB action related to F&I add-ons. “We have not received any information about CFPB investigations regarding optional products other than dealer reserve,” he explained.

The CFPB has not publicly confirmed the targeting of F&I products, but a spokesman did not deny recent reports.

“When I look at what the CFPB’s been doing with mortgages and with, say, credit card companies, they’ve gone after things that are potentially misleading,” Meenan said. He explained that while credit card companies have been known to sign up customers for add-on products without their knowledge or understanding, car buyers must sign a contract for F&I add-ons that says, “Yes, I want this.”

Last year, the CFPB reached settlements with credit card issuers such as Capital One Bank, which agreed to refund approximately $140 million to 2 million customers, as well as pay a $25 million penalty for the way it marketed add-on products like payment protection.

“I think those kinds of misleading practices don’t really apply to automobile service contracts,” Meenan said. “You can, in the first 45 days, cancel a service contract and get all your money back. And thereafter, you can get the pro rata share back… There are lots of good consumer protections in these products that I think the CFPB will find attractive.”

The CFPB is not the only agency looking at the auto industry. At a panel discussion at George Mason University on May 2, Jon M. Seward, deputy at the U.S. Department of Justice’s Housing and Civil Enforcement Section, said that the DOJ has experienced a shift in referrals of violations from federal bank regulators including the CFPB.

“We’re seeing a lot more referrals involving pricing discrimination allegations in the unsecured consumer lending space; a number of auto-related referrals either involving indirect auto lending or some involving buy-here, pay-here car dealerships,” Seward said in a video.

In December 2012, the department signed a memorandum of understanding with the CFPB aimed at strengthening their coordination in connection with fair lending investigations. That’s why, Meenan says, “We’re not taking anything lightly… We are in a fact-finding mode using local council and others to find out what it is the CFPB is after.”

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Compliance Experts to Dealers: Heed CFPB’s Aggressiveness

Crystal Lake, Ill. — Automotive Compliance Consultants, a group of automotive retail compliance experts, cautions auto dealers to heed the aggressiveness of the Consumer Financial Protection Bureau (CFPB) in its indirect, but very real review of automobile dealership financing practices.

“Whether dealers like it or not, the CFPB is looking at and analyzing all financial practices and compliance with financial regulations by indirectly looking into those entities under CFPB’s jurisdiction that transact business with the retail automotive industry,” said David Missimer, general counsel for Automotive Compliance Consultants.

Terry Dortch, the firm’s CEO, who last week participated in the American Financial Services Association’s (AFSA) 30th Independents Conference & Exposition in Las Vegas, said Automotive Compliance Consultants joined the AFSA to engage with its members and committees to be at the forefront of an ever-changing financial landscape.

“The CFPB has made recent bold moves that are affecting how auto dealerships finance customers, as it is apparent that auto dealers, though technically not under the CFPB’s umbrella, are being targeted by the CFPB to pressure their lenders to modify their lending practices,” Dortch said.

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