Tag Archive | "Consumer Financial Protection Bureau"

U.S. Bank Monitoring F&I Product Pricing


MINNEAPOLIS — Dealers signed up with U.S. Bank received a notice this week containing the bank’s policy in regards to fair and responsible lending. Also detailed was the bank’s dealer monitoring program, which, according to the notice, isn’t just focused on how dealers mark up interest rates on finance contracts.

Obtained by F&I and Showroom, the notice was similar to ones distributed by other finance sources, explaining that regulators like the Consumer Financial Protection Bureau (CFPB) have interpreted fair lending laws to prohibit not only intentional discrimination, but also “certain neutral practices that have an adverse discriminatory impact on a prohibited basis (i.e., disparate impact).” But in explaining its monitoring program, the bank didn’t focus on rate markups; it focused on how F&I products are priced and sold.

“If this monitoring program finds unexplained differences in pricing or excessive add-on product financing on a prohibited basis, then we will notify you,” the notice read, in part. “We will ask you to provide any additional information that you believe we should consider regarding the matter. If you are unable to provide an explanation for the identified differences, or if the unexplained differences persist, we will consider taking further action.”

Since the CFPB issued its March 2013 guidance on dealer participation — which warned finance sources that they’d be held liable for the way dealers mark up interest rates — finance sources have warned dealers that they are monitoring their rate markup practices. But the U.S. Bank notice could be the first to add F&I product sales to those efforts.

The question is: Does the CFPB have jurisdiction over the sale of F&I products? It’s a question that has been debated during F&I and Showroom’s annual conference for the past two years.

During a panel discussion at Industry Summit 2013, Nikki Munro, a partner with Hudson Cook LLP, said she didn’t believe the bureau had jurisdiction over the F&I industry. She noted that the CFPB-creating Dodd-Frank Act contains a catch-all provision that raises more questions than it answers.

“There’s a lot of gray area there,” she said at the time. “With aftermarket products that are financial in nature — and the easiest one to refer to is GAP — we think the CFPB can exercise jurisdiction over those types of products, because they are related to the extension of credit — they pay off the extension of credit if there’s a total loss.

“With nonfinancial products like vehicle service contracts, tire-and-wheel, paintless dent repair … we’re just not sure,” she added. “The CFPB will probably take the position that those types of products offered in connection with the loan gives them jurisdiction.”

At Industry Summit 2014, Rick Hackett, a former CFPB official who now serves as a partner at Hudson Cook LLP, confirmed the bureau’s interest in how F&I products are priced and sold, saying that the regulator can’t connect how dealers price F&I protections with the value they provide consumers.

“If I found out that Walmart set the price [of their products at different levels], and they were all the same products, and they were just hoping I would buy one for $20.95 because I was a particularly gullible consumer, I’d be grumpy,” he said. “That’s the bureau’s perspective of variable pricing of ancillary products.”

Hackett offered several scenarios as to how the bureau might proceed. One of them involved the data the bureau has collected from the tens of millions of transactions it reviewed during its investigation of dealer participation. If the bureau comes up with its own determination on how F&I protections should be priced, it could say that anything above that price is a finance charge. The bureau could then say a finance source provided “reckless substantial assistance” for financing a product with an artificially inflated price, Hackett noted.

“So there’s the question,” he said. “Will the bureau try to make finance companies a cop for dealers’ pricing of ancillary products?”

U.S. Bank’s dealer notice points to a “Yes,” although a spokesperson for the bank played down its significance. “We regularly distribute updated policy notifications to our dealers across our footprint,” read a statement the bank issued to F&I and Showroom. “We have and continue to work closely with our dealership partners on changing guidance and regulation in our industry to provide the best service for our clients.”

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Members of Congress Call on CFPB to Eliminate Arbitration Agreements


SAINT PAUL, Minn. — More than 50 members of Congress, led by U.S. Sen. Al Franken (D-Minn.) and Rep. Hank Johnson (D-Ga.), signed a letter asking the Consumer Financial Protection Bureau (CFPB) to issue new rules that would eliminate the use of forced arbitration clauses in consumer financial service contracts.

The letter, submitted to CFPB Director Richard Cordray on May 21, commends the bureau for its study of arbitration clauses, but asks the CFPB to take its work in that arena one step further. A similar appeal by more than 100 groups was made to the regulator in late March.

“In total, the study conducted by CFPB at Congress’s request roundly confirms that individuals unknowingly sign away their rights through forced arbitration agreements, which do not reduce consumer costs for financial services,” the letter read, in part. “Moreover, forced arbitration shields corporations from liability for abusive, anti-consumer practices, encouraging even more unscrupulous business conduct at the expense of individuals and law abiding businesses.

“Based on this substantial bedrock of evidence, we urge the CFPB to move forward quickly to use its authority under the Dodd-Frank Act to issue strong rules to prohibit the use of forced arbitration clauses in financial contracts and give consumers a meaningful choice after disputes arise.”

On March 10, the CFPB released the results of its study of pre-dispute arbitration clauses in consumer finance markets. It indicated that more than 75% of consumers don’t know whether they are subject to an arbitration clause in their agreements with their financial service providers. The report also concluded that it is common for arbitration clauses to be invoked to block class action lawsuits.

At a field hearing coinciding with the report’s release, Cordray told stakeholders that the results of the study would “provide the basis for important policy decisions that the Consumer Bureau will have to make in this area.”

But not everyone is taking these findings at face value. In an April article, F&I and Showroom legal columnist and Hudson Cook LLP Partner Tom Hudson criticized the CFPB’s report for its “gaping holes” — such as failing to address the growing consumer-friendless of arbitration clauses.

“In fact, it isn’t unusual to see clauses that provide for the payment by the creditor of some or all of the costs of arbitration,” Hudson wrote. “Creditors also frequently call attention to the presence of an arbitration agreement by using large type, separately boxing the clause or having it separately signed or initialed. The study offers no insight on whether these best practices might change any of its conclusions.

“There’s much to dislike about the CFPB’s work on arbitration,” Hudson added. “You’d think arbitration must have some things to recommend it, since Congress passed the Federal Arbitration Act and nearly all states have enacted laws permitting arbitration. But the bureau seems determined not to see any good in the process.”

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The Consumer Financial Protection Bureau’s Encroachment Into the F&I World


When Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, both the auto dealer and insurance industries were at the table to be sure they were carved out from the jurisdiction of the now powerful Consumer Financial Protection Bureau, better known as the CFPB. As is frequently the case, however, legislative exemptions are usually not wholesale in nature, and later interpretations of law can whittle them back from their ostensibly intended purposes. This may indeed be the fate for some insurance and insurance-like products sold to consumers who purchase and finance such products in connection with the purchase or lease of an automobile.

Auto dealers have a broad exemption from the CFPB’s purview but with a limited cut-back. Specifically, the CFPB “…may not exercise any rulemaking, supervisory, enforcement or any other authority, including any authority to order assessments, over a motor vehicle dealer that is predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both. This exemption does not apply to an auto dealer to the extent it (1) provides services related to residential or commercial mortgage loans, (2) engages in a “line of business” involving the extension of retail credit for purchasing or leasing autos in which the financing agreement is not regularly sold to an unaffiliated lender, a consumer financial product or (3) renders a service not involving the “sale, financing, leasing, rental, repair, refurbishment, maintenance or other servicing of motor vehicle.”

Also excluded from the CFPB’s jurisdiction are the “business of insurance,” which means the writing of insurance or reinsuring of risks by an insurer and a “person regulated by a state insurance regulator.” This means any person engaged in the business of insurance and subject to regulation by any state insurance regulator but only to the extent that such person acts in such capacity.

Before delving deeper into the question of the limits of these two exemptions, let’s take a step back and ask whether they are relevant to auto F&I products, specifically GAP waivers, vehicle service contracts and so called “ancillary products,” because, if these types of products are none of the consumer financial products or services over which the CFPB has oversight, then perhaps that ends the inquiry. The CFPB has authority over ten types of consumer financial products or services:

  1. Extending credit
  2. Extending leases with purchase financing functional equivalency
  3. Real estate settlement services
  4. Receiving deposits and transmitting funds
  5. Issuing stored-value payment instruments
  6. Check cashing services
  7. Certain payment and financial data processing services
  8. Financial advisory services not regulated by the Securities Exchange Commission
  9. Certain activities of consumer reporting agencies
  10. Consumer debt collection

The CFPB also has the power to add additional consumer financial products and services to this list, if a product’s or service’s purpose is to evade a federal consumer financial law or if it can be offered by a bank or financial holding company and is likely to have a material impact on consumers. GAP waivers, at least those entered into by national banks and credit unions, are likely to be considered part and parcel of an extension of credit since the lender is waiving its right to collect a portion of its debt and thus is subject to the CFPB’s authority. GAP waivers issued by other types of persons may be regulated under state insurance codes, either as insurance or specifically as a GAP waiver that is regulated but not as insurance. This is where things get murky and the question of whether the business of insurance exception applies comes full circle. Vehicle service contracts present a slightly different issue. While they are likely not within any of the ten enumerated consumer financial products and services listed above, the CFPB could, through its rule making authority, attempt to add them to the list but that begs the question of the business of insurance exemption. Here it gets awkward as most vehicle service contract acts expressly state that vehicle service contracts are not insurance. The business of insurance exemption will likely be interpreted based on the long line of McCarran-Ferguson Act’s judicial decisions, and it is possible that vehicle service contracts could constitute insurance for purposes of the Consumer Financial Protection Act, regardless of the fact that they are not insurance under most states’ insurance codes.

Notwithstanding these exemptions, the CFPB has tools to exercise enforcement authority for preventing and redressing unfair, deceptive or abusive acts or practices (“UDAAP”) involving consumer financial products or services involving auto customers. First, if a lender, lessor or one of its affiliates is the seller of a GAP waiver, vehicle service contract or ancillary product, the CFPB may have direct regulatory oversight of such sales. Second, the CFPB has enforcement powers over a service provider of a person that offers a consumer financial product or service that is directly regulated by the CFPB, a covered person. A “service provider” means any person who provides a material service to a covered person in connection with its offering or providing a consumer financial product or service, including (1) participating in designing, operating or maintaining the consumer financial product or service or (2) processing transactions relating to the consumer financial product or service but does not include services of a type provided to businesses generally, a ministerial service or media advertising services. Therefore, to the extent that the purchase of an auto F&I product is being financed through a loan or lease, the provider of that product may be a service provider to the lender or lessor and thus subject to the CFPB’s UDAAP enforcement powers. Indeed, in a 2013 consent order entered into with the CFPB, a provider of auto GAP waivers and vehicle service contracts financed by a national bank, the CFPB imposed a $3.3 million restitution penalty on the provider for alleged misrepresentations about the products made to certain consumer purchasers.

As sales of service contracts continue to rise (including for products outside the auto industry, such as cellphones and computer tablets), the CFPB is likely to focus on marketing and sales practices for these products at some point. Where the rubber hits the road as to whether the CFPB has authority to regulate their sales has yet to be determined and is an important area of uncertainty for which regulatory counsel to lenders, lessors, auto dealers and service contract providers need to plan accordingly.

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Gov. Jeb Bush Slams CFPB’s ‘Unelected Bureaucrats’ Over Dealer-Assisted Financing Regulations


SAN FRANCISCO – The fate of the country rests on moving government out of the way of business so “the promise of fair and free opportunity returns to America,” former Florida Gov. Jeb Bush told a capacity crowd at the National Automobile Dealers Association Convention & Expo on January 23.

And while the audience of nearly 4,000 attendees responded favorably to Bush’s remarks, his discussion about recent legislation concerning the Consumer Finance Protection Bureau (CFPB) brought the most exuberant applause.

“Another great example sadly of this are the CFPB rules on dealer financing,” he said. “They went forward with the rule without notice, without a public hearing, not knowing whether it would work. The worst part is that unelected bureaucrats have more power than Congress in this particular case, [and Congress is] trying to repeal the rules—and I hope you continue to stay involved.”

Bush also cited NADA research that shows regulations add $3.2 billion in costs that the auto industry must pass on to buyers. The total equates to about $2,400 per dealership, per employee, per year, he said.

“Those costs to comply, those costs of regulation, could have gone for higher pay to allow people more disposable income or they could have gone to create more jobs,” he said.

Bush spoke about reforming health care, revamping immigration, improving education and the pace and uneven results of the nation’s economic recovery.

“I have sensed Americans are frustrated,” he said. “All the polling shows it as well. We are in the fifth year of recovery … but 60 percent of Americans believe we are in a recession. They are not dumb. It’s because they are in a recession.” Although a small portion of Americans are on the “up” economic escalator and portfolios are strong, the majority of Americans have weak paychecks that have led them to withdraw from building families, communities and careers, he said.

“Far from spreading opportunity, our government gets in the way each and every day … another law, another tax, another fee or another regulation. It all stands in the way of a new business, a new invention, a new job but, most important, rising income for American families,” Bush said.

“The great stories that were told here today of successful dealerships, it’s harder to do that today, to do exactly what you all have done to achieve earned success. I know you know what I mean, because your industry has to deal with this,” he said.

Speaking to the standing-room crowd, Bush stressed that he considers leadership in Washington severely lacking and called for the next president to change that course. Yet because of what he said are legal considerations, he did not discuss his presidential aspirations. In remarks after his speech, he playfully said, “I am seriously considering the possibility of running.”

Other crowd-pleasing remarks included Bush’s support of fracking and following Arizona’s example of requiring high school students to pass a civics-education test similar to those taken by immigrants seeking citizenship.

“We are on the verge of this becoming the greatest time to be alive in this country,” Bush said. “Leadership can solve some big, complex problems” that hold the country back.”

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Comment Period Opens for CFPB’s New Rule


WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB)’s proposed rule that would give it supervisory authority over larger participants in the nonbank auto finance segment was published in the Federal Register on Oct. 8, kicking off a 60-day public comment period that ends on Dec. 8.

If adopted, the proposed rule would generally allow the CFPB to supervise nonbank auto finance companies that make, acquire, or refinance 10,000 or more loans or leases in a year. The bureau has estimated that about 38 auto finance companies, which originate around 90% of nonbank auto loans and leases, would be subject to this oversight.

“Nonbank auto finance companies extend hundreds of billions of dollars in credit to American consumers, yet they have never been subject to any supervisory oversight at the federal level,” CFPB Director Richard Cordray said at an auto finance hearing on Sept. 18. “These companies have also played a significant role in the growth of subprime auto lending by making loans to consumers with lower credit scores. In this market, as in others, subprime borrowers may be more vulnerable to predatory practices, so direct oversight of their lending practices is essential.”

The CFPB began regulating the auto finance market in March 2013, when it issued a bulletin stating that lenders that offer auto loans through dealerships will be held responsible for discriminatory rate markups on retail installment sales contracts. The regulator has also expressed interest in the marketing of loans and leases, the accuracy of information given to credit bureaus, and the treatment of consumers during debt collection.

The proposed rule is the fifth in a series of rulemaking to define larger participants in consumer financial markets.

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Braskamp to be Keynote for P&A Leadership Summit and Industry Summit


Las Vegas — Organizers of the annual for P&A Leadership Summit announced that Steve Braskamp of Capital One Auto Finance will deliver the evening keynote address at this year’s event, which will be held Sept. 8–9, 2014, at Paris Las Vegas.

Braskamp is director of national sales and originations for Capital One, which is among the industry’s leading noncaptive finance companies. He will welcome P&A Leadership Summit and the Industry Summit attendees on the evening of Monday, Sept. 8 when he delivers the joint keynote address. The evening’s welcome reception will immediately follow.

Rick Hackett, former assistant director for the Consumer Financial Protection Bureau (CFPB), agreed to speak on Tuesday morning. Hackett was the CFPB’s point man to the automotive industry and supported the agency’s efforts to regulate dealer-arranged sales and financing.

“We are very lucky to have both of these gentleman speak at the P&A Leadership Summit this year. They are both industry veterans with significant expertise and experience in the finance and regulatory segments of the industry,” said David Trinder, advisory board chair and CEO, F&I Administration Solutions. “With all the current concerns and doubts about the initiatives of the CFPB, it will be interesting to hear the perspectives of both of these keynote speakers.”

Braskamp’s 15-year career at Capital One includes leadership positions in several consumer-lending segments. In his current role, he oversees a team of more than 900 associates that generates more than $17 billion in prime, nearprime and subprime auto contracts on an annual basis. Prior to joining the company, Braskamp worked in investment banking and management consulting.

The P&A Leadership Summit is a joint production between P&A and F&I and Showroom magazines. It is scheduled for Sept. 8-9 at the Paris Las Vegas Hotel. For more info, visit pa-leadershipsummit.com or contact Eric Gesualdo via email hidden; JavaScript is required or at (727)-940-5823.

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