Tag Archive | "Federal Reserve Board"

NADA Chairman: ‘CFPB Guidance Lacks Transparency and Research’

McLean, Va. — Chairman David Westcott took to the National Automobile Dealers Association (NADA)’s Web site to call out the Consumer Financial Protection Bureau (CFPB) for its lack of transparency in its quest to regulate dealer participation programs. Westcott criticized the CFPB for releasing its fair lending guidance regarding dealer participation without demonstrating that problems exist and without analyzing the effects of any changes it makes to that compensation method.

“When a federal agency seeks to upend an enormously efficient $783 billion market, it should only do so in a manner that is transparent, thoroughly researched and that benefits the interagency coordination and public feedback,” he wrote.

The chairman also called out the CFPB for centering its guidance on a theory of liability called “disparate impact.” Under that theory, if an auto finance policy results in a certain group of consumers paying more for credit than similarly-situated consumers in other groups, then unintentional discrimination is taking place.

“The bureau claims that this theory exists under the Equal Credit Opportunity Act and Regulation B and is using it to target the compensation arrangements used by indirect auto lenders with dealers,” he wrote. “The bureau favors arrangements in which indirect lenders compensate dealers through the use of flat fees instead of arrangements that allow dealers to discount the credit rates that they offer to consumers in order to earn their business.”

The chairman’s post also questions the CFPB’s lack of oversight and for not coordinating its enforcement actions with other regulatory agencies like the Federal Trade Commission and the Federal Reserve Board. To read Westcott’s letter, click here.

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GAP Deductible Under Threat in California

New disclosure requirements being considered by the Federal Reserve Board (FRB) for loan insurance products aren’t the only threat to core F&I offerings like GAP coverage. In California, product providers are racing to notify dealers that one of the key selling features of GAP might be barred since a new law took effect on Jan. 1, F&I and Showroom reported.

In late September, Gov. Arnold Schwarzenegger signed AB 2782 into law. The Omnibus bill packaged, among other things, a new licensing requirement for sellers of accident and health insurance. How GAP got thrown into this new requirement is a case of unintended consequences. According to executives at the San Diego, Calif.-based OwnerGUARD, the California New Car Dealers Association asked the California Department of Insurance to clarify whether a GAP waiver would fall under the new requirement. In its response, the state agency said that the new requirement would not allow GAP waivers to cover a customer’s deductible.

Fortunately for the industry, the state’s Department of Insurance has delayed implementation of the new law, because many broker agents were unaware of the new requirement.

“The department dropped this opinion 30 days prior to the [law’s effective date], which sent dealers, providers and the agent community in a mad scramble. This is, unfortunately, something that can’t be retracted,” said Michelle Dicks, OwnerGUARD’s general counsel. “At this point, the industry, the dealers and the product providers are really concerned, as this is a crucial component of the product.”

If left unchanged, California dealers will be prohibited from selling deductible coverage through GAP if they have not obtained an agent license. In the meantime, providers are adding language to their agreements that informs consumers that deductible coverage is void.

“GAP sales can continue, but the law is what the law is,” said Dicks. “The Department of Insurance has agreed to delay enforcement through March 31, which means the department, in looking at GAP waiver forms, is not going to fine someone or haul them into court for having a form that indicates that the deductible will be covered. However, you can’t cover the deductible.”

OwnerGUARD, which has reached out to the Guaranteed Asset Protection Alliance, the American Financial Services Association, the Consumer Credit Industry Association, and several other associations, is mounting a two-pronged effort to fix the problem.

With the California New Car Dealers Association in tow, the company is working closely with the California Department of Insurance on new legislation to solve the deductible problem. “We’re really close to having language that will fix this legislation,” Dicks said.

OwnerGUARD is also working with John Norwood, a noted California lobbyist who specializes in the state’s insurance and financial sector. OwnerGUARD officials are hoping he can clear the way for the state legislature to vote and pass its drafted legislation by June, but company officials admit there are several hurdles standing in the way.

“Our goal is to, hopefully, see something in June, but nothing is ever certain,” said Dicks. “If it doesn’t work the way we’re anticipating, we might be looking at a September vote. But if our legislation is not labeled as an emergency measure, we could be looking at Jan. 1, 2012.”

This threat to GAP couldn’t have come at a worse time for dealers. The industry is preparing to mount a campaign to remove credit insurance, GAP and debt cancellation agreements from a new set of disclosure rules proposed by the FRB. Legal watchers say the disclosure rules are designed to convince customers not to buy these F&I products.

The industry is also dealing with proposed revisions to the Truth in Lending Act’s Regulation Z, which the FRB has said is supposed to enhance consumer protections for home mortgage transactions. However, the new disclosures created by the proposal would also apply to auto transactions.

Letters opposed to the proposal, which was announced in August 2010, were submitted by the National Automobile Dealers Association and others in the industry to the FRB during the public comment period, which ended in December 2010. The industry argued that the FRB overstepped its bounds and that regulation of the auto industry would fall under the Federal Trade Commission and the new Consumer Financial Protection Bureau.

“This is a huge problem for the industry,” said Al Sacko, vice-president of sales and marketing at OwnerGUARD. “We submitted our letter in opposition to what the FRB is proposing. As for California, frankly, if no one had asked the question, there would be an interpretation levied. And as you know, any of these products are typically submitted to lenders for approval, so now we get into changing forms to get them compliant. Then the department comes out and says we don’t have to have the forms in place until March. That’s when we said, wait a second, we need to look at this closer. That’s when our management team decided we needed to take some action.”

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FTC and Federal Reserve Issue Risk-based Pricing Rules

In what is expected to have a big impact on the special-finance marketplace, the Federal Trade Commission (FTC) and the Federal Reserve Board (FRB) issued in late December finalized rules that will require creditors, including dealers, to alert consumers when derogatory credit data causes them to receive less than optimal terms. The rule is expected to take effect Jan. 1, 2011.

The finalized rules implement Section 311 of the Fair and Accurate Credit Transactions Act of 2003. Among other reforms, the act introduced the concept of providing consumers with one free credit report per year to ensure their accuracy and directed the FTC and FRB to develop a Risk-Based Pricing Notice (RBPN) for credit applicants whenever their credit scores triggered higher interest rates or other adverse terms.

According to the FTC’s Manas Mohapatra, the rule also fills a gap created by the advent of risk-based pricing, a practice of setting or adjusting the price and other terms of credit provided to a consumer based on his or her credit worthiness. “With the adverse action requirement, people are told that things in their credit report probably caused their denial of credit,” Mohapatra told F&I. “However, what had been occurring was that people were not getting denied credit, but were getting much worse material terms and weren’t being informed of that fact. This rule is supposed to fill that gap.”

The two agencies had published proposed regulations that would implement these risk-based pricing provisions in May 2008, which was followed by a three-month public comment period. The agencies received more than 80 responses to the proposed rules from banks and other creditors, industry associations such as the National Automobile Dealers Association (NADA), consumer groups, and more.

The rule lays out several scenarios in which the rules may apply. However, because of the difficulty in determining which consumers fit in this category, the NADA recommended — and the agencies adopted — an exception notice that dealers and other creditors may issue in lieu of the RBPN.

Called the credit score disclosure notice, which is based on an existing requirement that applies to dealers in California, the notice must be provided to all customers who apply for credit. It must contain, among other things, the consumer’s credit score, the date the score was created and the source of the score. The notice must also provide consumers with a range of scores and information on how lenders use their scores. The notice must also include a written description or graphic representation of how the applicant ranks against other consumers. An example of the form can be found on page 198 of the rules.

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Economy Improving Modestly, Says Fed’s Beige Report

The Federal Reserve Board’s latest Beige Book reports that economic conditions have generally improved modestly since the last report. Eight districts indicated some pickup in activity or improvement in conditions, while the remaining four–Philadelphia, Cleveland, Richmond, and Atlanta–reported that conditions were little changed and/or mixed.

Auto sales generally improved since the last report, in some cases rebounding from a brief dip after the Cash-for-Clunkers program ended.

Increased vehicle sales were reported from New York, Philadelphia, Richmond, Chicago, St. Louis, and Dallas, while sales were described as flat or mixed in the Cleveland, Minneapolis, Kansas City, and San Francisco districts. A number of districts reported that used vehicles have been selling better than new ones.

Financial institutions generally reported steady to weaker loan demand, continued tight credit standards, and steady or deteriorating loan quality.

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