The Dodd-Frank Act: The Creation of the CFPB and How it Impacts F&I

One of the sessions that garnered a lot of attendance and attention at the Industry Summit show at the Paris Hotel and Casino in Las Vegas last month was the Dodd-Frank panel, moderated by Bob Harkins, vice president/director of training, AFG Training Academy; president, RAH Consulting. It tackled subjects such as the Consumer Financial Protection Bureau (CFPB) and other regulatory bodies that impact the F&I office across the board.

As outlined by the panel, the Dodd-Frank act was signed into law in July 2010, and that set into motion the creation of the CFPB, which is the federal agency “causing the most uproar in recent memory”. It was officially created in July 2011, and currently has approximately 1,400 employees – about 700 of whom are attorneys. The problem, and the cause of much anxiety throughout the F&I industry, is that the CFPB has issued only vague, general statements, but hasn’t provided any concrete rules or guidelines that dealers, agents and providers can follow. This leaves a legal “grey area” with everyone uncertain as to what is expected of them.

“It’s been a very interesting trip for us,” said Damon Wiener, senior vice president and general counsel, Safe-Guard Products International LLC. He went on to compare it to a marriage – “They claim they have authority over me, they won’t tell me what the rules are, but they punish me when I break them,” he said, to laughs throughout the room.

Nicole Munro, partner, Hudson Cook LLP, agreed, noting that the CFPB is impacting her legal practice every day. While Wiener compared it to a marriage, she used the analogy of a two-year-old on a sugar high, noting that the agency might be young, but it’s been very, very active. “You should be very prepared for their intervention,” she noted.

Part of the reason the CFPB is so active, and something to be concerned about, is that it is extending and augmenting it’s authority by incentivizing the state Attorney Generals, noted Terry O’Loughlin, director of compliance, Reynolds and Reynolds. He explained that the Attorney General doesn’t have the same limits that are in place to constrain the CFPB, so the agency is encouraging them to adopt and prosecute its policies, extending its reach.

The key to staying out of trouble, noted Dave Robertson, executive director, Association of Finance & Insurance Professionals (AFIP), is to take a proactive approach – dealers, agents and providers should all be looking at the F&I process and asking themselves what can they be doing on a day-to-day basis to stay in compliance.

One of the key points the CFPB is targeting is the issue of dealer compensation and the ability for dealers to price credit. “The CFPB has agreed that dealers should be compensated, but the debate is how they get compensated,” said Andrew Koblenz, executive vice president, Legal and Regulatory Affairs, and general counsel, National Automobile Dealers Association (NADA). His agency has been one of the industry players looking to educate the CFPB, among others, on how dealer compensation works, and why it is important. At first, he said, they were looking at the possibility of eliminating it altogether, but once it was explained how it adds value to the consumer, and provides access to credit that many consumers would not otherwise have had, they were persuaded not to slash compensation completely. Now, however, it is trying to find the middle ground where dealers are compensated fairly, and consumers are protected from unfair practices.

The agency is also targeting “unfair or deceptive” advertising, which is where the vagueness comes in. They have not clarified what “unfair or deceptive” means, but they have issued orders noting that dealers should avoid them. When there are no clear-cut actions to avoid, what should the industry be doing? First, Munro, noted, providers and dealers need to look at each product and classify exactly what it is in each state – is it a vehicle service contract (VSC), warranty or insurance product? Then, she noted, examine whether that state’s law allows the financing of that type of product, and if so, how it needs to be disclosed. “The problem is in characterizing it,” she said. “Since if you get that wrong, everything else could be wrong too, and you might have violated state laws.” The challenge gets even harder when bundled or combo products start to come into play – she gave the example of adding an insurance product to a bundle of non-insurance products – and noted that it varies as to whether that changes the classification of the other bundled products as well. “You may only know you have an insurance product when you get a violation,” she said.

“Agencies prefer to be unclear,” said O’Loughlin. “Because it forces their targets to overreact, to overcompensate. It’s a great result, because it makes the industry more fearful of what else they might do.”

“There’s a lot of uncertainty out there,” said Wiener. “Everything right now is mostly speculation.” He did go on to note that while the orders have started to at least frame what the CFPB is looking to do, we are still in the early days of figuring out exactly what that is. He did say that the agency does not seem to be attacking the value of the products themselves – they are focused instead on how they are marketed to consumers. However, that does not change the need to make sure the product itself is compliant with all state laws where it is being sold, and that the sales practices themselves are buttoned-up. “We need to be careful, and pay attention to nitpicky details,” he said.

It also goes back to that jurisdictional issue that O’Loughlin pointed out – at the end of the day, what authority does the CFPB actually have, and what actions do they have available to enforce them? Munro does not believe that, legally, the agency has the jurisdiction to regulate product or service providers directly – but she believes it will be a fight to prove that and keep the agency out of this area. “I believe anything offered equally in cash or finance should be outside their jurisdiction,” she said.

“They will try to overreach, and we will have to push back,” agreed Koblenz.

Words Matter

While the CFPB orders might be vague, the panel agreed that they matter, and they will have an impact going forward on the ancillary products offered in the F&I office. O’Loughlin believes the impact will be more far ranging than just products, however. “They will issue very harsh demands, and will conduct audits where they collect tremendous amounts of data. The CFPB is going to share sensitive information [with state Attorney Generals] to identify patterns and practices – and that is a menacing prospect.” The problem is that the CFPB can gain access to sensitive information that the Attorney General could not have otherwise obtained without a subpoena. That worries him; right now, not all of the Attorney Generals are signing on to work with the CFPB, but he believes it is only a matter of time – there is too much money to be made for the state, he noted. The CFPB allows them to enact much higher penalties than the Attorney General could alone, and he does not see them refusing to go that route for long.

Munro noted that while the agency does not have direct access to dealers today, she agrees that the access to data is the most concerning. “They cannot go into a dealership [and collect information],” she noted. “But they can find information about the dealership through the sales of finance products, and pass that along to the Attorney General.”

However, cautioned Koblenz, there are limits. He noted that, like Munro, he sees jurisdiction issues coming into play, as to what the CFPB can and cannot do, and where their authority extends, and that could limit the effectiveness of their strategy in the future.

Disparate Impact – Where Does That Come Into Play?

One of the ways the CFPB is targeting dealers and providers is to claim disparate impact – which is when they go back and look at deals already made, and use an algorithm to determine if they believe discrimination happened. The problem is that it is illegal to collect information such as race when filling out loan or credit documents. So agencies like the CFPB use information such as the U.S. Census, or surnames, to try and assign race or gender. But, agreed the panel, that process is flawed. It can be misleading at best, and plain wrong at worst, leading the agency to make policies to prevent unintentional discrimination that, the panel noted, might not even exist in the first place.

“They have to look at other factors,” said Koblenz. “Things like credit risk – it costs more to place a subprime loan, regardless of race. And there are other variables such as inventory, the amount financed or the term of the loan.” A better metric for determining if everyone was treated fairly, he said, is to look at the dollars – if the goal is to have every deal generate approximately the same dollar amount, then the rates will be all over the place, based on all those credit and financing factors – race doesn’t play into it. Everyone is treated equally, based on their financial standing.

The frustration over disparate impact, Wiener noted, is that the CFPB is preaching transparency in all transactions to ensure every customer is treated equally and fairly – but at the same time, they are refusing to release the metrics they used to determine that there was discrimination in the first place. It is a double standard that leaves dealers, agents and providers to develop compliant policies, only to have to constantly keep adjusting them as the CFPB releases new bits of information.

“They’ve given us little information on how to code these loans,” said Munro. She pointed out that there is currently a case before the Supreme Court that might make it a moot point – the case is seeking, among other points, to have the court rule on whether disparate impact is a valid legal theory. She believes the case will eventually do away with disparate impact completely, which will change the entire conversation around the CFPB completely, yet again.

At the end of the day, the CFPB is impacting F&I today, and will continue to have an impact in the future. But exactly what that impact will be long term, not even the panel could say for sure. There are still too many variables in play, and not enough information to go on – the best policy for anyone in the industry is to stay vigilant and create clear, understandable policies that apply to every loan and every product that is sold through the dealership – so even if a violation is cited, there is a clear paper trail showing the intent to be compliant and stay within the law.