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