At the Consumer Bankers Association (CBA) Conference earlier this year, an informal poll was taken from the several hundred bankers in the audience as to the major concerns they had for their industry. For the past six years, compliance was substantially the greatest concern and ranked first. However, in the 2017 poll, compliance declined to the fifth tier of concern with the change in the regulatory climate. The Trump administration and a Republican House and Senate have clearly posited that regulation should be reduced and markets should be allowed to work. Passage of the Choice Act in the House is a good example of this deregulatory zeal.
But are the bankers correct? Should dealers celebrate a defanged CFPB and an announced deregulatory posture?
The answer is a muted one. If the CFPB is disciplined, and its authority is significantly lessened, franchise and independent dealers should take a modicum of solace in this outcome. Issues such as disparate impact, new ancillary product rules, and less supervision of financing sources will lessen regulatory burden for dealers.
However, due to political pressure from certain senators and congressmen, as well as numerous consumer advocacy groups, the federal agencies, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Federal Reserve Bank (FRB), National Credit Union Administration (NCUA), Department of Justice (DOJ) and the Federal Trade Commission (FTC), will be emboldened to continue certain CFPB policies and add to them. These agencies have a mandate which they can’t ignore and possess powers which they seldom exercise. They also collect consumer complaints.
A sinister emerging issue which could force these agencies to act would be the apparent growing bubble regarding vehicle financing fraud which parallels the housing bubble.
Point Predictive, analysts of risk management in the financial sector, has concluded that as many as 1% of vehicle credit applications include some type of material misrepresentation which is similar to the percentage in the housing bubble around 2009. The losses which financing sources experience from deception may double this year to $6 billion which is twice what it was in 2015. Remarkably, only 3% of dealers can be responsible for all of a financing source’s fraudulent applications.
As would be anticipated by anyone who has observed miscreant dealer behavior, the common types of credit application fraud include misrepresenting years employed and income, creating false paystubs, indicating nonexistent vehicle options (powerbooking) and overstating the value of the vehicle. Deception of this nature can be attributed to the consumer or dealer or both.
If such an economic systemic problem emerges, agencies would have no choice but to prosecute and add regulatory burdens to financing sources and dealers, which has already been somewhat exhibited.
In addition, there is growing interest by both federal and state regulators in alleging deception against creditors for extending credit to consumers who are not truly credit worthy and who will default on their retail installment sale contracts or lease contracts early in the contractual term. Dealers need to be reminded that they are considered creditors under the law. This problem is further addressed below.
DAGA stands for the Democratic Attorney General Association and its statements on its website are strident and defiant in reaction to the Trump administration:
“Our Democratic Attorneys General provide crucial checks and balances on a new federal administration that often refuses to follow the rule of law.”
“Democratic Attorneys General Are The First Line Of Defense Against The New Administration.”
Democratic attorneys general are planning to maintain many of the policies of the CFPB should it be reduced in power. For example, California is considering its own disparate impact enforcement.
Consider, as well, what actions DAGA members have taken against dealers in the past few years:
- New York: Attorney General Eric Schneiderman has prosecuted and settled with dealers for over $15 million in the past three years and has convicted a dealer of felony charges regarding the burial of hazardous waste.
- Massachusetts: The Massachusetts attorney general entered into a $13 million settlement regarding GAP.
- Washington: The Washington AG sued and settled with a dealer for discriminating against Spanish speakers, misrepresenting finance terms, interest rates, title branding and warranties. The dealer had to pay $250,000 in its settlement and provide Spanish translated contracts in the future. Unusually, it was a civil rights case.
- Delaware and Massachusetts: The attorneys general of these two states settled with a major financing source for $26 million regarding purchasing retail installment sale contracts from thousands of consumers who could not afford them.
The corresponding organization to DAGA is the Republican Attorneys General Association or RAGA. It is fair to report that the members of RAGA are generally supportive of the Trump administration. But all attorneys general must discharge their legal responsibilities and will be forced to respond to consumer complaints.
Attorney General Complaints
Many of the state attorneys general priorities are based upon consumer complaints. Dealers should remember that the Consumer Federation of America (CFA) and North American Consumer Protection Investigators (NACPI) have tallied consumer complaints every year for the past 30 years. Consumer complaints regarding vehicle transactions have almost been the No. 1 complaint every year for the past three decades.
Various state statistics in 2016, regarding vehicle complaints filed with the state attorney general, support this conclusion of the CFA and NACPI:
- Illinois: There were 2,783 complaints which made these complaints No. 1 collectively.
- New Jersey: These complaints returned to No. 1 as the most common complaint.
- Michigan: Vehicle complaints were No. 3.
- New York: There were 3,437 complaints filed, which meant that they were No. 2 on the list.
New Risks to Dealers
Regulatory action could also be manifested in new ways:
- Autonomous Vehicles and Franchise Dealers: Autonomous vehicles have been attracting a great deal of attention from companies not traditionally affiliated with the automobile industry: software companies. A number of these companies are attempting to fashion artificial intelligence, which will drive vehicles without the need of a human driver.
It is also rumored that these software companies are quietly lobbying Congress to enact legislation, which would allow them to bypass franchise law and sell these futuristic vehicles directly to the public. The FTC has already welcomed this idea. If Congress enacted such a law it would probably override state franchise law pursuant to the commerce clause of the Constitution.
- An “All In” 36% APR: In November 2016, South Dakota voters approved a referendum which bars licensees from contracting for or receiving greater than a 36% maximum finance charge on financing. The finance charge calculation, as in the Military Lending Act APR calculation (MAPR), is an “all-in” calculation, and would include all interest, fees, and charges, including any ancillary products or services.
A violation of the 36% finance charge cap would be deemed void and uncollectable, and the financing source could face a misdemeanor charge, a serious consequence, indeed. Adding products such as GAP, service contracts, and other ancillary products very quickly would increase the interest rate beyond the 36% cap. What this means, quite simply, is that dealers will have less opportunity to sell ancillary products to their customers. Profit opportunities will be lost and consumers will have fewer options.
- Creditor Liability in Underwriting: As the Delaware and Massachusetts case demonstrated above, regulators may be targeting creditors for not denying credit to those consumers who will, most likely, default on their retail installment sale contracts or lease contracts.
Dealers should recall, once again, that they are creditors by law and share in this potential liability. In other words, dealers and financing sources may be liable for advancing sales when the consumer’s ability to discharge their contractual obligations is limited. The law used for these prosecutions is the ubiquitous unfair and deceptive trade practices act (UDAP), which grants federal and state regulators great leeway and flexibility.
Remedies for Dealers
Compliance is here to stay. To paraphrase the ancient Roman, Vegetius, “In Times of Peace Prepare for War” — or as the Boy Scouts say “Be Prepared.” Dealers should remain diligent in protecting their interests.
If dealers don’t have a sound compliance program they should implement one. If they have a good program they should maintain it. Dealers need to continue to include compliance as simply part of their business regimen.
If dealers don’t have a sound compliance program the place to start is to appoint a Compliance Officer and grant him the appropriate authority. Dealers should be encouraged to craft a compliance management system.
Many of the new threats to dealers can be challenged by trade associations. The NADA, NIADA, and state ADAs all lobby lawmakers and agencies. Dealers should enthusiastically support these associations so that they can protect dealer interests. For example, the Choice Act is pending before the Senate and the passage of it would lesson regulatory burdens substantially. Dealers should support their dealer associations in this highly significant deregulatory bill.
Dealers should also police their own. If they are aware of another dealer’s fraudulent activities regarding credit applications they should report them to the AG’s office anonymously before the problem grows. This reporting should apply to other infractions as well. Honest dealers suffer unfairly when deceptive practices are employed since it gives advantages to disreputable dealers.
In my days of service at the Florida Attorney General’s Office, dealers often reported deceptive practices to me anonymously. It improved the business climate as action was taken against these dealers’ infractions. The vast majority of dealers operate honestly but a very small percentage tarnishes the industry’s reputation and invites regulation.
Finally, please note: The “general” part of the term “attorney general” is what is defined as a postpositive adjective. In other words, an attorney general is really a general attorney of the jurisdiction. Consequently, the plural of attorney general becomes attorneys general since the noun is the attorney part. It can be confusing.
Govern yourselves accordingly!