CRYSTAL LAKE, IL – Automotive Compliance Consultants, the only dealership-exclusive compliance experts in the auto industry, advises auto dealers to stay alert to how the new Consumer Financial Protection Bureau (CFPB) under new director Richard Cordray will affect auto dealerships.
The consensus is the CFPB will begin taking immediate action against non-bank financial institutions.
“Automotive Compliance Consultants expects the CFPB will attempt to make an impact within the coming months with high penalty cases in order to show that there is a new sheriff in town. We do not believe the Federal Trade Commission will be far behind,” says David R. Missimer, general counsel to Automotive Compliance Consultants, Inc., an attorney at law practicing in the Northern District of Illinois.
Missimer says politicians created the CFPB, political persuasions aside, in an effort to remove the focus of any mismanagement on their part and place it squarely on lending institutions, thereby making every lending institution suspect when it comes to consumer transactions.
“An entire bureau was created to focus on work that was already being done by existing agencies within the federal government,” he says.
Twenty-twelve kicked off in Washington, DC with the president’s appointment of Cordray to head the CFPB. Prior to Cordray’s Jan. 5 appointment the CFPB remained somewhat in limbo. With a director in place, the CFPB is now free to start showing its teeth and flexing its rule making and enforcement powers.
Last December the CFPB took over a number of regulations including Regulation Z under the Truth in Lending Act, The Gramm–Leach–Bliley Regulations, Regulation M under the Consumer Leasing Act, Regulation B under the Equal Credit Opportunity Act, and Regulations under the Fair Credit Reporting Act. Each was transferred to the CFPB for enforcement, modifications and changes. Adoption by the agency of these regulations explicitly excludes their adoption as to automobile dealerships excluded from the CFPB’s jurisdiction under the Dodd–Frank Act.
So what effect will the appointment of Cordray and the gearing up of the CFPB have on franchised automobile retailers?
“At first blush, none,” Missimer says. “To see how Mr. Cordray’s appointment will impact dealerships, one must look closely. Despite exemption from CFPB jurisdiction, it is my opinion that rule making and enforcement actions by the CFPB will have an indirect impact on dealerships.
“Remember President Obama’s statement following exclusion of automobile dealerships from CFPB jurisdiction? The president stated that the exemption of auto dealers from the CFPB’s jurisdiction ‘would allow them (dealers) to inflate rates, insert hidden fees into the fine printed paperwork, and include expensive add-ons that catch purchasers by surprise.’
“I guess we know what the president really thinks about retail automobile dealers,” Missimer says. “Since the president’s comments, the FTC has been directed to step up its enforcement and rule making with respect to dealerships. The first step in the process has been the FTC roundtables held across the country. Those in the industry expect extensive cooperation between the CFPB and FTC.”
Publically, each agency has indicated that it will be going after the “bottom feeders and bad guys in the lending industry,” Missimer notes. “ The problem I have, based upon my experience as an attorney representing clients, is that the government usually has a vastly different opinion as to who the bad guys are, and what constitutes improper business practices.”
Not only does Automotive Compliance Consultants expect the FTC to show some teeth, but advises dealers that state attorney generals now have more authority to enforce federal laws and regulations courtesy of the Dodd–Frank Act.
“Unlike the FTC, states are more inclined to follow up on individual consumer complaints. The end result is that new measures taken by the CFPB to rid the lending industry of practices that are not compliant or consumer friendly will drive enforcement efforts by the FTC and state attorney generals,” says Missimer.
Although the CFPB has no direct jurisdiction over franchise retail automobile sellers, it does have jurisdiction over many of those entities that provide the financing to consumers for the purchase of automobiles.
Even though the majority of retail automobile dealers are excluded from the CFPB’s jurisdiction, going forward the actions taken, initiatives and enforcement by the Bureau cannot be ignored.
“It does not take a genius to conclude that the new bureau will flex its muscles and seek to immediately make a name for itself. The FTC will not be far behind with its renewed emphasis and directive to police and enforce financial regulations for those institutions, dealerships, which escaped the Dodd–Frank net,” Missimer cautions.
Automotive Compliance Consultants advises auto dealers to focus attention on these areas of their operation likely to come under increased regulatory scrutiny:
• Payment packing: This must be forbidden; total transparency here is mandatory. Dealers, some of your managers must be carefully scrutinized, reprimanded and perhaps let go due to persistent use of this noncompliant method.
• Menu Use: Insist on menu use for every deal; make the menu use real, not just a ploy. The idea is to be transparent with the consumer and to make sure the dealership abides by discrimination laws and presents the same menu products/services to the every customer at every presentation. Be sure to disclose rates clearly.
• Adverse Action Letters: This letter must be sent to anyone who applies for credit and denied or when the terms are different from that requested. In most situations, the bank with which the dealership has pursued financing for the customer will produce and distribute this notice, but that does not eliminate the dealer’s responsibility to provide its own notice. There are numerous scenarios where the lender’s Adverse Action letter does not protect the dealer from liability. Where the dealer makes the credit decision or denies credit without shopping the application to a bank or finance company, the dealer is required to take the action.
• Risk-Based Pricing Notices: Dealers are required to provide a Risk-based pricing notice to customers who receive credit on material terms that are less favorable than terms offered to a substantial portion of their customers. In the alternative, an Exception Notice must be delivered to all customers that request credit from the dealership prior to the agreement being entered into.
• Running Credit Reports: Today, both sales and F&I personnel take credit applications. Our recommendation is to have the customer complete the credit application with the assistance of a trained member of the sales team. If you find it necessary to interview the customer and complete the application, then you should have the customer initial his or her income, time in present job and time in current residence. In addition, you should have the customer sign the agreement at the bottom of the application. Dealerships that incorporate this best practice avoid accusations of altering customer information, bank fraud and violations of their dealer/lender agreement
• Deal Checklist: Dealers should strongly consider using a deal checklist for numerous reasons. A couple of reasons we need to concentrate on are: (1) speed up as well as guarantee funding (the longer it takes to fund a deal the greater risk of it being returned unfunded), and (2) to make sure you have all the necessary documentation to comply with all the existing regulation today such as Gramm Leach Bliley, Risk-based Pricing Rule, and Red Flags.
About Automotive Compliance Consultants
Automotive Compliance Consultants specializes in dealership compliance, providing in-dealership consultations and analysis, compliance audits, and training, and offers solutions for all compliance needs. The company’s experts have extensive experience in the retail automotive industry and focus exclusively on dealership compliance issues. For more information, contact Terry Dortch, CEO, at [email protected] or visit www.compliantnow.com