At the Auto Finance Risk and Compliance Summit held this week, Calvin Hagins, CFPB Deputy Assistant Director for Originations, stated that the CFPB is increasingly asking lenders about ancillary product programs during examinations, particularly about the percentage of consumers buying these products.

In June 2015, when the CFPB released its larger participant rule for nonbank auto finance companies, it also issued auto finance examination procedures in which ancillary products, like GAP insurance and extended service contracts, received heavy attention.  We commented that by giving so much attention to these products, the CFPB was signaling its intention to give lots of scrutiny to these products in the auto finance market.  Mr. Hagins’s comments confirm that the CFPB is in fact looking closely at these products in exams.

Speaking at the Summit as a member of a regulatory panel, Mr. Hagins indicated that companies should expect to get questions from CFPB examiners about ancillary products.  He indicated that the CFPB specifically looks at how the product is offered to the consumer, when in the contracting process is it offered, how disclosures are being provided to the consumer, and the acceptance rate.  As an example, he indicated that a 95% acceptance rate would cause CFPB examiners to raise questions about how the rate was achieved.

At the Summit, Colin Hector, an FTC attorney, indicated that the FTC is also interested in ancillary products, particularly whether there is a potential for consumer deception in how they are sold.  He commented that, in its enforcement work, the FTC has focused on ancillary product sales that occur at the end of the sales process when consumers may be led to believe they must purchase the products to obtain financing and the seller has increased leverage because the consumer is more invested in completing the transaction.

 

Republican members of the House Financial Services Committee recently released a report, prepared by the Republican Staff of the Committee, titled “Unsafe at Any Bureaucracy, Part III: The CFPB’s Vitiated Legal Case Against Auto Lenders.”  This is the third Republican Staff report examining the automotive ECOA enforcement actions of the CFPB with respect to what its characterizes as a “dealer markup” of the wholesale buy rate established by the assignee of a retail installment sale contract (“RISC”).  We previously wrote about the first investigative report in this series, which was titled “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending.”  The latest report discusses two subjects.

The “Vitiated Legal Case”

The third report is devoted principally to “demonstrat[ing] that under” the Supreme Court decision in Inclusive Communities, “if the CFPB were to rely upon the legal theory it deployed in previous enforcement actions against auto financiers, its claims would not survive judicial scrutiny.”  As a threshold matter, the report asserts that disparate impact claims are not cognizable under the ECOA because the ECOA does not contain “results-oriented language” like that which the Supreme Court relied upon in holding that disparate impact claims are cognizable under the Fair Housing Act (“FHA”).   The ECOA speaks instead in terms of discriminating against an applicant on a prohibited basis.  The report further asserts that Inclusive Communities interpreted the adoption of the FHA Amendments of 1988, which it said contemplated the existence of disparate impact liability, as Congressional ratification of prior appellate decisions holding that disparate impact claims are cognizable under the FHA.  By way of contrast, however, the report notes that “Congress has made no such amendments to ECOA.”

The staff report also asserts, and contains a robust discussion of, additional reasons why the Bureau could not establish a prima facie case of disparate impact liability against an assignee of RISCs.  Specifically, for reasons discussed therein, the report concludes that: (i) the asserted “discretion” to “mark up” the wholesale buy rate is not a specific “policy” upon which a disparate impact claim may be based; and (ii) the CFPB could not meet the robust causality standard that Inclusive Communities reiterated and expounded upon in its discussion of the safeguards against abusive disparate impact claims.  Finally, the report suggests that, “[b]y asking only whether a minority [buyer] paid more than the non-Hispanic white average, the CFPB does not accurately assess whether he or she was actually harmed by the disparate impact.”

The report’s discussion of the “vitiated legal case” against assignees of RISCs concludes with the observations that “[f]uzzy logic and false comparisons are unfortunately prevalent in the” Bureau’s ECOA auto enforcement actions, as is a “lack of rigor that leads to unsupported and unreliable conclusions.”  We have written previously about some of the issues discussed in the report, including in our articles on the Supreme Court decision in Inclusive Communities, “Auto Finance and Disparate Impact: Substantive Lessons Learned from Class Certification Decisions,” and a February 2006 Business Lawyer article titled “The ECOA Discrimination Proscription and Disparate Impact – Interpreting the Meaning of the Words That Actually Are There.”

The Auto Finance Larger Participant Rule

The press release issued by the Republican members of the Committee highlights the final subject covered by the report.   Titled “CFPB Director Failed to Heed Attorney Advice on Auto Lending Rule, Likely Violated Federal Law,” the press release asserts that the Bureau may have violated the Administrative Procedures Act in adopting the larger participant rule for the automobile financing market (the “LPR”).  Quoting from the Supplementary Information accompanying the proposed LPR, the report states that the definition of a “larger participant” is “based upon ‘quantitative information on the number of market participants and their number and dollar volume of annual originations’ taken from Experian’s AutoCount database.”

According to the report, during the comment period for the proposed LPR, the Bureau received requests for a list of the companies that it believed would qualify as “larger participants” under the proposed rule, and “‘a number of comments pertaining directly or indirectly to the Experian list.’” Believing the Experian AutoCount data, and any information derived from it, to be proprietary information that it was not at liberty to disclose, the Bureau did not respond with the requested information.

The report indicates, however, that after the comment period ended, Experian informed the Bureau that it had no objection to: (i) releasing the list of the names of the entities that the Bureau estimated would be “larger participants” under the proposed volume threshold for larger participant status; and (ii) the relative market share for each listed entity.  Relying upon internal CFPB documents obtained by the Committee, the report asserts that the Bureau did not follow an internal legal recommendation to reopen the comment period, publish this information and request comments with respect to it before proceeding to adopt a final LPR for the automobile financing market.

In its Fall 2016 Supervisory Highlights, which covers supervision work generally completed between May and August 2016, the CFPB highlights violations found by its examiners involving origination and servicing of auto financing, debt collection, mortgage origination and servicing, student loan servicing, and fair lending.

On December 2, 2016, from 12 p.m. to 1 p.m ET, Ballard Spahr attorneys will hold a webinar, “The CFPB’s Fall 2016 Supervisory Highlights: Looking Beyond the Headlines.”  A link to register is available here.

The report states that recent non-public supervisory actions have resulted in restitution of approximately $11.3 million to more than 225,000 consumers.  The report also indicates that the CFPB’s supervisory activities “have either led to or supported” two recent public enforcement action described in the report that resulted in over $28 million in consumer remediation and $8 million in civil money penalties.

The CFPB’s “supervisory observations” include the following:

  • Servicing of auto financing.  CFPB examiners concluded that it was an unfair practice to detain or refuse to return personal property found in a repossessed vehicle until the consumer paid a fee or where the consumer requested return of the property, regardless of what the consumer agreed to in the contract.  Even when the consumer agreements and state law provided support for lawfully charging the fee, examiners concluded there were no circumstances in which it was lawful to refuse to return property until after the fee was paid, instead of simply adding the fee to the borrower’s balance as companies do with other repossession fees.  Examiners also found that in some instances, one or more companies were engaging in the unfair practice of charging a borrower for storing personal property found in a repossessed vehicle when the consumer agreement disclosed that the property would be stored, but not that the borrower would need to pay for the storage.  The report indicates that in upcoming exams, CFPB examiners “will be looking closely at how companies engage in repossession activities, including whether property is being improperly withheld from consumers, what fees are charged, how they are charged, and the context of how consumers are being treated to determine whether the practices were lawful.”
  •  Debt collection.
    • Fees. CFPB examiners determined that a “convenience fee” charged by one or more debt collectors to process payments by phone and online violated the FDCPA where the consumer’s contract did not expressly permit convenience fees and applicable state law was silent on whether such fees are permissible.  CFPB examiners also found that debt collectors had made false representations in violation of the FDCPA by demanding unlawful fees, stated that the fees were “nonnegotiable,” or withholding  information from consumers about other methods to make payments that would not incur the fee after the consumer requested such information.  CFPB examiners also found that one or more debt collectors violated the FDCPA by charging collection fees in states where collection fees were prohibited or in states that capped collection fees at a threshold lower than the fees that were charged.  The report notes that examiners “also observed a [compliance management system (CMS)] weakness at one or more collectors that had not maintained any records showing the relationship between the amount of the collection fee and the cost of collection.”
    • Collection calls; third party communications. CFPB examiners determined that collection calls made by one or more debt collectors involved false representations or deception in violation of the FDCPA where collectors (1)  purported to assess consumers’ creditworthiness, credit scores, or credit reports when collectors could not assess overall borrower creditworthiness, represented that an immediate payment was necessary to prevent a negative impact on a consumer’s credit, (3) impersonated consumers while using a creditor’s consumer-facing automated telephone system to obtain information about a consumer’s debt, or (4) told consumers that the ability to settle an account was revoked or would expire.  At one or more debt collectors, examiners also identified several instances where collectors violated the FDCPA by disclosing the consumer’s debt to a third party (which the CFPB stated was often the result of inadequate identity verification during telephone calls) or by an employee’s disclosure of the debt collection company’s name to a third party without first being asked for that information by the third party.
    • FCRA. CFPB examiners determined that “one or more entities” failed to provide adequate guidance and training to staff regarding differentiating FCRA disputes from general customer inquiries, complaints, or FDCPA debt validation requests.  One or more of such entities were directed to develop and implement “reasonable policies and procedures to ensure that direct and indirect disputes are appropriately logged, categorized, and resolved” and/or “a training program appropriately tailored to employees responsible for logging, categorizing, and handling FCRA direct and indirect disputes.”  Examiners also determined that one or more debt collectors violated the FCRA by not investigating indirect disputes that lacked detail or not accompanied by attachments with relevant information from the consumer or, for disputes categorized as frivolous, sending notices that did not indicate what the consumer needed to provide in order for the collector to complete the investigation.
    • Regulation E. Examiners found that one or more debt collectors violated Regulation E by failing to provide consumers with a copy of the terms of an authorization for preauthorized electronic fund transfers.  Some of these debt collectors had instead sent consumers a payment confirmation notice before each electronic fund transfer.  The CFPB stated that such notices did not satisfy the Regulation E requirement to provide a copy of the terms of the authorization because the notices did not describe the recurring nature of the preauthorized transfers from the consumer’s account, such as by describing the timing and amount of the recurring transfers.
  • Mortgage origination. CFPB examiners found that one or more entities offering mortgage loan programs that accepted alternative income documentation for salaried consumers as part of their underwriting requirements had violated Regulation Z ability to repay (ATR) requirements. Such entities indicated that they relied primarily on the consumer’s assets when making an ATR determination, but also established a maximum monthly debt to income (DTI) ratio in their underwriting policies and procedures.  CFPB examiners “found that the income disclosed on the application to calculate the consumer’s monthly DTI ratio was not verified, but instead was tested for reasonableness using an internet-based tool that aggregates employer data and estimates income based upon each consumer’s residence zip code address, job title, and years in their current occupation.”  CFPB examiners also found that one or more federally-regulated depository institutions were using employees of a staffing agency to originate loans who were improperly registered in the National Multistate Licensing System and Registry as employees of the depository institutions.
  • Student loan servicing. In addition to finding that one or more servicers were engaging in an unfair practice in violation of the Dodd-Frank Act UDAAP prohibition by denying, or failing to approve, applications for income-driven repayment (IDR) plans that should have been approved on a regular basis, CFPB examiners cited servicers for the unfair practice of failing to provide an effective choice on how payments should be allocated among multiple loans.  Such servicers had failed to provide an effective choice through such practices as not giving borrowers the ability to allocate payments to individual loans in certain circumstances, not effectively disclosing that borrowers had the ability to provide payment instructions, or not effectively disclosing important information (like the allocation methodology used when instructions are not provided).  The CFPB also cited a student loan servicer for engaging in a deceptive practice in violation of the Dodd-Frank Act UDAAP prohibition in connection with loans considered to be “paid ahead.” CFPB examiners concluded that one or more servicers’ billing statements could have misled reasonable borrowers to believe additional payments during or after a paid-ahead period would be applied largely to principal. According to the CFPB, the statements, which noted that nothing was due in months that the borrower was paid ahead, misled consumers as to how much interest would accrue or had accrued, and how that would affect the application of consumers’ payments when the borrower began making payments.  The CFPB directed one or more servicers to hire independent consultants to conduct user testing of the servicer’s communications to improve how the communications describe the basic principles of the servicer’s payment allocation methodologies, the consumer’s ability to provide payment instructions, and the accrual of interest during a paid-ahead period.  The CFPB refers servicers to the policy direction on student loan servicing issued in July 2016 by the Department of Education for guidance on IDR application processing, billing statements, and  allocation methodologies.  (Issues related to IDR plan applications were highlighted in the midyear report of the CFPB’s Student Loan Ombudsman released in August 2016.)
  • Fair lending.
    • LEP consumers. CFPB examiners “observed situations” in which financial institutions’ treatment of limited English proficiency (LEP) and non-English-speaking consumers posed fair lending risk, such as marketing only some credit card products to Spanish-speaking consumers, while marketing additional credit card products to English-speaking consumers.  The CFPB noted that one or more such institutions lacked documentation describing how they decided to exclude those products from Spanish language marketing, thereby “raising questions about the adequacy of their compliance management systems related to fair lending.”  According to the CFPB, to mitigate any compliance risks related to these practices, one or more financial institutions revised their marketing materials to notify consumers in Spanish of the availability of other credit card products and included clear and timely disclosures to prospective consumers describing the extent and limits of any language services provided throughout the product lifecycle.  The CFPB observed that such institutions “were not required to provide Spanish language services to address this risk beyond the Spanish language services they were already providing.”  The report includes a list of “common features of a well-developed” CMS that considers treatment of LEP and non-English-speaking consumers.
    • Redlining. The report lists factors considered by the CFPB in assessing redlining risk in examinations and describes how the CFPB conducts its analysis of redlining risk, such as its use of HMDA and census data to assess an institution’s  lending patterns and its comparison of an institution to peer institutions.  The report indicates that in their initial analysis, CFPB examiners will compare an institution’s lending patterns to other lenders in the same MSA to determine whether the institution received significantly fewer applications from minority areas relative to other lenders in the MSA.  Examiners may also compare an institution to a more refined group of peers which can be defined in various ways, such as lenders that received a similar number of applications, originated a similar number of loans in the MSA, or offered a similar product mix.  Examiners have also considered an institution’s own identification of its peers in particular markets.
  • Examination procedures and guidance. The CFPB references recent updates to its reverse mortgage, student loan, and Military Loan Act examination procedures, as well as its recent amendment of its service provider bulletin.  According to the CFPB, some small service providers reported that entities have imposed the same due diligence requirements on them as for their largest service providers. The CFPB stated that this may have resulted from some entities having interpreted its 2012 bulletin to mean they had to use the same due diligence requirements for all service providers no matter the risk for consumer harm.  The amendment was intended to clarify that a risk management program can be tailored to the size, market, and level of risk for consumer harm presented by the service provider.

 

 

 

The CFPB has unveiled its latest “Know Before You Owe” initiative aimed at consumers shopping for an auto loan.  The new initiative was accompanied by the CFPB’s release of a report entitled “Consumer Voices on Automobile Financing” that is intended to share the CFPB’s research about how consumers approach decisions about auto financing.

The CFPB’s overall objective is to help consumers make informed choices about financing when buying a car by encouraging them to do the following:

  • Shop for and compare financing options
  • Look beyond the monthly payment and consider the total cost of financing
  • Be aware of situations and financing features that could result in “costly surprises down the road”

Know Before You Owe.  The key component of the initiative is a shopping sheet that is intended to assist consumers by indicating which financing factors are negotiable (vehicle price, add-ons, fees, down payment, trade-in value, interest rate, loan term) and allowing them to compare the total cost of multiple loan offers.

The shopping sheet is also included in a guide entitled “Take control of your auto loan” that is intended to walk consumers through the auto financing process.  (The guide does not address leasing.)  The guide contains sections on (1) budgeting, (2) different types of auto financing (such as bank loans, dealer-arranged financing and “buy here pay here” dealer financing), (3) shopping for an auto loan (which includes advice encouraging consumers to checking current interest rates, consider the impact of an existing loan on a trade-in, and “think about optional add-ons ahead of time”), (4) negotiating an auto loan (which includes advice encouraging consumers to know what is negotiable and negotiate to lower the total cost and not just the monthly payment), and (5) closing the deal (which includes advice encouraging consumers to confirm that the documentation reflects what was negotiated).

Most of the information in the guide is also separately provided on the CFPB’s website.  Both the guide and the website information include highlighted tips, such as “If you finance add-ons as part of your loan, the amount you borrow and pay will increase,” “Be cautious of some biweekly payment plans,” and “In general, dealers and lenders are not required to offer the best rates available.  When negotiating, ask if you can get a better rate or more favorable terms.”

Report.  According to the CFPB’s press release, the auto loan initiative was informed by the research described in the report.  To research consumer experiences with auto financing, the CFPB conducted a series of focus groups with 308 consumers and examined narratives in consumer complaints submitted to the CFPB in the “vehicle loan or lease category.”

Themes that emerged from the focus groups included: (1) most consumers did advance research on the type and price of vehicles they wanted to buy but not on available financing options, (2) most consumers focused on the monthly payment and vehicle price, (3) many consumers did not consider or attempt to negotiate financing or interest rates, and (4) many consumers purchased add-on products despite having negative perceptions of the sales process for add-ons.

Themes that were identified in complaint narratives included a lack of understanding of financing options, difficulty understanding loan features during loan negotiations, and problems with add-ons such as paying for unwanted add-ons and reports of lenders insisting that the purchase of add-ons was necessary for loan approval.

 

 

 

I am proud to report that Ballard attorneys Peter N. Cubita and Christopher J. Willis have been selected to receive a 2016 Distinguished Legal Writing Award from The Burton Awards, which recognize outstanding legal writing.  They are being honored for their article entitled “Auto Finance and Disparate Impact: Substantive Lessons Learned from Class Certification Decisions,” which was published in the May 1, 2015, edition of the Consumer Financial Services Law Report.  This article argues that seminal class certification decisions rendered in employment and mortgage discrimination cases undercut the disparate impact theory of liability used to allege “discretionary pricing” rate spread claims against assignees, whether brought as private class actions or as governmental enforcement actions.

Run in association with the Library of Congress and co-sponsored by the American Bar Association, The Burton Awards is a non-profit, academic effort devoted to recognizing and rewarding excellence in the legal profession.  Law firm nominations for its Distinguished Legal Writing Awards are submitted annually for articles published during the prior year.  The nominated articles are reviewed by an Academic Board that includes law school professors and a former Chair of the White House Plain Language Committee.  Only 35 articles are selected each year from nominations submitted by many of the nation’s 1,000 largest law firms.

The 17th annual Burton Awards ceremony will be held at The Library of Congress in Washington, D.C., on May 23, 2016. U.S. Supreme Court Justice Stephen Breyer will be the featured speaker, and Justice Ruth Bader Ginsburg will memorialize Justice Antonin Scalia during the program.

As becomes readily apparent to those who have the pleasure of working with them, Peter and Chris have a talent for explaining complex subjects in a clear, concise and illuminating manner.  It does not surprise me that their article was selected as one of the 35 best articles published by law firm writers last year.

In their article, Peter and Chris discuss the substantive implications that class certification appellate decisions may have for disparate impact retail pricing claims alleged against assignees of motor vehicle retail installment sale contracts.  Peter previously received a 2007 Burton Award for Legal Achievement for his Business Lawyer article entitled, “The ECOA Discrimination Proscription and Disparate Impact – Interpreting the Meaning of the Words that Actually Are There.”  In that ground-breaking article, Peter discussed the threshold issue of whether disparate impact claims should be cognizable under the Equal Credit Opportunity Act.  Peter’s Business Lawyer article was cited in a November 2015 report, prepared by the Republican Staff of the House Financial Services Committee, entitled “Unsafe at Any Bureaucracy:  CFPB Junk Science and Indirect Auto Lending.”

 

Much of Director Cordray’s testimony in his appearance before the Senate Banking Committee yesterday consisted of his predictable defense of various CFPB positions.  While the hearing was much less contentious than last month’s hearing of the House Financial Services Committee at which Director Cordray appeared, the questions raised by Republican Senators focused on many of the same areas of concern as those of Republican House members.

In response to criticism of the CFPB’s enforcement actions against auto finance companies, Director Cordray continued to defend the CFPB’s reliance on disparate impact liability.  As he did in the House hearing, Director Cordray pointed to the U.S. Supreme Court’s Inclusive Communities decision as vindicating the CFPB’s position despite the fact that the decision did not address whether disparate impact claims are cognizable under the Equal Credit Opportunity Act.  According to Director Cordray, the Supreme Court had “resoundingly reaffirmed” the validity of using disparate impact to prove discrimination.  He also defended the CFPB’s methodology for establishing disparate impact as well as its method for identifying consumers entitled to relief under the auto finance company settlements.

Director Cordray also gave no ground on the CFPB’s reliance on enforcement in place of rulemaking.  Indeed, he appeared to embrace the phrase “regulation by enforcement” used by industry to criticize the CFPB’s approach.  Director Cordray cited to his remarks last month to the Consumer Bankers Association in which he called it “compliance malpractice” for companies not to look at CFPB consent orders with others to assess their own compliance.

In addition to his continued defense of CFPB positions, Director Cordray did provide some noteworthy information in response to Senators’ questions:

  • In response to a question regarding the CFPB’s activities related to small business lending, Director Cordray appeared to acknowledge that the CFPB’s role is limited to its enforcement of the Equal Credit Opportunity Act and implementation of the expanded small business lending data collection requirements of Dodd-Frank Act Section 1071.  (Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data includes the race, sex, and ethnicity of the principal owners of the business.)  As we previously reported, the CFPB has been seeking to hire a new “Assistant Director, Small Business Lending,” who will be charged with leading its Section 1071 team.  Based on Director Cordray’s comment that he would welcome recommendations from Senators of candidates for the position, it appears that the position has not yet been filled.
  • In response to a question asking how consumers will be able to access small dollar loans in the wake of anticipated CFPB restrictions on payday loans, Director Cordray indicated that he envisions three categories of outlets: a “reformed” payday loan industry, community banks and credit unions, and Fintech companies.  With regard to Fintech, Director Cordray indicated that he envisions “real opportunities” for online lending but commented that small-dollar lending is “tricky” for Fintech companies.  He also commented that the CFPB will be “mindful” and “watchful” of the need for Fintech innovations “to be consumer friendly.”  He indicated that while Fintech companies should not have an advantage in the marketplace over banks because they are not complying with same rules, the CFPB would seek to enforce the laws without stifling innovation.
  • When questioned about the criticism directed at the CFPB’s policy on no-action letters for its restrictiveness, Director Cordray acknowledged that legitimate questions have been raised about the policy.  He indicated that he was “not satisfied” with the policy and that further thought would be given to it (while also noting that the CFPB was “leery” of the burden that would result from a high volume of requests for no-action letters).

On April 4, at the Practicing Law Institute’s (“PLI”) 21st Annual Consumer Financial Services Institute in Manhattan, Alan Kaplinsky (a co-chair of the institute) moderated a panel entitled “The CFPB Speaks,” where CFPB officials shared their own insights on industry trends on their radar, priorities for the coming years, and views on certain hot-button issues. On the panel from the CFPB were Anthony (“Tony”) Alexis (Assistant Director for Enforcement), Jeffrey Langer (Assistant Director for Installment Lending and Collections Markets), Diane Thompson (Managing Counsel, Office of Regulations), and Peggy Twohig (Assistant Director for Supervision Policy).

During the discussion, the CFPB panelists gave us their hopes on the timetables for new rules that the CFPB is promulgating. They indicated that debt collection rules may be forthcoming in late spring, that the payday lending rules will “hopefully” come out before summer, that the arbitration rules may come out in late spring or early summer, that overdraft rules should be issued in late summer, and that prepaid card rules will be promulgated in “early summer.”

Peggy Twohig first shared the CFPB’s supervision priorities for the coming year, which include: (i) arbitration, (ii) consumer reporting by both CRAs and furnishers, (iii) debt collection both by first and third parties, (iv) demand-side consumer behavior, which she indicated was an initiative to create tools to allow consumers to make better financial decisions, (v)household balance sheets, (vi) mortgages, (vii) open use credit, which she defined as credit like payday, installment, credit card, and other lending not tied to a specific purchase, (viii) small business lending, and (ix) student lending. In addition, she pointed out that the CFPB would continue to pursue past priorities, such as auto finance ECOA cases based on dealer finance charge participation.

Tony Alexis commented on several areas of interest to industry in response to questions posed by Alan and others:

  • Civil Money Penalties: He defended the CFPB’s case-by-case approach to assessing civil money penalties in enforcement actions and declined an invitation by another panelist to establish set parameters for the size of a civil money penalty relative to restitution.
  • Precedential Value of Consent Orders: In response to Alan’s question on whether CFPB consent orders have precedential value, he confirmed that the CFPB’s consent orders, while not binding on other industry participants, are nevertheless indicative of the types of conduct that the CFPB believes to constitute violations of law.  Recently, Director Cordray gave a speech in which he said that consent orders are precedential and that the Bureau will expect industry to comply with orders issued to others who are engaged in practices similar to those engaged in by parties to consent orders. Chris Willis also opined that, in advising clients, he treats consent orders as precedential.

Chris Willis also asked Mr. Alexis about a trend he referred to as “reverse vendor oversight,” where the CFPB has lately been holding service providers liable for the conduct of financial institutions to which they provide services, citing as examples the recent CFPB actions against lead generators, payment processors, and debt collection law firms.  Mr. Alexis indicated that reverse vendor oversight is contemplated by Dodd-Frank and consistent with the CFPB’s enforcement modus operandi. This confirms that service providers to entities under the CFPB’s (ever expanding) jurisdiction  must themselves take steps to ensure they are not assisting in violations of law, or risk prosecution themselves.

Jeffrey Langer reiterated the strong priority that the CFPB places on student lending. His remarks also highlighted the divergence between the CFPB and the Department of Education. He stated that, while the two agencies cooperate, they each have their own statutory mandates and that they set priorities independently. He also touched upon the types of alleged abuses and violations that the CFPB is taking great pains to correct in the marketplace, including issues related to the availability of loss mitigation options, the transfer of servicing from one entity to another, misallocation of partial payments, failure to credit payments appropriately, the lack of transparency around student loan refinancing, and student loan debt relief fraud.

Diane Thompson responded to Alan’s question about whether it is a foregone conclusion that the CFPB will be banning consumer arbitration. She pushed back on the notion that the CFPB has already decided to ban arbitration or class action waivers. She said that the CFPB is taking great pains to carefully analyze the impact of arbitration and to reach a decision that is good for consumers and industry alike.

Overall, the CFPB’s remarks were not surprising, but they provide useful insight on the CFPB’s views on these and other important topics.

The CFPB and Department of Justice (the “Agencies”) announced recently that they have entered into a settlement with Toyota Motor Credit Corporation (TMCC) to resolve charges that TMCC engaged in unlawful discrimination in violation of the Equal Credit Opportunity Act (ECOA).  The settlement includes TMCC’s agreement to change its so-called “dealer compensation policy” and pay up to $21.9 million in remediation to affected consumers.  According to the CFPB press release, the CFPB did not assess a civil penalty “because of the proactive steps the company is taking that directly address fair lending by substantially reducing or eliminating discretionary pricing and compensation systems.”

The DOJ consent order includes a statement by TMCC in which it asserts that “it has treated all of its customers fairly and without regard to impermissible factors such as race or national origin” and entered into the settlement “solely for the purpose of avoiding contested litigation with the [DOJ] and instead to devote its resources to providing fair and industry-leading services to its customers.”  In another statement issued after the settlement was announced, TMCC stated that it “respectfully disagrees with the agencies’ methodologies to determine whether industry lending practices have been discriminatory.”

The settlement arises out of a joint CFPB and DOJ investigation that, as described in the CFPB consent order targeted TMCC’s alleged “policy and practice that allows dealers to mark up a consumer’s [contract] rate above [TMCC’s] established buy rate” and then compensate dealers “from the increased [finance charge] revenue to be derived from the dealer markup.”  The CFPB claimed that the so-called dealer “markups” were “based on dealer discretion” and “separate from, and not controlled by, the adjustments to creditworthiness and other objective criteria related to [buyer] risk in setting the buy rate.”

Based on a portfolio-level analysis of the dealer “markups” on “non-subvented” retail installment contracts (i.e., contracts not subsidized by the auto manufacturer) purchased by TMCC in 2011 to 2013, using the “Bayesian Improved Surname Geocoding” proxy methodology, the Agencies claimed that African-American and Asian and/or Pacific Islander buyers were charged higher dealer “markups” than similarly-situated white buyers.  According to the Agencies, TMCC’s dealer compensation policy violated the ECOA because it had a disparate impact on African American and Asian and/or Pacific Islander buyers.  In its complaint filed in the United States District Court for the Central District of California, the DOJ alleged that TMCC’s “policy“ was “not justified by legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact on” such minority buyers.

Under the terms of the substantially similar DOJ and CFPB consent orders, TMCC must implement one of three dealer compensation policies: Option One provides substantially lower limits on dealer discretion in setting the contract rate; Option Two provides for the establishment of a standard dealer participation rate (within the substantially lower rate spread limits) with downward deviations pursuant to authorized exceptions; and Option Three allows no dealer discretion in setting contract rates.  The settlement includes additional requirements regarding TMCC’s maintenance of general compliance management systems, sending annual notices to dealers regarding ECOA compliance, monitoring of dealers for compliance with the limits on dealer discretion in setting the contract rate, and submission of portfolio-level data to the Agencies.

The settlement also includes monetary relief consisting of a $19.9 million settlement fund to provide redress for affected consumers who allegedly were “overcharged” when they entered into retail installment sale contracts from January 1, 2011 through the Effective Date.  (The Effective Date is the date on which the CFPB Consent Order is issued or on which the DOJ Consent Order is approved and entered by the district court.).  TMCC can be required, however, to deposit up to an additional $2 million into the settlement fund based upon a determination by the Agencies as to need for additional redress attributable to the period from the Effective Date until the date by which TMCC has fully implemented its new dealer compensation policy.  This additional redress apparently relates to affected consumers who enter into contracts during the pre-implementation window period after the Effective Date.

While the TMCC settlement closely tracks the terms of the Agencies’ two most recent settlements of this nature, there are some differences. Two of these differences are particularly noteworthy.

First, although it is not provided for in either the TMCC consent orders, the CFPB’s and DOJ’s press releases issued by each of the Agencies stated that TMCC “has further committed that it will not fund any additional nondiscretionary component of dealer compensation by increasing its posted risk-based buy rates.”

Second, as in prior consent orders and subject to certain compliance with documentation requirements, a footnote in the TMCC consent orders provides that TMCC is not precluded from using a “competitive modifier” to reduce its risk-based buy rate “based on competitive offers (e.g., a valid, dealer documented, competitive offer from another financing source) when it is necessary to retain the customer’s transaction.”  Prior consent orders have required, however, that the respondents’ policies relating to a “competitive modifier” of a risk-based buy rate shall “eliminate Dealer Discretion in the transaction.”  Instead of imposing a prohibition of this nature, the relevant footnote in the TMCC consent orders concludes with the following sentence: “Respondent’s dealer compensation policies shall not vary when Respondent reduces a risk-based buy rate; dealers may retain the discretion to mark up the modified buy rate, subject to the caps set forth in subparagraph (a) of this Option, ¶ 25(a).”

The CFPB has announced that it has entered into a consent order with a Colorado buy-here pay-here used car dealer to settle charges that the dealer’s sales and advertising practices violated the Truth in Lending Act and the Consumer Financial Protection Act prohibition of unfair, deceptive, or abusive acts or practices.  The consent order requires the dealer to pay $700,000 in restitution and imposes a civil penalty of $100,000 which is suspended based on the dealer’s inability to pay.

The dealer offered financing to car purchasers through retail installment contracts (RIC) and assigned the majority of such RICs to an affiliate.  (Perhaps wanting to send a signal that even small companies are not below its radar screen, the CFPB noted in its press release announcing the consent order that during the relevant time period, the dealer “offered financing to about one thousand people each year.”)  According to the consent order, the dealer violated TILA by engaging in the following conduct:

  • Failing to include the costs of a required repair warranty contract and payment reminder device in the disclosed  finance charge and APR
  • Failing to include markups paid by credit customers in the disclosed finance charge and APR (The CFPB claimed that the markups resulted from the dealer’s policy of negotiating the sales price with customers paying cash but not with customers entering into RICs.)
  • Advertising inaccurately low APRs as a result of failing to include the costs of the required repair warranty contract and payment reminder device and the markup in the finance charge

The CFPB claimed that the TILA disclosure violations also constituted deceptive acts and practices that violated the CFPA UDAAP prohibition.  In addition, the CFPB claimed that the dealer’s failure “to post sticker prices or otherwise reveal the asking prices of cars offered to consumers until after consumers indicated they would purchase a car” coupled with the TILA disclosure violations constituted abusive practices in violation of the UDAAP prohibition.  According to the CFPB, these practices “left consumers unable to protect their interests in selecting or using the credit transactions” offered by the dealer.

In addition to requiring the payment of restitution and imposing a suspended civil penalty, the consent order requires the dealer to “clearly and prominently post a purchase price on all automobiles available for sale” and provide consumers with a written disclosure containing certain specified information “that would apply in the event that the consumer financed the purchase of the automobile at the terms offered by the [dealer]-prior or simultaneous to [dealer’s] offering a specific automobile to the consumer or in any way soliciting a commitment from the consumer to purchase from the [dealer].”  Such information includes: the duration of the RIC; the timing, number and dollar amount of periodic payments; the total number of payments required to obtain full ownership; an itemization of additional products to be included in the financing; and the purchase price, finance charge and APR if the dealer offers financing.  The dealer must obtain the consumer’s signed acknowledgment that the disclosure was received.

The consent order is not binding on other buy-here pay-here car dealers.  Nevertheless, we would not be surprised if the CFPB were to view the new written disclosure required by the consent order as something other buy-here pay-here dealers should be providing to consumers even though the disclosure is not required by TILA or other federal law.

Republican members of the House Financial Services Committee recently released a report, prepared by the Republican Staff of the Committee, which chronicles in detail the controversial automotive ECOA enforcement initiative of the CFPB with respect to what it characterizes as “dealer markup.”  The highly critical nature of the report is encapsulated by its title, which is “Unsafe at Any Bureaucracy:  CFPB Junk Science and Indirect Auto Lending.”  The report was announced in a press release which is titled “Internal Documents Reveal Weakness of CFPB’s ‘Disparate Impact’ Claims Against Vehicle Finance Business.”

Notwithstanding its scathing title, the report itself is a captivating read with a scholarly tone to it.  Moreover, some of its more newsworthy assertions are substantiated with citations to, and quotations from, internal CFPB documents that are posted on the website of the House Financial Services Committee.  The report, and the supporting documents, provide the reader with an inside glimpse into the formulation and execution of the Bureau’s enforcement strategies with respect to dealer finance income under motor vehicle retail installment sale contracts.  According to the report, some of these internal documents acknowledge areas of potential vulnerability in the event of contested litigation.  The areas of litigation risk to the CFPB include several dispositive legal issues, as well as questions relating to the statistical methodology employed by the Bureau.

The legal issues discussed in the report include: (1) whether disparate impact claims are cognizable under the ECOA; (2) whether the asserted assignee “policy” of “allowing” dealerships the discretion to “mark up” wholesale buy rates when negotiating contract APRs with their customers is a “specific policy or practice” within the meaning of Supreme Court disparate impact jurisprudence; (3) whether a potential assignee is a “creditor” under the ECOA with respect to retail installment sale contracts (“RISCs”) entered into on a “spot delivery” basis before the decision of a prospective assignee has been communicated to the dealership; (4) whether the assignee “portfolio imbalance” theory of liability, and the statistical analytical approach employed by the Bureau, would enable it to state a prima facie disparate impact claim under the “robust causality” requirement recently emphasized by the Supreme Court in Inclusive Communities; and (5) the business justification for the asserted “policy” given that “dealers will not assign RISCs to finance companies that don’t make competitive offers, and finance companies that attempt to impose terms and conditions (including costly, impractical compliance procedures) even slightly more burdensome than its rivals can lose most of their business.”

The “portfolio imbalance” theory of liability refers to the approach of analyzing all of the RISCs acquired by an assignee without differentiating among the assignor dealerships.  The report says that, “[i]n conducting its fair lending analysis, the Bureau examines a[n assignee’s] entire portfolio rather than on a dealer-by-dealer basis.”  As a result, “racial disparities within [an assignee’s] portfolio can be caused by the composition of the portfolio itself.”  This analytical flaw was noted in the AFSA report prepared by Charles River Associates, which concluded that “[a]ggregating contracts originated by individual dealers to the [assignee] portfolio level may create the appearance of differential pricing on a prohibited basis where none exists.”  Even if each dealership prices its RISCs in a manner that is neutral with respect to race and ethnicity, pricing differences among dealerships may create an appearance of disparities at the portfolio level when the RISCs of different dealerships are aggregated to the portfolio of the assignee.

The report is as fascinating a read as its provocative title suggests it will be.  It concludes by saying that “[t]he information and documents accompanying this report should help auto dealers, finance companies, and consumers better understand the Bureau’s flawed approach to indirect auto financing and compliance with [the] ECOA.”  According to the New York Times, “a bureau spokeswoman said the report showed that the agency engaged in careful deliberation.”

Various issues and items addressed in the report have been discussed in prior Ballard legal alerts and CFPB Monitor blog posts, including the following:  “The CFPB Stretches ECOA Past the Breaking Point with Auto Finance”; “Auto finance: can we really call disparate impact ‘discrimination’?”; “CFPB Releases Report on Fair Credit Exams and White Paper on Proxy Methodology”; “Auto Finance Company Agrees to Change Dealer Compensation Policy to Settle CFPB and DOJ Fair Lending Claims”; and “Ballard attorneys author article on auto finance and disparate impact.”  Our article concerning the substantive implications that class certification appellate decisions may have for disparate impact pricing claims alleged against assignees of motor vehicle RISCs is available here.