The CFPB's and FTC's
Supervision & Enforcement Authority
in Auto Finance
Presented by
With
Michael Benoit
Richard Hackett
Lucy Morris
Joel Winston
The CFPB’s Proposed Larger Participant
Rule for Automobile Financing
The Proposed Rule
 Purpose
 The Larger Participant Test
 Leasing
 Cost of Supervision
Purpose
 Level Playing Field
 87.4 million outstanding finance and lease transactions
 Representing < $900 billion in value
 Market fragmented between banks and non-banks
 Exert Supervisory Authority over Non-Banks
 Bureau mandate
 Enforce federal consumer financial laws consistently without
regard to a person’s status as a depository institution
Aggregate Annual
Originations = 10,000
 Originations by nonbank entity and any affiliates
during the preceding calendar year:
 Credit granted for the purpose of purchasing an
automobile, plus
 Automobile leases, plus
 Lease and credit refinancings, plus
 Purchases or acquisitions of leases and purchase
financing
Aggregate Annual
Originations = 10,000
Automobile means any self-propelled vehicle
primarily used for personal, family, or
household purposes for on-road
transportation. The term does not include
motor homes, recreational vehicles (RVs),
golf carts, and motor scooters.
Aggregate Annual
Originations
 Bureau indicated it did not intend to capture:
Title lending, or
Securitization
 But:
 Not clear if title lending isn’t a form of refinancing,
and
Language of the rule does not sufficiently carve out
securitization SPEs (“invest in ABS”).
Leasing
Two definitions:
Dodd- Frank: extending or brokering leases of
personal … property that are the functional equivalent
of purchase finance arrangements, if (I) the lease is on
a non-operating basis; and (II) the initial term of the
lease is at least 90 days.
CEBA §108 (Competitive Equality Banking Act)
Leasing
Parsing the DFA definition:
Initial term of at least 90 days
Non-operating
 Accounting definition
 Permissible non-banking activities for bank holding
companies
The functional equivalent of purchase finance
arrangements
Leasing
 Is CFPB’s determination that leases are the
functional equivalent of purchase finance
arrangements sound?
 What impact if applied to other scenarios?
(TILA, ECOA, creditor’s rights)
Leasing
CEBA §108: Must be:
A full-payout lease and
A net lease.
Leasing
Full-payout lease:
Return of full investment in property is
reasonably expected, plus the estimated cost of
financing the property over the term
From (1) rentals; (2) estimated tax benefits;
and (3) the estimated residual value of the
property at the expiration of the lease term.
Leasing
 Net lease: Lessor will not, directly or indirectly,
provide or be obligated to provide for:
(1) Servicing, repair, or maintenance;
(2) Parts or accessories;
(3) Loan of replacement or substitute property during
servicing;
(4) Lessee insurance costs (except force-placed); or
(5) Renewal of any license or registration for the
property (unless necessary to protect lessor interests).
Costs of Supervision
Bureau estimates based on its experience with bank
examinations.
 On site for 9 weeks
 2 weeks of preparation
11 weeks of staff time
 Assumes 1 full time compliance person and 1/10th of an
attorney – total labor cost $27,611 (assumption may not
align with reality)
CFPB Enforcement in the Auto Finance
Market
Big Picture
• Proposed larger participant rule only impacts
the Bureau’s supervisory authority.
• The Bureau has enforcement authority over
large bank and nonbank auto finance
companies.
• Enforcement can occur independent of
Supervision or Rulemaking.
• Expect Bureau to be active in this space.
How CFPB Investigations
Originate
• As a result of a Bureau examination.
– The “PARR” letter and the decision to pursue
public enforcement action.
• By the Enforcement Office, based on:
–
–
–
–
–
Consumer Complaints
Whistleblowers
Media Attention
Referrals from Federal/State Partners
Enforcement Priorities
Civil Investigative
Demands
• Investigations typically start with broad CIDs
for documents, data, and written responses.
• Compulsory process with tight deadlines.
• “Meet and confer” within 10 days of receipt.
• CID modification letters.
• Petitions to modify or set aside the CID must
be filed within 20 days of receipt.
What to Expect Next
• Several weeks or months without word
• Then:
– A closing letter (possible, but not likely yet)
– Follow-on CIDs for more materials or
investigational hearings
– CIDs to third-parties, like banks and vendors
– Bureau interviews of customers and former
employees
What to Expect Next
• Closing letter; or
• Notice and opportunity to respond and advise
(NORA).
– Written response will be shared internally,
including with Director.
• Pre-complaint settlement negotiations.
• Bureau lawsuit if unable to settle.
CFPB Areas of Interest in
Auto Finance Market
• Deceptive practices in the marketing of loans
and leases.
• Providing accurate information to credit
bureaus.
• Treating consumers fairly when collecting
debts.
• Discriminatory pricing and dealer markups.
FTC Enforcement in the Auto Finance
Market
Federal Trade Commission
• FTC has jurisdiction over all entities “in or
affecting commerce, except:
– Depository institutions
– Common carriers
– Non-profits
– Business of insurance
Includes non-bank auto finance companies and
their principals
FTC – CFPB
• CFPB: exclusive jurisdiction over banks.
• FTC: exclusive jurisdiction over non-financial services
companies.
• But, large areas of overlap, including non-bank auto finance
companies.
• Memorandum of Understanding
- No duplication or inconsistent standards
- Coordination and cooperation
- May “divide and conquer”
• Deception and unfairness standards are the same.
• But, FTC and CFPB don’t necessarily see the world the same way.
Recent FTC Developments
• Consumer Portfolio Services (5/14). Subprime auto lender
and servicer. Alleged illegal practices included:
– Loan servicing
• Misrepresenting fees owed
• Improper assessment and collection of fees
• Improper principal balance increases
• Failing to disclose effects of loan extensions
• Misrepresenting payment options
Recent FTC Developments
• Consumer Portfolio Services (cont). Subprime auto lender and servicer.
Alleged illegal practices included:
– Debt collection (both FDCPA and first party), including
• Disclosing debts to third parties
• Calls to consumers’ places of employment
• Harassment
• Unauthorized debits
• False repossession threats
• Manipulating Caller ID
– FCRA Furnisher Rule violations – failing to have reasonable
procedures to ensure maximum possible accuracy of data it reported
and to resolve consumer disputes.
Recent FTC Developments
• Operation Steer Clear (1/14) – 10 cases vs. auto
dealer advertising for:
– TILA and CLA violations
– Low-balling
– “Teaser” rates
– Balloon payments
– “No money down” claims
– Hidden fees
– Limited availability
Recent FTC Developments
• Timonium Chrysler and Ganley Ford West
(9/13) – advertised discounts available only
on certain models and with certain
qualifications.
The “Typicality” Principle
• An unqualified claim about the performance, efficacy,
availability, benefits, or features of a product or service
imply that consumers “typically” will achieve that result.
– Consumer testimonials
– “Up to” claims (“rates as low as ….”)
If only a minority of the target audience will achieve
the advertised results, the claim must be clearly
and conspicuously qualified.
“Clear and Conspicuous”
Disclosures
Operation Full Disclosure
• FTC reviewed over 1000 magazine and TV ads to identify those
with inadequate disclosures. Follow up to Dot.Com Disclosures.
• Sent 60+ warning letters to advertisers that included potentially
misleading statements that they tried to fix with fine print
disclosures.
– Prices quoted without adequate disclosure of qualifications or
limitations
– Accessories offered without adequate disclosure of need to
purchase related items
– Unrepresentative consumer testimonials without adequate
disclosure of average results
“Clear and Conspicuous”
Disclosures
Operation Full Disclosure (cont)
• Clear and conspicuous disclosures should be presented:
– Close to the claim to which it relates (not buried in footnotes
or blocks of text)
– In easy-to-read font that is as large as font used to make the
claim
– In a shade that stands out against background
– In language that consumers will understand
– Video disclosures: on screen long enough to be noticed, read
and understood
– Oral disclosures: in a cadence that is easy to follow
FTC – Other issues
• Privacy and data security
• Debt collection
• Fair Credit Reporting Act (furnisher
obligations; risk-based pricing; permissible
purpose)
• Telemarketing Sales Rule
• Tracking devices
Questions
Michael Benoit
Hudson Cook, LLP
1020 19th Street, NW
7th Floor
Washington, DC 20036
 202-327-9705
 mbenoit@hudco.com
Rick Hackett
Hudson Cook, LLP
22 Free Street
Suite 205
Portland, Maine 04101
 207-541-9556
 rhackett@hudco.com
Joel Winston
Hudson Cook, LLP
1020 19th Street, NW
7th Floor
Washington, DC 20036
 202-327-9712
 jwinston@hudco.com
Lucy Morris
Hudson Cook, LLP
1020 19th Street, NW
7th Floor
Washington, DC 20036
 202-327-9710
 lmorris@hudco.com
Jack Tracey
NAF Association
7250 Parkway Drive
Suite 510
Hanover, MD 21076
 410-865-5431
 jtracey@nafassociation.com