MOTOR VEHICLE FINANCE REGULATION AFTER DODD-FRANK: Whos Got the Ball?

2011 NAAG Presidential Initiative Americas Financial Recovery: Protecting Consumers While We Rebuild April 10-12, 2011 Charlotte, North Carolina

Kathleen E. Keest Senior Policy Counsel Center for Responsible Lending Durham, NC

Adapted from materials originally presented to the Consumer Financial Services Committee, American Bar Association, January, 2011, prepared by Kathleen Keest and Michael Benoit, Hudson Cook, Washington, DC.

Motor Vehicle Finance Regulation After Dodd-Frank Overview & General Principles Scope of the Dealer Exclusion from CFPB: o If a dealer qualifies for the exclusion, then it is excluded from CFPB rules, supervision and enforcement. 1029(a). (FTC is the federal regulator for excluded dealers, see below.) o Excluded from CFPB authority Dealers that arrange the vehicle financing and assign the car loans to unaffiliated third parties. (dealer-as-broker / indirect lending/ three-party financing model.) Id. Franchise dealers only? As drafted, this exclusion may apply only to franchise dealers. The exclusion applies to a dealer that is predominately engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both. 1029(a). Many independent dealers who do indirect financing do not have servicing departments. Presumably CFPB and FTC rule-making will clarify what role a dealers service department plays in the exclusion.

o Included under CFPB authority Buy here/pay here (BH/PH) dealers, i.e. ones that extend retail loans or leases directly to consumers and do not routinely assign the loans or leases to unaffiliated sources of financing or leasing. 1029(b)(2) Query # 1: What about the hybrid BH/PH dealers? E.g. the ones who routinely keep subprime customers in house or with affiliated finance arms, but routinely send prime buyers out to unaffiliated banks or indirect lenders? Query # 2: There is a separate CFPA provision with an extremely convoluted exclusion for merchants, with special emphasis on small businesses, 1027, Dodd-Frank wonks disagree as to whether dealers who are subject to CFPB under 1029 get a second bite at being excluded through the merchant exclusion. (This wonk believes rules of statutory construction would say no.) Presumably rules will clarify this, as well.

o Also included: To the extent that a dealer offers mortgage-related services, it will be under CFPB, and to the extent it offers any consumer financial product not relating to the sale, financing, leasing, rental, repair, refurbishment, maintenance, or other servicing of vehicles, it will be under CFPB. In other words, if an otherwise exempt dealer runs a payday loan business on the side, the payday loan business is subject to the CFPB. 1029(b)(1), (3).
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 Definition of motor vehicle: The definition includes recreational boats, motorcycles, motor homes, RVs, etc. 1029(f). Basic allocation between CFPB & FTC: The basic breakdown (with some tweaks) is that the buy-here/pay-here and other dealer-finance models are under CFPB jurisdiction, while the originate-to-sell or brokered-loan model (indirect lending) model stays with FTC. o The FTC is granted APA rule-making authority to issue UDAP rules applicable to the dealers under its jurisdiction. 1029(d). By its terms, this FTC UDAP authority is not limited to rules relating to financial products and practices. o The FTC does not have APA rulemaking authority as to dealers subject to CFPB authority, but retains enforcement authority concurrent with the CFPB. Vehicle financing itself is not excluded from CFPB jurisdiction, just qualifying dealers: The dealer exclusion is personal to qualifying dealers. The vehicle financing products and practices themselves are not the subject of a categorical exclusion o If someone other than an excluded dealer is a provider of vehicle financing products and services, that provider is covered, absent its own independent exclusion.1 The exclusion also only applies to qualifying dealers three party vehicle-financing business. As noted above, CFPB will have jurisdiction over dealers to the extent dealers provide other financial products or services, e.g. mortgage products or payday loans are subject to CFPB without regard to the dealer exclusion. UDAP and UDAAP: The reference to UDAP in the chart below refers to unfair and deceptive acts and practices, familiar from the FTC Act and state laws. 1031(a) UDAAP is not a typo it refers to the CFPBs statutory charge to prevent unfair, deceptive, or abusive acts or practices. o Abusive is defined as an act or practice that materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or serve; or takes unreasonable advantage of a lack of understanding on the part of the consumer or the material risks, costs, or conditions of the product or services; the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or the reasonable reliance by the consumer on a covered person to act in the interests of the consumer. 1031(d). o This statutory definition of abusive resonates of unconscionability doctrine, and the pre-1980 Sperry-Hutchinson test for unfairness used by the FTC. 2 The term (undefined) was first used in the 1994 HOEPA
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provision giving the FRB authority to promulgate rules regarding unfair mortgage refinancing practices. 15 U.S.C. 1639l. The definition also seems clearly constructed with an eye toward some of the problem practices that fed to the current crisis which the existing definitions of unfair and deceptive proved insufficient to stem. State Attorney General Authority: State Attorneys General have enforcement authority to enforce CFPA provisions, Section 1042(a)(1). o AGs also retain their authority under state law, 1042(e)(1). Consequently, as to dealers subject to CFPB jurisdiction, AGs have both CFPA UDAAP and state UDAP authority, and as to dealers who are excluded from CFPB jurisdiction, AGs retain their state UDAP authority. o There is also an argument that state AGs might be able to enforce FTCissued UDAP rules applicable to dealers, as well. (Under 1042(a)(1), AGs have authority to enforce rules issued under this title [Title X, the CFPA], and the FTCs UDAP rule-making authority over auto dealers is in Title X. 3) o Enforcement authority under transferred enumerated statutes.4 This is another area where some Dodd-Frank wonks are in disagreement: whether CFPA gives AGs authority to enforce the enumerated transferred statutes like TIL, ECOA, etc. Argument for yes -- Section 1042(a)(1) says very broadly that a state AG has the authority to enforce provisions of this title or regulations issued under provisions of this title. Title X transfers the authority for the enumerated statutes to the CFPB. Argument for no; it is status quo as to AGs authority to enforce transferred enumerated statutes Section 1042(a)(3) says that this title [Title X] does not modify any provision of enumerated statute relating to states enforcement: (3) RULE OF CONSTRUCTION. No provision of this title shall be construed as modifying, limiting, or superseding the operation of any provision of an enumerated consumer law that relates to the authority of a State attorney general or State regulator to enforce such Federal law. (emphasis added). Note: The FTC Act is not a transferred enumerated consumer act, 1002(12), so this discussion does not affect the argument in the second bullet above, since the rule of construction only applies to enumerated consumer laws, and thus by its terms does not apply to what authority does or does not exist under the FTC Act.
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National banks AGs only have authority to enforce CFPB rules, not the general prohibition against unfair, deceptive or abusive acts and practices, Section 1042(a)(2)).

[Rest of page intentionally left blank.] See chart below for discussion of jurisdiction over other providers involved in motor vehicle financing and summary of above discussion relating to dealers.

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MOTOR VEHICLE FINANCING REGULATION AFTER DODD-FRANK: SUMMARY CHART

ENTITY RULE-MAKING AUTHORITY
UDAP (FTC) or UDAAP (CFPB) (The second A refers to CFPBs additional authority to address abusive practices.) Auto dealers who are : a) primarily engaged in the sale and servicing or leasing and servicing of motor 6 vehicles and b) who routinely assign purchase money credit or leases to unaffiliated third parties. (indirect lending dealers) Auto dealers who are a)primarily engaged in the sale and servicing or leasing and servicing of motor vehicles and b)who routinely keep loans in house or assign to affiliated third parties (BHPHand certain other CFPB Effective > UDAAP rules, July 21, 2011; Sec 1031(b), 1037 >general CFPB rule making (e.g. supervision rules, etc), 10 July 21, 2010) Sec.1029) CFPB > Effective July 21, 2011. FTC: FCRA 615(e) (Red Flags and 628 (Records Disposal) Larger market participants CFPB Smaller market participants FTC [Larger and smaller to be defined by CFPB rule, after CFPB FTC State AG State regulator (see note 4) [NB: FTC & CFPB to negotiate agreement to coordinate enforcement] FTC: (APA rule-making authorized for UDAP rules) > Effective July 21, 2011 (Sec. 1029(d), 1029A.)
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SUPERVISION
Supervision refers to ongoing monitoring and oversight; distinct from investigations related to law enforcement. N/A at federal level. [NB FTC has no supervision authority]

ENFORCEMENT
Note: State enforcement below is for CFPAs organic authority. For enumerated statutes, it is status quo as to state authority. FTC State AG and regulators?
9

Enumerated Statutes (Existing federal consumer protection statutes transferred to CFPB relevant 5 to vehicle financing ) FRB: TILA, ECOA, CLA, EFTA FTC: FCRA
8

(also state AGs and regulators for state law.)

ENTITY

RULE-MAKING AUTHORITY
UDAP (FTC) or UDAAP (CFPB) (The second A refers to CFPBs additional authority to address abusive practices.) Enumerated Statutes (Existing federal consumer protection statutes transferred to CFPB relevant 5 to vehicle financing )

SUPERVISION
Supervision refers to ongoing monitoring and oversight; distinct from investigations related to law enforcement. consultation with FTC. Due by 7/21/12.] - individual dealer where there is reason to believe is engaging in conduct posing risk to consumers - CFPB

ENFORCEMENT
Note: State enforcement below is for CFPAs organic authority. For enumerated statutes, it is status quo as to state authority.

dealers)

Auto dealers providing financial services unrelated to the sales & servicing, rental, etc. of motor vehicles, to the extent they engage in such unrelated services Small Banks (under $10 Bn in assets) [both as indirect lender/assignee and as direct-to-buyer lender}

CFPB Effective- 7/21/11

CFPB Effective date 7/21/11 FTC: FCRA 615(e) (Red Flags and 628 (Records Disposal)

If payday or mortgage services, CFPB; Other kind of services not related to auto larger participants CFPB; , smaller participants -- FTC Applicable banking regulator [CFPB has authority to >request reports > ride-along supervision with banking regulator on

CFPB / FTC State AG State regulator

CFPB Effective date 7/21/11

CFPB Effective date 7/21/11 FTC: FCRA 615(e) (Red Flags and 628 (Records Disposal) .

FDIC (state-chartered nonmember banks) FRB (state-chartered member banks) OCC (national banks/federal thrifts)

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ENTITY

RULE-MAKING AUTHORITY
UDAP (FTC) or UDAAP (CFPB) (The second A refers to CFPBs additional authority to address abusive practices.) Enumerated Statutes (Existing federal consumer protection statutes transferred to CFPB relevant 5 to vehicle financing )

SUPERVISION
Supervision refers to ongoing monitoring and oversight; distinct from investigations related to law enforcement. sampling basis]

ENFORCEMENT
Note: State enforcement below is for CFPAs organic authority. For enumerated statutes, it is status quo as to state authority. NCUA (credit unions) State banking regulator (as applicable) State AG. (with narrow restriction as to national banks/federal thrifts)

Large Banks (over $10 Bn in assets)--both as indirect lender/assignee and as direct-to-buyer lender

CFPB Effective date 7/21/11

CFPB Effective date 7/21/11 FTC: FCRA 615(e) (Red Flags and 628 (Records Disposal)

CFPB [Effective as of date of enactment as to simultaneous supervision with banking regulator.] Sec. 1025(e) 1029A

CFPB primary among federal regulators; back-up enforcement in other applicable federal regulator State banking regulator (as applicable) State AG (with narrow restriction as to national banks;/federal thrifts)

Non-bank/non-dealer lenders --both as indirect lender/assignee and as direct-to-buyer lender

CFPB Effective date 7/21/11

CFPB Effective date 7/21/11 FTC: FCRA 615(e) (Red Flags and 628 (Records Disposal)

Larger market participants CFPB Smaller market participants FTC

CFPB FTC State AG State regulator

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ENTITY

RULE-MAKING AUTHORITY
UDAP (FTC) or UDAAP (CFPB) (The second A refers to CFPBs additional authority to address abusive practices.) Enumerated Statutes (Existing federal consumer protection statutes transferred to CFPB relevant 5 to vehicle financing )

SUPERVISION
Supervision refers to ongoing monitoring and oversight; distinct from investigations related to law enforcement.

ENFORCEMENT
Note: State enforcement below is for CFPAs organic authority. For enumerated statutes, it is status quo as to state authority. [NB: FTC & CFPB to negotiate agreement to coordinate enforcement]

[Larger and smaller to be defined by CFPB rule, after consultation with FTC] - individual provider where there is reason to believe it is engaging in conduct posing risk to consumers. - CFPB

Relevant sections: Section 1022 (CFPB rule-making generally) Section 1024 (non-banks general supervision & coordination ) Section 1025 (large banks supervision & coordination) Section 1026 (small banks supervision & coordination) Section 1029 (auto dealer exclusion)

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Financial product or service includes extending credit, servicing loans, collecting debts related to financial products or services, and leases with initial terms of at least 90 days, among many other things. Section 1002(15). See National Consumer Law Center, Unfair and Deceptive Acts and Practices 4.3.3.3 and 4.4 (7th Ed. 2008) for discussions of unconscionability and the Sperry-Hutchinson standards. The CFPAs definition of unfairness is the same as the existing FTC Act definition, Section 1031(c). There is no definition of deception in CFPA, but presumably regulations will look to the FTC and, perhaps, state UDAP law to define that term by regulation.

State officials can enforce Title X or regulations issued under this title as to entities under their jurisdiction. Arguably the FTC-issued rules using APA process will be under CFPA. There is no provision in section 1029 (the dealer exclusion) limiting states use of their 1042 CFPA authority as to any dealer excluded under 1029. This is in stark contrast to that explicit provision in the merchant exclusion, Section 1027(a)(2)(E).
4

The enumerated statutes transferred to CFPB most relevant to vehicle financing include TILA, CLA, ECOA, FCRA, and GLB. See Section 1002(12) for complete list. See note 4, above.

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By its terms, this arguably means that dealers without both sales and servicing capacity will be subject to CFPB jurisdiction. Many independent dealers have sales-only capacity, without servicing departments and thus may not qualify for the exclusion. Regulations will be required to determine to what extent a servicing capability must go to qualify a dealer for the exclusion.
7

Dodd-Frank directed the Secretary of the Treasury to set a Designated transfer date within 60 days of enactment, which was to be between 6 and 12-months out, with the possibility of an extra 6 month extension. Treasury set the transfer date at July 21, 2011. 75 F.R. 57252

Query whether excluded auto dealers are excluded for future CFPB amendments to the regulations implementing the enumerated laws, e.g., amendments to Reg. Z disclosures? Presumably, the FRB will conduct a joint rulemaking.
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See note 3, above.

The CFPBs general rule-making authority was effective upon enactment (July 21, 2010), This includes supervision authority over non-banks, and coordinated supervision over large banks. (over $10 Billion in assets). Section 1022, 1029A..

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