Auto lenders are under the Consumer Financial Protection Bureau’s microscope, as the agency issued subpoenas regarding the sale of extended warranties and other financial products, people close to the matter said in a published report.
Lenders worry the investigation could put the brakes on strong auto-loan activity. Any impending regulation could affect millions of borrowers for new and used vehicles as add-ons, like extra insurance, are widely used methods car dealers use to increase profits. Nearly three-quarters of all new-car sales are financed or include add-on products, according to the National Automobile Dealers Association.
Watchdogs, however, are looking into whether prices and terms are sufficiently divulged, and the CFPB has similarly penalized credit card companies for using marketing practices that may be misleading to push extra products such as identity-theft protection.
At a panel discussion at George Mason University in Fairfax, Va., yesterday, Jon Seward, deputy chief of the Justice Department’s housing and civil-enforcement division, said the department is examining auto dealers who provide loans to borrowers with bad credit and charge higher rates. The department, Seward said without being more specific, plans to take action this year.
These are regulators’ latest attempts to restrain what they see as dubious auto lending practices. In March, the CFPB urged lenders to overhaul deals that allow auto dealers to raise interest rates on low-credit customers, which it says is discriminatory against Hispanics and African-Americans. Lenders and dealers then share proceeds from the extra interest, which can be as much as 2.5% of the loan amount, according to financiers and dealers.
Both lenders and dealers debate such discrimination, and say that any restrictions on auto lending could derail a lending-industry bright spot during a period that lenders are battling low interest rates and loan demand. The Federal Reserve Bank of New York reported that outstanding auto loans, which totaled $783 billion at yearend 2012, were the highest in roughly four years, rising 10% since the end of 2010.
Add-on products are generally included in a car’s total purchase price, and account for a major part of dealer revenue. “It is very clear that these products are optional,” said NADA’s Senior Director of Legislative Affairs and Communications Bailey Wood.
Recently, the CFPB sent civil subpoenas to banks and captives that could result in civil charges and fines. The bureau asked dozens of questions and requested data on auto lending practices, including sales of warranties and insurance, according to Alan Kaplinsky, a partner at law firm Ballard Spahr LLP. “The CFPB is on the warpath when it comes to add-on products,” he added.
The agency has not determined if it will conduct regular examinations of captives — “Not yet,” Assistant Director Richard Hackett said during a compliance panel at the Auto Finance Risk Summit in Dallas this week — but it is able to fine them should it decide they have broken laws.
Doesn’t look like it offers any room for backseat drivers.
The Dodd-Frank Act authorizes the Bureau to conduct investigations to ascertain whether any person is or has been engaged in conduct that, if proved, would constitute a violation of any provision of Federal consumer financial law. Section 1052 of the Dodd-Frank Act sets forth the parameters that govern these investigations. 12 U.S.C. 5562 Section 1052 became effective immediately upon transfer on July 21, 2011 and did not require rules to implement its provisions. On July 28, 2011, the Bureau issued the interim final rule for the Rules Relating to Investigations (Interim Final Rule) to provide parties involved in Bureau investigations with clarification on how to comply with the statutory requirements relating to Bureau investigations.
II. Summary of the Final Rule
15 U.S.C. 41 et seq., the Bureau drew most heavily from the FTC’s nonadjudicative procedures in constructing the rules. The Final Rule lays out the Bureau’s authority to conduct investigations before instituting judicial or administrative adjudicatory proceedings under Federal consumer financial law. The Final Rule authorizes the Director, the Assistant Director of the Office of Enforcement, and the Deputy Assistant Directors of the Office of Enforcement to issue civil investigative demands (CIDs) for documentary material, tangible things, written reports, answers to questions, or oral testimony. The demands may be enforced in district court by the Director, the General Counsel, or the Assistant Director of the Office of Enforcement. The Final Rule also details the authority of the Bureau’s investigators to Furthermore, the Final Rule sets forth the rights of persons from whom the Bureau seeks to compel information in an investigation. Specifically, the Final Rule describes how such persons should be notified of the purpose of the Bureau’s investigation. It also details the procedures for filing a petition for an order modifying or setting aside a CID, which the Director is authorized to rule upon. And it describes the process by which persons may obtain copies of or access to documents or testimony they have provided in response to a civil investigative demand. In addition, the Final Rule describes a person’s right to counsel at investigational hearings.
Denial of Constitution Rights.
Section 1080.6 Civil Investigative Demands.
This section of the Interim Final Rule lays out the Bureau’s procedures for issuing CIDs. It authorizes the Assistant Director of the Office of Enforcement to issue CIDs for documentary material, tangible things, written reports, answers to questions, and oral testimony. This section of the Interim Final Rule details the information that must be included in CIDs and the requirement that responses be made under a sworn certificate.
If a State or Federal Agency person walks into your business and demands you provide all of the above information, you now apparently have to comply or you will be in violation of the law, and the Federal Government through the Dodd-Frank Act, authorizes the CFPB to exercise these powers.
Everyone is hanging their hat on the Director Issue to destroy the CFPB, which I think will be resolved one way or another and the bureau will carry on. I think the real issue the Auto Dealer Associations should focus on is a class action law suit to modify or restrict the CID section of the Dodd-Frank/CFPB Act.
What are your thoughts?
Unfortunately, the banking industry has lost the trust of everyone including the regulators because of all the abusive, deceptive, irresponsible actions over the last decade. The captive finance companies contributed to it as they gained power while the banks were consolidating their mergers. Ultimately, the ability of bank credit administrators (including those in the CBA) to provide guidance to the auto finance industry is where the leadership should be but that appears to be dead. It appears that few leaders are prepared to say “No” when schemes to abuse the public are advanced by unethical vendors. We also know that private capital purveyors will defer to the easiest way to source business which is to take the additional risk – so let them have it; but, leadership includes counseling dealers about the risk to the industry when they cross the mystical line between a little add-on and an abusive add-on.
Until bankers return to establishing trust, the CFPB and regulators will always have good reason to be on top of them. Today’s headlines in major papers detail how the regulators told the JP MorganChase board that the regulators do not trust them. How bad is that!? So the ADA can sue for relief but would a suit have the objective to be able to abuse customers with ease?
Putting to much power in the hands of petty government officials is nothing but trouble. So make the CFPB go to court and prove their case that is the proper execution of law.