PROGRAM THE FUTURE OF FEDERAL AND STATE REGULATION OF AUTOMOBILE FINANCE

Transcription

1 PROGRAM THE FUTURE OF FEDERAL AND STATE REGULATION OF AUTOMOBILE FINANCE

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3 American Bar Association Committee on Consumer Financial Services Federal and State Trade Practices Subcommittee Winter meeting - Naples, Florida January 2011 Chair: Michael Goodman Hudson, Cook, LLP Hanover, Maryland Co-Vice Chair: Thomas B. Pahl Federal Trade Commission Washington, D.C. Katherine Armstrong Federal Trade Commission Washington, D.C. Presentation: The Future of Federal and State Regulation of Automobile Finance Automobile finance traditionally has been the focus of state regulation and law enforcement. In the Dodd-Frank Act, however, Congress conferred new regulatory and enforcement authority on the Federal Trade Commission relating to automobile finance. This panel will discuss what the FTC should do with this new authority and what will be the effects of the exercise of this authority on states, industry, and consumers. Speakers: Moderator: Panelists: Katherine Armstrong, Federal Trade Commission, Washington, D.C. Michael Benoit, Hudson Cook, LLP, Hanover, Maryland Thomas B. Pahl, Federal Trade Commission, Washington D.C. Kathleen Keest, Center for Responsible Lending, Durham, NC [State Regulator or Law Enforcer]

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5 Remarks by Thomas B. Pahl before the American Bar Association Section of Business Law Section Committee on Financial Services Naples, Florida January 8 11, 2011 FTC Consumer Protection Tools Law Enforcement and Rulemaking Consumer Education Research and Policy Development Law Enforcement and Rulemaking Section 5 of the FTC Act Deception Unfairness FTC has brought many cases using its FTC Act authority to challenge false or misleading claims auto dealers made in advertising and marketing vehicles, including claims about the terms of the loan, the terms of the lease, or other costs of the transaction

6 Law Enforcement and Rulemaking FTC Act Rules Used Car Rule Holder in Due Course Rule Credit Practices Rule Law Enforcement and Rulemaking Used Car Rule Main Provisions: Prohibition on specific types of misrepresentations Requires that dealers, prior to sale, affix to vehicles Buyers Guide with critical information, such as: Existence of any warranty Terms of any warranty List of defects that can occur in cars Mandates that dealers disclose in the contract for sale that the Buyers Guide is part of the contract and overrides contrary provisions of the contract for sale Regulatory Review of Used Car Rule Ongoing Law Enforcement and Rulemaking Holder in Due Course Rule Main provisions: Auto dealers who use retail installment contracts must disclose in them that purchasers of the contracts are subject to claims and defenses consumers could assert against dealers Auto dealers cannot accept the proceeds of a purchase money loan unless the loan agreement disclose that purchasers of the agreement are subject to the claims and defenses consumers could assert against dealers Regulatory Review Scheduled for 2011

7 Law Enforcement and Rulemaking Credit Practices Rule Primary Provisions: Prohibited contract provisions Confessions of judgment Waivers of exemptions Wage assignments Security interest in household goods Required disclosure of co signer obligations Prohibition on pyramiding of late charges Law Enforcement and Rulemaking FTC Enforced Financial Services Statutes and Rules Truth in Lending Act and Regulation Z Consumer Leasing Act and Regulation M Equal Credit Opportunity Act and Regulation B Magnuson Moss Warranty Act and Rules Consumer and Business Education FTC Consumer Publications Car Ads: Reading Between the Lines Buying a New Car Buying a Used Car Understanding Vehicle Financing Keys to Vehicle Leasing Auto Service Contracts

8 Consumer and Business Education Business Education A Dealer s Guide to the Used Car Rule A Businessperson s Guide to Federal Warranty Law Advertising Consumer Leases The FTC s Privacy Rule and Auto Dealers: FAQ The Dodd Frank Act Jurisdiction over Automobile Dealers FTC, not, generally has authority over dealers predominantly engaged in the sale, leasing, or servicing of motor vehicles, however, retains authority over motor vehicle dealers who extend retail credit or leases directly to consumers and do not routinely assign their contracts to an unaffiliated third party. These Buy Here/Pay Here dealers tend to sell cars to consumers who finance their purchase through subprime credit transactions. The Dodd Frank Act Implementation Motor Vehicle Dealer Rulemaking APA notice and comment procedures, rather than Section 18 of the FTC Act procedures, may be used Much more expeditious rulemaking Rulemaking will be a more viable alternative to enforcement Unfair and deceptive acts and practices relating to sales or leasing of motor vehicles may be prohibited or restricted New rulemaking authority does not take effect until designated transfer date July 2011

9 The Dodd Frank Act Implementation FTC is conducting extensive outreach to identify issues for possible rulemakings and enforcement actions FTC public roundtables across the USA planned for early 2011 The Dodd Frank Act Implementation Possible Future Rulemaking/Enforcement Issues Deceptive sales or leasing practices (e.g., false or misleading claims concerning, or the failure to disclose, important sale or lease terms) Deceptive financing practices (e.g., false or misleading claims about loan terms) Unfair sales, leasing, and financing practices (e.g., yo yo financing, loan packing, and failure to pay off liens on tradeins) The Dodd Frank Act Implementation Possible Rulemaking and Enforcement Issues (Cont d) Fair lending and discrimination in auto financing Privacy issues (e.g., use of GPS devices in vehicles to track consumers) Unfair and deceptive practices of non automobile vehicle dealers (e.g., motor homes)

10 The Dodd Frank Act Implementation Coordination with the U.S. Military FTC must coordinate with Office of Service Members Affairs (OSMA) to educate service members and their families to help them make well informed decisions about the financial products and services that motor vehicle dealers offer FTC must coordinate with OSMA on monitoring and responding to consumer complaints about motor vehicle dealers Future FTC Rulemaking Activities Possible rulemakings to prohibit unfair and deceptive acts and practices of motor vehicle dealers to implement the Dodd Frank Act Possible changes to FTC rules as part of regulatory review process Used Car Rule Holder in Due Course Rule Future FTC Law Enforcement Activities Vigorous Enforcement of Statutes and Rules Section 5 of the FTC Act UDAP Rules Any new FTC rules to implement the Dodd Frank Act Existing FTC rules (e.g., Used Car Rule and Holder in Due Course Rule) FRB and rules to implement financial services statutes (e.g. Regulation Z)

11 Future FTC Interaction with Government Officials Close cooperation and coordination with FTC s partners on rulemaking and law enforcement efforts relating to motor vehicle financing OSMA on consumer education and complaints concerning motor vehicle dealers State law enforcement and regulatory officials generally Conclusion FTC has a long history of regulating automobile transactions In the Dodd Frank Act, Congress indicated that the Commission should play an even greater role High Future FTC Priority: rulemaking, law enforcement, consumer education, and research and policy development related to automobile transactions Questions?

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13 MOTOR VEHICLE FINANCE REGULATION AFTER DODD FRANK: Who s Got the Ball? American Bar Association Consumer Financial Services Committee Winter Meeting January, 2010 Kathleen E. Keest Senior Policy Counsel Center for Responsible Lending Durham, NC Michael Benoit Hudson Cook Washington, D.C. C:\Documents and Settings\scleckle\Desktop\Winter Meeting 2011\(4) Federal and State Trade Practices\MAB - Auto Finance RegDodd-Frank-SummaryChart-ABA (2).doc

14 Motor Vehicle Finance Regulation After Dodd Frank Definitions Motor Vehicle: Self propelled vehicle designed for transporting persons or property on a street, highway or other road; recreational boats and marine equipment; motorcycles; motor homes, recreational vehicle trailers and slide in campers as defined in 49 CFR and (d); and other vehicles that are titled and sold through dealers. Section 1029(f)(1) Motor Vehicle Dealer: Person or resident in US or US territory who is licensed by a State, territory or DC and takes title to, holds an ownership in, or takes physical custody of motor vehicles. Section 1029(f)(2). o The reference to dealers who are predominantly engaged in the sale and servicing likely means that the exclusion applies primarily to franchise dealers. Many independent dealers do not have servicing departments, or at least no significant servicing departments. Regulations will probably clarify how much servicing is required to qualify for the jurisdictional exclusion. Overview & General Principles Dealer Exclusion: Franchise dealers are generally excluded from jurisdiction as to their traditional financing activities. Dodd Frank provides: Except as permitted in subsection (b), the [Consumer Financial Protection] Bureau may not exercise any rulemaking, supervisory, enforcement or any other authority, including any authority to order assessments, over a motor vehicle dealer that is predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both. Section 1029(a). Subsection (b) provides that the general exclusion does not apply to any dealer to the extent she: (1) provides consumers with any services related to residential or commercial mortgages or self financing transactions involving real property; (2) operates a line of business C:\Documents and Settings\scleckle\Desktop\Winter Meeting 2011\(4) Federal and State Trade Practices\MAB - Auto Finance RegDodd-Frank-SummaryChart-ABA (2).docPage 2

15 (A) that involves the extension of retail credit or retail leases involving motor vehicles; and (B) in which (i) the extension of retail credit or retail leases are provided directly to consumers; and (ii) the contract governing such extension of retail credit or retail leases is not routinely assigned to an unaffiliated third party finance or leasing source; or (3) offers or provides a consumer financial product or service not involving or related to the sale, financing, leasing, rental, repair, refurbishment, maintenance, or other servicing of motor vehicles, motor vehicle parts, or any related or ancillary product or service. Basic allocation between & FTC: The basic breakdown (with some tweaks) is that the buy here/pay here and other dealer finance models are under 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. Section 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 non excluded dealers, but retains enforcement authority concurrent with the. Vehicle financing itself is not excluded from jurisdiction, just qualifying dealers: The dealer exclusion is an entity exclusion, i.e., it is personal to qualifying dealers. The vehicle financing products and practices themselves are not the subject of a categorical exclusion, so 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. 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 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. UDAAP is not a typo it refers to the s statutory charge to prevent unfair, deceptive, or abusive acts or practices. C:\Documents and Settings\scleckle\Desktop\Winter Meeting 2011\(4) Federal and State Trade Practices\MAB - Auto Finance RegDodd-Frank-SummaryChart-ABA (2).docPage 3

16 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. Section 1031(d). The 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 provision giving the FRB authority to promulgate rules regarding unfair mortgage refinancing practices. 15 U.S.C. 1639l. The definition also seem clearly constructed with an eye toward some of the problem practices that fed to the current crisis for which the existing definitions of unfair and deceptive proved insufficient to stem. State Attorney General Authority: State Attorneys General have enforcement authority under the CFPA, Section 1042(a)(1). (For national banks, they only have authority to enforce rules, not the general prohibition against unfair, deceptive or abusive acts and practices, Section 1042(a)(2)). They also retain their authority under state law. Consequently, as to dealers subject to jurisdiction, they have both CFPA and state UDAP authority, and as to dealers who are excluded from jurisdiction, they retain their state UDAP authority. There is also an argument that they might be able to enforce FTC issued UDAP rules, as well. 3 C:\Documents and Settings\scleckle\Desktop\Winter Meeting 2011\(4) Federal and State Trade Practices\MAB - Auto Finance RegDodd-Frank-SummaryChart-ABA (2).docPage 4

17 MOTOR VEHICLE FINANCING REGULATION AFTER DODD FRANK: SUMMARY CHART ENTITY RULE MAKING AUTHORITY SUPERVISION ENFORCEMENT UDAP (FTC) or UDAAP () (The second A refers to s additional authority to address abusive practices.) Enumerated Statutes (Existing federal consumer protection statutes transferred to relevant to vehicle financing 4 ) Supervision refers to ongoing monitoring and oversight; distinct from investigations related to law enforcement. Note: State enforcement below is for CFPA s organic authority. For enumerated statutes, it is status quo as to state authority. Auto dealers who are : a) primarily engaged in the sale and servicing or leasing and servicing of motor vehicles 5 and FTC: (APA rule making authorized for UDAP rules) > Effective July 21, (Sec. 1029(d), 1029A.) FRB: TILA, ECOA, CLA, EFTA 7 FTC: FCRA N/A at federal level. [NB FTC has no supervision authority] FTC State AG and regulators? 8 (also state AGs and regulators for state law.) 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 ( BHPH and certain other Effective > UDAAP rules, July 21, 2011; Sec 1031(b), 1037 >general rule making (e.g. supervision rules, etc), July 21, 2010) Sec.1029) 9 > Effective July 21, FTC: FCRA 615(e) (Red Flags and 628 (Records Disposal) Larger market participants Smaller market participants FTC [ Larger and smaller to be defined by rule, after FTC State AG State regulator (see note 4) [NB: FTC & to negotiate agreement to coordinate enforcement] C:\Documents and Settings\scleckle\Desktop\Winter Meeting 2011\(4) Federal and State Trade Practices\MAB - Auto Finance RegDodd-Frank-SummaryChart-ABA (2).docPage 5

18 ENTITY RULE MAKING AUTHORITY SUPERVISION ENFORCEMENT UDAP (FTC) or UDAAP () (The second A refers to s additional authority to address abusive practices.) Enumerated Statutes (Existing federal consumer protection statutes transferred to relevant to vehicle financing 4 ) Supervision refers to ongoing monitoring and oversight; distinct from investigations related to law enforcement. Note: State enforcement below is for CFPA s organic authority. For enumerated statutes, it is status quo as to state authority. dealers) consultation with FTC. Due by 7/21/12.] individual dealer where there is reason to believe is engaging in conduct posing risk to consumers Auto dealers providing financial services unrelated to the sales & servicing, rental, etc. of motor vehicles, to the extent they engage in such unrelated services Effective 7/21/11 Effective date 7/21/11 FTC: FCRA 615(e) (Red Flags and 628 (Records Disposal) If payday or mortgage services, ; Other kind of services not related to auto larger participants ;, smaller participants FTC / FTC State AG State regulator Small Banks (under $10 Bn in assets) [both as indirect lender/assignee and as direct to buyer lender} Effective date 7/21/11 Effective date 7/21/11 FTC: FCRA 615(e) (Red Flags and 628 (Records Disposal). Applicable banking regulator [ has authority to >request reports > ride along supervision with banking regulator on FDIC (state chartered nonmember banks) FRB (state chartered member banks) OCC (national banks/federal thrifts) C:\Documents and Settings\scleckle\Desktop\Winter Meeting 2011\(4) Federal and State Trade Practices\MAB - Auto Finance RegDodd-Frank-SummaryChart-ABA (2).docPage 6

19 ENTITY RULE MAKING AUTHORITY SUPERVISION ENFORCEMENT UDAP (FTC) or UDAAP () (The second A refers to s additional authority to address abusive practices.) Enumerated Statutes (Existing federal consumer protection statutes transferred to relevant to vehicle financing 4 ) Supervision refers to ongoing monitoring and oversight; distinct from investigations related to law enforcement. Note: State enforcement below is for CFPA s organic authority. For enumerated statutes, it is status quo as to state authority. sampling basis] 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 Effective date 7/21/11 Effective date 7/21/11 FTC: FCRA 615(e) (Red Flags and 628 (Records Disposal) [Effective as of date of enactment as to simultaneous supervision with banking regulator.] Sec. 1025(e) 1029A 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 Effective date 7/21/11 Effective date 7/21/11 FTC: FCRA 615(e) (Red Flags and 628 (Records Disposal) Larger market participants Smaller market participants FTC FTC State AG State regulator C:\Documents and Settings\scleckle\Desktop\Winter Meeting 2011\(4) Federal and State Trade Practices\MAB - Auto Finance RegDodd-Frank-SummaryChart-ABA (2).docPage 7

20 ENTITY RULE MAKING AUTHORITY SUPERVISION ENFORCEMENT UDAP (FTC) or UDAAP () (The second A refers to s additional authority to address abusive practices.) Enumerated Statutes (Existing federal consumer protection statutes transferred to relevant to vehicle financing 4 ) Supervision refers to ongoing monitoring and oversight; distinct from investigations related to law enforcement. Note: State enforcement below is for CFPA s organic authority. For enumerated statutes, it is status quo as to state authority. [ Larger and smaller to be defined by rule, after consultation with FTC] [NB: FTC & to negotiate agreement to coordinate enforcement] individual provider where there is reason to believe it is engaging in conduct posing risk to consumers. Relevant sections: Section 1022 ( 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) C:\Documents and Settings\scleckle\Desktop\Winter Meeting 2011\(4) Federal and State Trade Practices\MAB - Auto Finance RegDodd-Frank-SummaryChart-ABA (2).docPage 8

21 1 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). 2 See National Consumer Law Center, Unfair and Deceptive Acts and Practices and 4.4 (7 th Ed. 2008) for discussions of unconscionability and the Sperry-Hutchinson standards. The CFPA s 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. 3 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 This is in stark contrast to that explicit provision in the merchant exclusion, Section 1027(a)(2)(E). 4 The enumerated statutes transferred to most relevant to vehicle financing include TILA, CLA, ECOA, FCRA, and GLB. See Section 1002(12) for complete list. 5 By its terms, this arguably means that dealers without both sales and servicing capacity will be subject to 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. 6 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, F.R Query whether excluded auto dealers are excluded for future amendments to the regulations implementing the enumerated laws, e.g., amendments to Reg. Z disclosures? Presumably, the FRB will conduct a joint rulemaking. 8 See note 3, above. 9 The s 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.. C:\Documents and Settings\scleckle\Desktop\Winter Meeting 2011\(4) Federal and State Trade Practices\MAB - Auto Finance RegDodd-Frank-SummaryChart-ABA (2).docPage 9

22 Katherine Armstrong has been with the Federal Trade Commission for 25 years. As an attorney advisor to former Chairman and Commissioners for over 15 years and as a senior attorney, she has wide-ranging FTC experience in law enforcement and policy making with expertise in the Fair Credit Reporting Act and Section 5 of the FTC Act. Ms Armstrong works in the Division of Privacy and Identity Protection where she manages Fair Credit Reporting Act (FCRA) initiatives, including law enforcement investigations, consent negotiations, rulemakings, and other interpretive policy tasks.