Wide variance between actions by FTC & CFPB

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Although perhaps not as active as President Trump is on Twitter, two of the main federal regulators that oversee vehicle deliveries and auto financing have been far from quiet so far in 2017.

But how the Federal Trade Commission and the Consumer Financial Protection Bureau went about its regulatory business during the first half of the year are quite different.

The FTC said in April it was moving “aggressively” to implement presidential directives aimed at eliminating wasteful, unnecessary regulations and processes. The agency took a significant step not long after the Fourth of July.

Meanwhile, the CFPB finalized its rule prohibiting the use of class action waivers in arbitration clauses, triggering negative reaction from Capitol Hill and beyond.

Let’s recap by opening with what some industry participant might consider to be positive developments.

5 reforms when FTC issues civil investigative demands

If a federal investigation into your dealership or finance company ever happens, perhaps here is some good news regarding how it might unfold.

Federal Trade Commission acting chairman Maureen Ohlhausen on July 17 announced several internal process reforms in the agency’s Bureau of Consumer Protection that are designed to streamline information requests and improve transparency in commission investigations.

The FTC explained the reforms are part of Ohlhausen’s efforts to further the agency’s mission to protect consumers and promote competition without unduly burdening legitimate business activity.

“It is our duty to carry out our vital mission in the most effective and efficient way possible,” Ohlhausen said. “The changes announced today will reduce unnecessary and undue burdens of FTC investigations without compromising our ability to protect American consumers.”

This past April, Ohlhausen announced new internal working groups on agency reform and efficiency to improve processes and focus resources where they will do the most good for the public. As part of this initiative, Ohlhausen directed the Bureau of Consumer Protection to identify best practices to streamline information requests and improve transparency in investigations.

The process reforms announced in July addressed civil investigative demands (CIDs) in consumer protection cases and include:

—Providing plain language descriptions of the CID process and developing business education materials to help small businesses understand how to comply

—Adding more detailed descriptions of the scope and purpose of investigations to give companies a better understanding of the information the agency seeks

—Where appropriate, limiting the relevant time periods to minimize undue burden on companies

—Where appropriate, significantly reducing the length and complexity of CID instructions for providing electronically stored data

—Where appropriate, increasing response times for CIDs (for example, often 21 days to 30 days for targets, and 14 days to 21 days for third parties) to improve the quality and timeliness of compliance by recipients.

In addition, to ensure companies are aware of the status of investigations, the FTC said it will adhere to its current practice of communicating with investigation targets concerning the status of investigations at least every six months after they comply with the CID. 

At least one compliance expert applauded the FTC’s actions. Steve Levine currently is chief legal and compliance officer at Ignite Consulting Partners.

"I’m encouraged by the acting chairman’s proposals for internal reform,” Levine said in an email to SubPrime Auto Finance News. “These will increase transparency and understanding and help small businesses meet the expectations of the FTC.

“I’m especially glad to see emphasis on plain language and business education as CIDs can take a small business by surprise and they are often unprepared to respond as quickly as is required,” continued Levine, who also has been chief legal and compliance officer of AutoStar Solutions, Sigma Payment Solutions and SecureClose as well as general counsel for Regional Acceptance Corp.

The FTC noted Ohlhausen initiated this project in part to address concerns raised by members of Congress and the American Bar Association Antitrust Section’s Presidential Transition Report about the investigational burdens on legitimate companies.

“The agency continues to consider other reforms,” the FTC said.

Why industry is ‘disappointed’ with CFPB’s arbitration rule

Clearly the industry is “disappointed” that the Consumer Financial Protection Bureau issued a final rule prohibiting the use of class action waivers in arbitration clauses. The American Financial Services Association, the National Independent Automobile Dealers Association and the American Bankers Association all used that specific adjective when relaying their reaction to the CFPB’s actions to ban dealerships and auto finance companies from using mandatory arbitration clauses “to deny groups of people their day in court.”

AFSA asserted the CFPB has finalized a rule on arbitration that ignores its own research and harms consumers, while enriching plaintiff’s attorneys.

“We are disappointed that the bureau has decided to move forward with a final rule,” said Bill Himpler, executive vice president with AFSA. “The bureau has ignored its mandate under the Dodd-Frank Wall Street Reform and Consumer Protection Act to limit arbitration only if such a prohibition is in the public interest and for the protection of consumers.”

AFSA, along with many other trade associations, has submitted a comment letter on the CFPB’s proposed arbitration rule, advocating for alterations in the best interest of both consumers and the industry.

“Numerous reports, including the CFPB’s own study, show the value that consumers derive from arbitration, especially when compared to class-action lawsuits. The CFPB’s study clearly demonstrates that the winner in class-action litigation is almost always the plaintiff’s attorneys, who pocket millions of dollars and leave the consumer with little to no financial compensation,” Himpler said.

NIADA pointed out that the CFPB’s study on arbitration found consumers receive on average more than $5,000 in arbitration hearings compared to roughly $32 in class-action litigation — if they receive anything at all.

“We are disappointed that the bureau has decided to adopt this ill-conceived rule,” NIADA chief executive officer Steve Jordan said. “Today’s action shows the CFPB has decided to put the interests of class-action lawyers above those of the very consumers the bureau is mandated to protect.

“Arbitration has proven to be a faster, less expensive and more effective means of resolving consumer disputes than class-action lawsuits. And consumers who receive an award in arbitration almost always receive more than they would in a class-action lawsuit, a point proven by the CFPB’s own research,” Jordan continued.

“This rule will force small businesses to bear additional costs in defending class-action litigation, particularly meritless suits,” Jordan went on to say. “Those costs will ultimately be borne by consumers, and in the case of those who are credit-challenged, it could prove to be too much.”

ABA president and CEO Rob Nichols also cited the disparity in monies consumers often receive via arbitration versus litigation. Nichols also agreed with the premise that attorneys are likely to receive the greatest windfall via the bureau’s decision.

“We’re disappointed that the CFPB has chosen to put class action lawyers — rather than consumers — first with today’s final rule,” Nichols said. “Banks resolve the overwhelming majority of disputes quickly and amicably, long before they get to court or arbitration. The Bureau’s own study found that arbitration has significant benefits over litigation in general and class actions in particular. Arbitration is a convenient, efficient and fair method of resolving disputes at a fraction of the cost of expensive litigation, which helps keep costs down for all consumers.

“Despite acknowledging these benefits in its own study, the bureau has chosen to write a rule that would essentially eliminate arbitration — and force consumers into court — by requiring companies to face a flood of attorney-driven class action lawsuits from which consumers receive virtually nothing. Under this final rule, consumers lose,” he continued.

“As Congress considers changes to the CFPB’s structure and accountability, we also urge lawmakers to overturn this rulemaking,” Nichols went on to say.

NIADA senior vice president of legal and government affairs Shaun Petersen said the association will work with congressional leaders to address the arbitration issue legislatively.

“From the outset of this rulemaking process, NIADA has voiced concern about the poor policy reflected in this proposal to both the CFPB and to members of Congress,” Petersen said. “As Congress considers CFPB reform, we will be urging lawmakers to overturn this anti-consumer rule.”

What might happen next

In October 2015, the bureau published an outline of the proposals under consideration and convened a Small Business Review Panel to gather back from small companies. Besides consulting with small business representatives, the bureau sought comments from the public, consumer groups, industry and other interested parties before continuing with the rulemaking.

Last May, the bureau issued a proposed rule that included a request for public comment. The CFPB said it received more than 110,000 comments.

“The final rule is pretty consistent with the proposed rule they issued a while back, so from a substantive perspective, it’s no surprise,” Hudson Cook chairman Michael Benoit told SubPrime Auto Finance News. “I think politics was the only thing in the way of issuing the final rule (well, that and wading through 110,000 public comments).  

“I think the director probably feels the odds are good that the current Republican infighting and focus on healthcare and tax reform will serve to keep the Congress distracted and uninclined to use their veto power under the Congressional Review Act. That remains to be seen,” Benoit continued.

“But in any event, now is as good a time as any to put this rule out and it’s probably important to the director that it come out on his watch,” he went on to say.

SubPrime Auto Finance News then asked about how much work is ahead for the auto finance industry to comply with this new rule.

“There are a number of avenues of resistance for the industry,” Benoit said. “First, it can lobby Congress to use its CRA authority to invalidate the rule (it’s a simple majority vote, so you only need 51 votes in the Senate). 

“Second, you can attack the rule as inconsistent with the mandate Congress gave in Dodd-Frank, i.e., Congress required in Dodd Frank that any arbitration rule be ‘in the public interest’ and ‘for the protection of consumers,’” he continued.

“Arguably, the CFPB’s own study reveals that the rule is neither,” Benoit added.

Benoit also touched on other elements that might be a path to challenge this new CFPB rule.

“You can also argue that the rule is inconsistent with the aforementioned study in that Dodd-Frank requires any arbitration rule be consistent with the arbitration study the CFPB was mandated to undertake,” he said. “There is plenty of data in the study that would argue against the rule being published.  You could also make constitutional arguments, e.g., Congress impermissibly delegated legislative authority to the executive branch when it authorized the CFPB to write a rule that conflicts with existing legislation, i.e., the Federal Arbitration Act. 

“The argument is that only Congress can amend a federal statute.  I’m sure there are other avenues of attack as well,” Benoit went on to say.

So if the rule actually does come into full effect, Benoit projected how the industry could continue.

“I would think ‘compliance’ with the rule is pretty simple, i.e., use agreements without a class action waiver in the arbitration clause. That’s a fairly easy fix for forms companies and institutions,” he said.

“The bigger problem for industry is determining how much increase in credit pricing is necessary to cover the greater liability that comes with class action exposure,” Benoit concluded.

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