The new Consumer Financial Protection Bureau (CFPB) came out swinging this past summer with three punitive consent decree enforcement actions against credit card companies. In doing so, the CFPB gave both an indication of how it will enforce consumer financial laws and what auto dealers may be looking at down the line. The CFPB also expressed its determination to pursue credit discrimination cases and a California case brought by the Department of Justice (DOJ) shows how auto dealers can get caught up in credit discrimination, even inadvertently.
First, the CFPB consent decrees. The first two were brought against Capital One and Discover for deceptive telemarketing of add-on (read aftermarket) products at point of card activation. The products involved were payment protection products like credit life, disability, and loss of income insurance and identity theft products like credit monitoring. Some of the same things you may be selling.
The CFPB learned during routine supervisory exams of Capital One and Discover that consumers were being misled into believing the products were free; deceiving people about the benefits of the products such as they would improve customers’ credit scores; that products were sold to people ineligible for benefits (like people already disabled or unemployed); or that consumers did not know they had bought the products due to fast-talking and deceptive communications. Service providers who did telemarketing were not adequately monitored or trained and consistent scripts were not used in selling the add-on products. Generally the telemarketing also targeted subprime customers only.
The financial penalties imposed by the CFPB were incredibly harsh. In Capital One’s case, the CFPB ordered Capital One to refund all payments and accrued finance charges for every customer—yes every single customer—who was signed up for or talked out of cancelling a telemarketed product from August 2010 to January 2012. The toll was $140 million and the CFPB threw on a $15 million fine payable to the agency to boot. (Imagine the effect on your dealership if you were ordered to rebate every payment made on a sold aftermarket product for a year and a half.) Capital One’s banking regulator piled on its own customer reimbursement requirement of $10 million and another fine of $45 million making the total cost $210 million. Along with a 20-year consent decree, bi-annual auditing, and other expensive compliance program requirements.
Discover did most of its telemarketing in-house but engaged in similar deceptive marketing practices over a longer period of time, from December 2007 to August 2011. Joining with the FDIC and the Utah Department of Banking, the CFPB required Discover to pay $200 million with customers getting rebates of three months of payments or more, depending how long they had been paying for the deceptively-marketed services. A 20-year consent decree, requirements for new compliance programs, and bi-annual auditing were also a part of this settlement as well.
In announcing the Capital One settlement, CFPB Director Richard Cordray indicated the objectionable selling and consent decree requirements for aftermarket products could apply to any creditor, including auto dealers. The message was clear: Be transparent and consistent in selling aftermarket products to customers, do your best to make sure the customer understands what they are buying, and do frequent audits to make sure that your salespeople are following scripts and giving uniform sales pitches, best done by using an electronic menu product with plain-language descriptions of each product. And keep documentation of doing so. The CFPB emphasized the importance of giving customers information to make a knowing and informed decision. The CFPB also criticized both Capital One and Discover for incentive compensation programs to salespeople that rewarded selling the products in ways that could encourage the deceptive practices.
The final CFPB consent decree was with American Express for alleged violations of numerous aspects of the entire customer relationship. Failing to give promised sign-up benefits; discriminating in credit scoring models based on age; charging unlawful late fees; violating collection law requirements by deceiving customers into thinking that payments on unenforceable amounts would help their credit scores; and not reporting payments to credit bureaus were among the charges. The bottom line bill to Amex was $112.5 million, $85 million in customer reimbursements and a $27.5 million fine. The message to dealers is that every aspect of your dealings with the customer—from initial contact to negotiating deal terms to documenting deals to providing services—are going to be scrutinized. Transparency and fair dealing have been repeatedly cited by the CFPB (and the FTC for that matter) as priorities for consumer credit.
The CFPB has set up a complaint hotline for consumers and auto finance complaints are one of the things consumers can file complaints about. The CFPB has said it will not only take affirmative steps to attempt to resolve the complaints but will use the complaint database to identify targets for future enforcement proceedings against companies that appear frequently in the database. This means you need to rethink and perhaps restructure how you resolve disputes with customers. You want to do so in-house or through a neutral third-party. You don’t want the customer filing a complaint with the CFPB and getting on the agency’s radar screen. The CFPB shares information with the FTC who also maintains a complaint system called the “Consumer Sentinel” that takes complaints and shares them with other law enforcement agencies like State Attorneys General. It’s another list you want to avoid.
Credit discrimination is possibly the CFPB’s top substantive priority in a recently-released 5-year plan and the DOJ has been actively bringing credit discrimination claims as well. Both the CFPB and the DOJ apply the “disparate impact” theory of credit discrimination under the Equal Credit Opportunity Act (ECOA). Under this theory (also called the “effects test”), a seemingly-neutral practice (like a dealer’s markup of a lender’s buy rate) can be the basis for credit discrimination if it is statistically significant and has a negative impact on a group of similarly-qualified members of a protected class such as age, sex, or race. Then the creditor must show a legitimate business justification for the practice that could not be met by using an alternative system that would not result in a disparate impact. Note that intent or even knowledge of the discriminatory effect is irrelevant. It’s purely the numbers.
In a recent California case, a lender settled a “disparate impact” credit discrimination case targeted at its auto finance portfolio. The DOJ charged that similarly-qualified “non-Asians” (primarily Hispanics) were marked up 33-155 basis points higher on similar deals. This was found to be statistically significant and a violation of ECOA. What the DOJ did next however is particularly troubling. It drilled down to identify which auto dealers had originated most of the offending contracts. It then brought a lawsuit against a dealer group making the same allegations of credit discrimination and disparate impact as it did against the lender and began looking at the dealer’s entire portfolio of deals sold to all lenders. The DOJ survived a motion to dismiss the case so its claim that a rate markup differential of as little as 33 basis points to members of a protected class can be statistically significant credit discrimination remains in play. In other cases, markups of as little as 19 basis points have been held statistically significant to show credit discrimination. So, for now, the government is making assumptions on who is in a protected class and statistically comparing their contracts with those of other people to see if it can find a “disparate impact.”
ECOA has a privilege for self-testing and correcting any violations revealed by the test. It is something you may want to speak to your attorney about. Credit discrimination cases are incredibly expensive to defend requiring statistical experts and analyses of literally every deal in your files. A sampling of deals to similarly-qualified customers might give you a sense of what that broader analysis could show. In determining whether a given customer is in a protected class, the government will use census tract data and a list of minority last names also compiled from census data to make assumptions about whether individual customers are in a protected class. Mortgage lenders report sex and ethnicity information. The Dodd-Frank Act requires the CFPB to publish regulations requiring dealers and other creditors to collect similar data on the sex and ethnicity of customers but those regulations don’t seem to be a priority with the CFPB just yet.
It’s a brave new world and the regulators are coming. Be ready for them. Be transparent, fair and consistent with customers and be sure to resolve customer disputes in-house, whenever possible. An ounce of prevention is worth a pound of cure.