Virginia Enacts Banking, Consumer Finance Bills

Over the past week, Virginia Governor Terry McAuliffe signed several bills impacting banks and certain consumer finance providers. The first bill, HB 358 repealed a state law that that barred out-of-state banks from opening de novo branches in Virginia unless the bank’s home state provided reciprocal access to Virginia banks. The change will allow out-of-state banks to establish branches in Virginia on the same basis as state-chartered banks. A second banking bill, HB 1062, provides that an existing statutory provision requiring the Virginia State Corporation Commission to ascertain that certain minimum capital stock requirements are met prior to issuing a certificate of authority to a bank does not apply to the Commission’s issuance of such a certificate to a bank holding company or to a resulting bank in connection with certain types of mergers involving the holding company and its subsidiary bank. A third bill, HB 69, amends state law to expand the types of services that may be provided under an extended motor vehicle service contract and to authorize the Board of Agriculture and Consumer Services to designate additional services that may be provided under an extended service contract. The bill also provides that extended service contracts are not insurance subject to state regulation as such. The above approved bills will take effect on July 1, 2014. Finally, the Governor has not yet approved a bill passed by the General Assembly, HB 954, which would permit the State Corporation Commission to issue transitional mortgage loan originator licenses.

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More CFPB Senior Staff Changes Announced

On March 12, the CFPB announced several new senior officials, as described below.  We also have learned that Peter Carroll, the CFPB’s Assistant Director for Mortgage Markets, will be leaving the Bureau later this month.

  • Jeffrey Langer has joined the CFPB as the Assistant Director of Installment and Liquidity Lending Markets in the Bureau’s Research, Markets, and Regulations Division. Mr. Langer most recently served as senior counsel at Macy’s, Inc., prior to which he was a lawyer in private practice. Mr. Langer is a founding fellow and treasurer of the American College of Consumer Financial Services Lawyers and is a former chair of the Consumer Financial Services Committee of the American Bar Association Business Law Section.

    Mr. Langer will fill a position vacated by Rick Hackett last year.  At the time of Mr. Hackett’s departure, Corey Stone, Assistant Director, Credit Information, Collections, and Deposit Markets, took over smaller dollar loan markets on a permanent basis. Rohit Chopra, the CFPB’s Student Loan Ombudsman, took responsibility for auto and student loans on an acting basis. Although Mr. Stone will continue to oversee smaller dollar loan markets, including payday and auto title loans, the addition of Mr. Langer allows Mr. Chopra to focus only on his Ombudsman duties.

  • Christopher D. Carroll has joined the CFPB as the Assistant Director and Chief Economist for the Office of Research in the Bureau’s Research, Markets, and Regulations Division, as the CFPB announced last year. Dr. Carroll is a professor of economics at Johns Hopkins University, from which he has taken a leave of absence to serve at the Bureau. He also is a member of the Board of Directors of the National Bureau of Economic Research, and the co-chair of the NBER Research Group on Consumption. Dr. Carroll has served as a senior economist for the Council of Economic Advisors on two separate occasions, and as an economist for the Board of Governors of the Federal Reserve System. Ron Borzekowski, who joined the CFPB at its inception from the Federal Reserve Board, has been serving as the acting head of the Office of Research.
  • Daniel Dodd-Ramirez has joined the CFPB as the Assistant Director of Financial Empowerment in the Bureau’s Consumer Education and Engagement Division. Mr. Dodd-Ramirez previously served as the executive director of Step Up Savannah Inc. in Savannah, Ga., from 2005 to 2014. Prior to Step Up, he served as education project director and community organizer for People Acting for Community Together (PACT) in Miami, Florida, and before that was the human resources director for Families First, a social services agency in southern Vermont.
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House Financial Services Chairman Presses CFPB On Auto Finance Enforcement

House Financial Services Committee Chairman Jeb Hensarling (R-TX) sent a letter today to CFPB Director Richard Cordray once again pressing the CFPB for information about its March 2013 auto finance guidance and its actions since that time to pursue allegedly discriminatory practices by auto finance companies. That guidance, which the CFPB has characterized as a restatement of existing law, sought to establish publicly the CFPB’s grounds for asserting violations of ECOA against bank and nonbank auto finance companies for the alleged effects of facially neutral pricing policies.

The letter recounts numerous exchanges between members of Congress—including both Democratic and Republican members of the Committee—and the CFPB on this issue to demonstrate what the Chairman characterizes as “a pattern of obfuscation” by the Bureau. Mr. Hensarling explains that through a series of written requests—see, e.g. here, here, and here—as well as in-person exchanges, lawmakers have sought detailed information about the CFPB’s application of the so-called disparate impact theory of discrimination to impose liability on auto finance companies. The letter states that the CFPB has repeatedly refused to provide certain key information used in applying that theory through compliance examinations and enforcement actions, including information about regression analyses, analytical controls, and numerical thresholds employed by the Bureau. Read more…

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Missouri AG Action Indicates Focus On Auto Service Contracts

On January 28, Missouri Attorney General Chris Koster announced a settlement with the owners of a vehicle extended-service-contract seller alleged to have marketed limited-time extend warranty programs for vehicles. The AG alleged that the company attempted to sell vehicle breakdown coverage with a generalized and often misleading description of the coverage, and that many customers later discovered their contracts were actually provided by a third party and did not contain the coverage promised. The AG stated that consumers who asked for refunds faced numerous objections and delays. The settlement requires the owners to pay $60,000 to resolve claims of deception, unfair practices, and unlawful insurance practices, and also permanently prohibits them from selling “additive contracts” in Missouri. The AG stated that the settlement “highlights [his office’s] efforts to clean up the auto service contract industry in Missouri and protect consumers from future deceptive sales practices.”

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New Jersey Bill Regulates Vehicle Service Contracts, Ancillary Products

Last month, New Jersey Governor Chris Christie signed SB 854, which will regulate, among other things, motor vehicle service contracts and motor vehicle ancillary protection products. For example, the new law (i) requires service contract providers or sellers to provide to the purchaser receipts or other written evidence of a contract, and copies of such contracts “within a reasonable period of time following the date of purchase”; (ii) specifies the form and contents of service contracts, including “plain language” requirements and certain disclosures; and (iii) grants purchasers the right to return a contract and obtain a full refund of the contract’s purchase price. In addition, providers must meet certain financial security requirements. A violation of the new provisions constitutes an unlawful practice under to the state’s consumer fraud act, which provides for fines of up to $10,000 for the first offense and up to $20,000 for any subsequent offense. The bill exempts, among other things, warranties and mechanical breakdown insurance policies offered by licensed insurers. The bill takes effect on 180 days following enactment, i.e. July 16, 2014.

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NADA Proposes Fair Credit Compliance Policy And Program For Its Member Dealers

On January 24, the National Automobile Dealers Association (NADA) distributed a proposed compliance program to its members aimed at reducing the risk of discrimination allegations stemming from CFPB Bulletin 2013-02, which places limits on how sources of indirect auto financing may compensate dealers. The bulletin and proposed program address the practice by which auto dealers “markup” an indirect lender’s risk-based buy rate and receive compensation based on the increased interest revenues. The NADA program recommends that dealerships adopt fixed markup limits and only exceed those limits if a legitimate business reason completely unrelated to a customer’s background is present. The proposal identifies seven “good faith” reasons for deviation—including a more competitive offer and generally-applicable promotional offers—which mirror those set forth in consent orders entered into between the DOJ and two automobile dealers accused of disparate impact discrimination in 2007. The CFPB has not commented on whether the program as proposed will satisfy regulatory scrutiny but plans to do so.

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CFPB Director Defends Mortgage Rules, Discusses Plans In Other Markets

On January 28, the House Financial Services Committee held a lengthy hearing with CFPB Director Richard Cordray in connection with the CFPB’s November 2013 Semi-Annual Report to Congress, which covers the period April 1, 2013 through September 30, 2013. The hearing came a day after the Committee launched a CFPB-like “Tell Your Story” feature through which it is seeking information from consumers and business owners about how the CFPB has impacted them or their customers. The Committee has provided an online submission form and also will take stories by telephone. Mr. Cordray’s prepared statement provided a general recap of the CFPB’s recent activities and focused on the mortgage rules and their implementation. It also specifically highlighted the CFPB’s concerns with the student loan servicing market.

The question and answer session centered on the implementation and impact of the CFPB’s mortgage rules, as well as the CFPB’s activities with regard to auto finance, HMDA, credit reporting, student lending, and other topics. Committee members also questioned Mr. Cordray on the CFPB’s collection and use of consumer data, particularly credit card account data, and the costs of the CFPB’s building construction/rehabilitation.

Mortgage Rule Implementation / Impact

Generally, Director Cordray pushed back against charges that the mortgage rules, in particular the ATR/QM rule, are inflexible and will limit credit availability. He urged members to wait for data before judging the impacts, and he suggested that much of the concerns being raised are “unreasoned and irrational,” resulting from smaller institutions that are unaware of the CFPB’s adjustments to the QM rule. He stated that he has personally called many small banks and has learned they are just not aware of the rule’s flexibility. He repeatedly stated that the rules can be amended, and that the CFPB will be closely monitoring market data.

The impact of the mortgage rules on the availability of credit for manufactured homes was a major topic throughout the hearing, On the substance of the issue, which was raised by Reps. Pearce (R-NM), Fincher (R-TN), Clay (D-MO), Sewell (D-AL), and others, Director Cordray explained that in his understanding, the concerns from the manufactured housing industry began with earlier changes in the HOEPA rule that resulted in a retreat from manufacture home lending. He stated that industry overreacted and now lenders are coming back into the market. Mr. Cordray has met personally with many lenders on this issue and will continue to do so while monitoring the market for actual impacts, as opposed to the “doomsday scenarios that are easy to speculate on in a room like this.” Still, he committed to work on this issue with manufacturers and lenders, as well as committee members. Read more…

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Report Criticizes Auto Dealer Compensation, Add-On Product Practices

On January 23, the Center for Responsible Lending (CRL) released a report titled “Non-Negotiable: Negotiation Doesn’t Help African-Americans and Latinos on Dealer-Financed Car Loans.” The report provides the results of CRL’s investigation of whether racial disparities occur in auto financing, “considering the consumer’s attempt to negotiate their interest rates and comparison-shop at other institutions.” The CRL also examined “other aspects of car buying by race and ethnicity, including the purchase of ancillary ‘add-on’ products and the accuracy of information provided by the dealer to the customer during the buying experience.” CRL states that its research “supports the likelihood that dealer practices, such as interest rate markups, have a discriminatory impact on borrowers of color.” Specifically, the CRL states its investigation revealed (i) African-American and Latino consumers attempt to negotiate pricing on car dealer loans just as much as white consumers, if not more, and their levels of comparison shopping are similar to those of white buyers; (ii) more borrowers of color reported receiving misleading information about their loans from car dealers, which served to negate the impact of negotiations or comparison shopping; and (iii) African Americans and Latinos are nearly twice as likely to be sold multiple add-on products as white consumers. The CRL recommends that policymakers (i) prohibit dealer compensation that varies based on the interest rate or other material, other than the loan’s principal balance; (ii) require dealers to disclose the actual costs of every add-on product sold during the financing process and to reveal the cost of the car with and without add-on products; and (iii) prohibit dealers from representing that the buyer is required to purchase ancillary products in order to obtain financing.

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North Carolina Regulator Issues Guidance On New Service Contracts Sales Tax

Recently, the North Carolina Department of Revenue issued guidance regarding a new state law that imposes the state’s 4.75% general sales and use tax, as well as applicable local and transit sales and use tax rates, to the sales price of “service contracts.” The law applies to “service contracts” sold at retail by a retailer on or after January 1, 2014 and sourced to North Carolina. “Service contract” includes any warranty agreement, maintenance agreement, repair contract, or similar agreement or contract by which a seller agrees to maintain or repair tangible personal property. The guidance addresses retailer liability, stating that a retailer that sells a covered service contract is liable for the sales and use tax due on the transaction. Further, a retailer that authorizes another person to sell or enter into a covered service contract with a purchaser on behalf of the retailer is encouraged to ensure that any agreement between the parties provides that any sales and use tax collected on the sales price of a service contract must be submitted to the retailer to be remitted to the Revenue Department. A retailer is not relieved of its liability for sales and use tax on the retail sale of a covered service contract due to failure by another person to collect or remit the applicable sales and use tax due on the sale to the retailer of the contract. The guidance also addresses (i) sales and use tax applicable to receipts for certain contracts entered into prior to January 1; (ii) sourcing of service contracts; and (iii) cancellation or refund of a service contract.

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CFPB, DOJ Announce First Joint Fair Lending Action Against Indirect Auto Finance Company

This morning, the CFPB and the DOJ announced their first ever joint fair lending enforcement action to resolve allegations that an auto finance company’s dealer compensation policy, which allowed for auto dealer discretion in pricing, resulted in a disparate impact on certain minority borrowers. The $98 million settlement is the DOJ’s third largest fair lending action ever and the largest ever auto finance action.

Investigation and Claims

As part of the CFPB’s ongoing targeted examinations of auto finance companies’ ECOA compliance, the CFPB conducted an examination of this auto finance company in the fall of 2012. This finance company is one of the largest indirect automobile finance companies in the country which, according to the CFPB and DOJ’s estimates, purchased over 2.1 million non-subvented retail installment contracts from approximately 12,000 dealers between April 1, 2011 and present. The CFPB’s investigation of the finance company allegedly revealed pricing disparities in the finance company’s portfolio with regard to auto loans made by dealers to African-American, Hispanic, and Asian and Pacific Islander borrowers. The CFPB referred the matter to the DOJ just last month, and the DOJ’s own investigation resulted in findings that mirrored the CFPB’s.

Specifically, the federal authorities claim that, based on statistical analysis of the loan portfolios, using controversial proxy methodologies, the investigations showed that African-American borrowers were charged on average approximately 29 basis points more in dealer markup than similarly situated non-Hispanic whites for non-subvented retail installment contracts, while Hispanic borrowers and Asian/Pacific Islander borrowers were charged on average approximately 20 and 22 basis points more, respectively. The complaint also faults the finance company for not appropriately monitoring pricing disparities or providing fair lending training to dealers. Read more…

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Pennsylvania Updates Auto Finance Statutes

On November 27, Pennsylvania enacted HB 1128, which updates and consolidates the state’s Motor Vehicle Sales Finance Act (MVSFA) and Goods and Services Installment Sales Act (GSISA), and includes numerous changes relevant to auto finance companies. Among other things, the bill amends the MVSFA with regard to installment sales contracts, to, among other things: (i) require installment sale contracts to include a statement informing the buyer of possible additional rights under the state Unfair Trade Practices and Consumer Protection Law; (ii) add triggers allowing for an acceleration clause; (iii) require a holder to notify a buyer upon payment in full by specifying the obligation has been paid in full on the instruments which are to be returned to that buyer with delivery in 10 days of the tender date; and (iv) prohibit a buyer from waiving any provisions in the chapter, including any purported waiver affected by a contractual choice of the law of another jurisdiction contained in an installment sale contract. Other MVSFA amendments provide that only costs disclosed at the time of the installment sale can be included in the contract and specifically prohibit costs for repairs that arise after contract execution from being added to the original contract. The bill amends the GSISA to, among other things: (i) add new requirements related to repossession; (ii) specify new standards for closed-end and open-end credit agreements; and (iii) increase certain maximum allowable fees and finance charges. The changes take effect November 27, 2014.

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Proposed California Ballot Initiative Targets Dealer Markups

Recently, the consumer advocacy group Consumers for Auto Reliability and Safety announced that it submitted a new ballot initiative in California that would, among numerous other things, prohibit dealer markups in auto finance transactions. The text as proposed would prohibit, in connection with the assignment of a conditional sale contract for a motor vehicle, any seller or employee of a seller from accepting, and any purchaser of a conditional sale contract from paying to any person or entity, compensation of any kind for arranging, assigning, or otherwise transferring a loan that varies based on the interest rate or other finance charges, or varies based on any other factor related to such interest rate or finance charges. The prohibition would not apply to, among other things, (i) an assignment that is with full recourse or under other terms requiring the seller to bear the entire risk of financial performance of the buyer or (ii) an assignment that is more than six months following the date of the conditional sale contract. The proposal is in the early stages of California’s ballot initiative qualification process.

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Report On CFPB’s Auto Finance Forum

This morning, the CFPB hosted an auto finance forum, which featured remarks from CFPB staff and other federal regulators, consumer advocates, and industry representatives.

Some of the highlights include:

  • Patrice Ficklin (CFPB) confirmed that the CFPB, both before issuing the March bulletin and since, has conducted analysis of numerous finance companies’ activities and found statistically significant disparities disfavoring protected classes. She stated that there were “numerous” companies whose data showed statistically significant pricing disparities of 10 basis points or more and “several” finance companies with disparities of over 20 or 30 basis points.
  • Much of the discussion focused on potential alternatives to the current dealer markup system.  The DOJ discussed allowing discretion within limitations and with documentation of the reasons for exercising that discretion (e.g., competition). The CFPB focus was exclusively on non-discretionary “alternative compensation mechanisms”, specifically flat fees per loan, compensation based on a percentage of the amount financed, or some variation of those. The CFPB said it invited finance companies to suggest other non-discretionary alternatives. Regardless of specific compensation model, Ms. Ficklin stated that in general, nondiscretionary alternatives can (i) be revenue neutral for dealers, (ii) reduce fair lending risk, (iii) be less costly than compliance management systems enhancements, and (iv) limit friction between dealers on the one hand and the CFPB on the other.
  • There was significant debate over whether flat fee arrangements, or other potential compensation mechanisms, actually eliminate or reduce the potential for disparate impact in auto lending. There was also criticism of the CFPB’s failure to empirically test whether these “fixes” would result in other unintended consequences.  Industry stakeholders asserted that such arrangements fail to mitigate fair lending risk market-wide while at the same time potentially increase the cost of credit and constrain credit availability. Industry stakeholders also questioned the validity of the large dollar figures of alleged consumer harm caused by dealer markups.  When assessing any particular model, the CFPB’s Eric Reusch explained, finance companies should determine whether (i) it mitigates fair lending risk, (ii) creates any new risk or potential for additional harm, and (iii) it is economically sustainable, with sustainability viewed through the lens of consumers, finance companies, and dealers.
  • Numerous stakeholders urged the CFPB to release more information about its proxy methodology and statistical analysis, citing the Bureau’s stated dedication to transparency and even referencing its Data Quality Act guidelines.  The DOJ described its commitment to “kicking the tires” on its statistical analyses and allowing institutions to do the same.  The CFPB referenced its recent public disclosure of its proxy methodology, noting that this was the methodology the CFPB intended to apply to all lending outside of mortgage.
  • Steven Rosenbaum (DOJ) and Donna Murphy (OCC) pointedly went beyond the stated scope of the forum to highlight potential SCRA compliance risks associated with indirect auto lending.

Additional detail from each panel follows. Read more…

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Senators Challenge CFPB On Indirect Auto Finance Guidance

On October 30, a bipartisan group of 22 Senators sent a letter to the CFPB raising concerns about CFPB guidance affecting the indirect auto financing market and auto dealers’ ability to negotiate retail margins with consumers. The guidance at issue, contained within CFPB Bulletin 2013-02, advised bank and nonbank indirect auto financial institutions about compliance with federal fair lending requirements in connection with the practice by which auto dealers “mark up” the financial institution’s risk-based buy rate and receive compensation based on the increased interest revenues.

In August, the CFPB responded to a similar inquiry from House members. The Senate letter asserts that the CFPB still has not explained a basis for alleging that discrimination under a “disparate impact” theory of liability exists in the indirect auto financing market.  Nor, the letter continues, has the CFPB released the statistical methodology it uses to evaluate disparate impact in an indirect auto lender’s portfolio. Read more…

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DOJ Announces Settlement of Auto Lending Discrimination Suit

On September 6, the DOJ announced the resolution of a long-running lawsuit against an auto dealer and a bank that financed many of the dealer’s loans, in which the government alleged that the dealer and the bank violated ECOA by charging non-Asian customers higher interest rate markups than other customers over a three-year period. The bank entered into a partial consent decree in 2009 and agreed to pay a total of $410,000 to non-Asian borrowers to resolve the allegations against it. The dealer chose to litigate and obtained a dismissal in trial court; that order was reversed last year by the Ninth Circuit. The dealer agreed to a consent decree  with the DOJ on September 4 that fully resolved all claims against it. The dealer, which is now out of business, specifically denied the government’s allegations and the decree made clear the outcome was a “compromise of disputed allegations.” Under the terms of the decree, the dealer will pay up to a total of $125,000 to non-Asian customers who were charged higher dealer interest rate markups. If the dealer or its principal shareholder re-enter the business of automobile lending within the two year duration of the consent decree, it will be required to implement clear guidelines for setting dealer markup and pricing, in compliance with ECOA, and establish fair lending training for its employees and officers.

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