The Future Direction of the CFPB: Preparing for the Coming Storm

Attorney Rick Hackett is the former assistant director of installment and liquidity lending markets for the Consumer Financial Protection Bureau’s (CFPB) division of research. During his stint there he was considered the bureau’s point man for the auto finance industry. At the fall 2014 P&A Leadership Summit and Industry Summit in Las Vegas, Hackett shed light on the inner workings of the CFPB and gave his predictions of the bureau’s direction for the future. In the last issue of AE we reported Hackett’s thoughts on flats, VSC and ancillary products, and the validity of disparate impact versus disparate treatment. In this issue we bring you Hackett’s advice to dealers and agents for staying out of the regulatory crossfire while still making a profit.

Tools for Compliance

As the retail auto marketplace is increasingly subjected to regulatory requirements, compliance and transparency are quickly becoming foundational parts of vehicle transactions. Keeping up with regulatory demands can be a challenge that comes with costly consequences for dealers if not done correctly. Taking advantage of available monitoring software, instituting a fair lending and compliance program and menu driven selling were among Hackett’s many suggestions for dealerships to stay in the clear. He explained how to be successful while facing challenges head on and the reasons why doing so should be prioritized.

Hackett reported that RouteOne and Dealertrack now have useful software for monitoring mark up that can be accessed through their automation. If executed from the top down, Hackett said using the automation to monitor how and when each individual sales person applies exceptions to the standard mark up can reveal dealership trends. Training can then be provided accordingly. Hackett said the process is not a fig leaf; it gathers reliable data that can be used to prove customers are treated fairly (in the fair lending sense) in every single transaction. The data can be used to rebut any claim that is made because it includes controls and monitoring to ensure it is being fully utilized by dealership sales personnel. Hackett said he has also seen the software used as part of escalation steps.

Hackett described escalation steps as part of the bureau’s process of squeezing finance companies. As a result, finance companies have to create a fair lending compliance program. The first thing the CFPB does if disparate treatment is suspected is to provide notification by mail. Then if it finds historically disparate results coming out of a dealership, the bureau recommends training. Hackett explained that in addition to a fair lending compliance program, there is still a need for “something else.” A monitoring software program could be used to meet that need. Hackett expects this will be the go-to solution for some finance companies.

Including controls and monitoring as additional components in a fair lending compliance program was suggested. Monitoring could be in the form of a welcome call to buyers who had been presented a competing offer as a negotiation tool when they visited the dealership. During the call, questions such as how they enjoyed their sales experience and how they felt about the dealer’s willingness to meet or beat their competing finance offer might be asked. If the consumer’s response indicated they had no idea what the caller was referring to, then dealers would immediately be made aware of a problem. Establishing top down training for this type of program creates documentation Hackett thinks could withstand any lender’s review.

Once every dealer is producing what Hackett referred to as “clean” numbers – numbers justified by the business transaction – he proposed the (hopefully) hypothetical question of lender responsibility in the following scenario:

Dealer “A” is located in a marketplace, which is not very competitive, thus they routinely charge a higher markup. Dealer “B” is in a highly competitive marketplace, so they typically charge a lesser mark up. The customer base for dealership “A” includes minorities, while the customer base for dealership “B” does not. The perfectly legitimate, random results of what is produced due to location and competition could appear as disparate impact in the portfolio. Hackett said if dealers were to really address this type of situation in collaboration with their lenders using the NADA’s program (which calls for a standard mark up for all deals) it would put the bureau to the test.

What Dealers and Agents Can Do

Hackett suggested several ways dealers and agents could guard against future accusations from the CFPB of aiding and abetting, and recklessly providing substantial assistance to unfair and deceptive practices. Hackett said having standard practices in place provides an arguable defense.

Menu driven selling is one means for preventing any appearance of consumer deception. Making it clear to the customer what they are going to pay for products may not be controversial, but Hackett suggested it also may not be common practice in all dealerships. He suggested beginning with the 300 rule – present 100% of the customers with 100% of the products for which they qualify, 100% of the time – and doing it using a menu that shows the payment for the vehicle, the customer’s payment for each product. Consumers can select the products they wish to purchase, and the price of each will be crystal clear.

Another of Hackett’s recommendations is to establish a target range of prices at which ancillary products are offered. He further stated that establishing an acceptable markup ceiling for products is a good idea.

Ultimately, Hackett warned agents and dealers to guard against “selling nothing for something.” He cited an example from industry literature, which looked at whether biweekly payment plans costing $12 per month actually provided any value. “On one side, was the argument that there was clearly value because you pay off the loan more quickly. On the other side was the argument that some products actually don’t pay anything off more quickly; instead, the payment company keeps the money until the end of the month. If I were looking for a biweekly payment plan, I would want to find the former and not the latter, because I wouldn’t want to sell nothing for something.”

He advised considering the suitability of products and taking the time to know customers and their needs. “Educate customers about the value of a product so they aren’t that confused consumer that the CFPB is so concerned about. Consider it as part of why you want to do right by your customer. I don’t think anybody who deals with a 50% down transaction would sell GAP insurance, but I would still train my F&I department not to do that. I tell installment lenders to help people think intelligently about credit insurance. If you have a lot of life insurance, you may not need credit insurance, but for certain people, this is actually a very useful and economically prudent product. When I think about VSCs, for me personally, I can self insure, but a certain number of vehicles, at certain points in time, have expensive repairs out of warranty. If you’d like to spread the cost of those repairs, then a VSC is a smart use of insurance.”

Supervision is Coming

Hackett made a 95% prediction that supervision is coming and is coming soon. He described supervision as a process where the bureau sends teams of examiners to sit with a finance company for weeks or even months to look at everything they do in relation to compliance and federal law. This includes the systemic parts of compliance management, the transaction testing of each individual interaction, and any contracting with consumers, which may implicate a federal consumer financial law. Hackett said everyone wants to know whom this will affect. It will cover both direct and indirect vehicle purchase finance. The key variables are the products that are covered. Hackett pointed out some of the interesting issues resulting from indirect financing: Do you need prior credit approval in the transaction to be part of the counting of transactions? What about spot deliveries? How recently do you need to have added the transaction to your portfolio for it to be a covered vehicle purchase transaction?

Since the vehicle secures an auto loan, Hackett does not foresee auto title lending being affected. Credit unions can also relax. With the exception of two credit unions that have more than ten million dollars in assets, Hackett said credit unions are “protected in their own safe little bubble.”

With leases currently making up more than 20% of delivery vehicles; Hackett says they pose the most interesting question. Hackett pointed out some “funky language” in the Dodd Frank Act, which states a lease is covered “only if it is the functional equivalent of a purchase.” Hackett explained that in his understanding of a closed-end lease, the customer had the right to use the vehicle for a certain number of months and miles, and then they walk away at the end of the lease term. “It’s not the functional equivalent of a purchase. When I worked on drafting the first version of this rule in 2011, that problem is the reason why it didn’t come out in 2011.”

Once you define the transactions, Hackett posed the question of how the size threshold is triggered. “We could be looking at originations or portfolio size on an annual basis. We could be looking at dollars of origination, or people - that’s really counting transactions.” His guesstimate was “a 99% prediction that it’s going to rain on auto lenders” but then softened his prediction with the caveat “it’s a lawyer-won’t–stand-behind-it guesstimate.” He also predicted auto finance companies will soon be included in the top 100-150 originators, probably totaling between 25 and 50 companies. This translates to somewhere around 10,000 transactions a year.

Life at the Bureau

When Hackett started with the CFPB there were 70 people working there. When he left, there were 1200. “That, in and of itself,” said Hackett, “should tell you what it was like to be there – complete chaos.” He likened the experience to trying to learn to fly an airplane while bolting on the wings. “We were figuring out what priorities ought to be for this huge new concept of a federal consumer regulator and then how to go about executing them.” He described the infrastructure as “atrocious” and continuing to get worse.

The bureau offices now span Washington DC, extending north of Massachusetts Avenue (NOMA). Hackett compared the physical expansion of the CFPB to the diaspora – the spreading of the Jews from Israel to locations spanning the globe. “The people in supervision are sitting in an office over Farragut Square; enforcement is near the White House on Pennsylvania Avenue, and everybody else who is supposed to be keeping those people on the right track are halfway across town. On a bad day it’s a 40 minute commute on the Red Line.”

Hackett described his time at the CFPB as constantly “reacting to and preparing for incoming fire from the hill.” To illustrate, he said an Internet search of “CFPB and testimony” would yield more than 300 hits and 15 pages – all testimony about auto finance, whistle blowers, and discrimination against employees at the bureau. “In the Dodd Frank Act, the bureau requires a report on every other page, half of which require congress. So there is a whole lot of time spent by people in cubicles over by NOMA preparing required reports about what really can’t be talked about in public.”

Since Hackett’s time at the CFPB, he stated that five of the six assistant directors in his division have changed. Hackett described four of the new directors as having the ideal background for the job. “They are people who have worked in the industry for a very long time and understand that you have to make some money or you aren’t going to be able to deliver vehicles to American consumers. And that’s not wrong.”

Ideally, treating customers fairly and doing business in an honest, ethical manner should be the goal for all businesses and is the case for most. Despite his concerns and uncertainty of the regulatory environment, Hackett closed on a positive note. “If you think about what the bureau’s story is, it is an additional motivation to do something that we want to do anyway. You have my weather report; now please don’t shoot the weatherman!”