A Formidable Advocate – and She’s Not Yours

Since August 2009, I’ve served as the Vice Chair of the American Bar Association’s Consumer Financial Services Committee (CFSC). Over 1,200 lawyers belong to this Committee. Several weeks ago, I attended the CFSC winter meeting in Naples, Fla. For three days, I and about 175 other attorneys listened to hours of programming where speakers attempted to explain the impact of the Dodd Frank Act and the Consumer Financial Protection Bureau (CFPB) on industry and consumers.

Speakers and attendees come from all walks of life and include lawyers representing industry, lawyers representing consumers, in-house counsel of banks and finance companies, association and government lawyers, and lawyers representing consumer advocacy organizations. The speakers commented on loss of federal preemption, potential elimination of arbitration provisions from consumer contracts, revisions to and the addition of substantive disclosure requirements, and new powers conferred on state attorneys general to enforce federal laws. The speculations abounded, since no one right now can explain the actual impact of an agency that is not yet staffed and hasn’t issued a regulation.

Although hours and hours of CFPB discussions may not be your cup of tea, I’ve built my work life around consumer finance, so I found the discussions fascinating for lawyers, and a bit disturbing for the industry.

One particular session comes to mind when I refer to disruption in the industry. It was 8:30 a.m. on a Sunday, not a cloud in the sky and 68 degrees (substantially warmer than the climate I left in Maryland). I wasn’t outside enjoying the weather, but was sitting with a bunch of lawyers getting ready for the next presentation. An industry lawyer, a representative from the FTC, and a representative of a large consumer advocacy group joined a panel to discuss the future of federal and state regulation of automobile finance. Each panelist reviewed what they believed to be the potential impact of Dodd Frank, the CFPB and their organization’s role in finding solutions to today’s motor vehicle sales and finance problems.

The industry lawyer—my partner at Hudson Cook, Michael Benoit—emphasized the importance of dealer and finance company compliance with current law, and the need to keep abreast of changes that would invariably come. The FTC representative detailed the FTC’s role in enforcement and indicated that the FTC plans to engage in a number of fact-finding “town hall” type meetings across the United States to determine what “issues” consumers have with dealers.

We all know who shows up to meetings of this type—consumers who have complaints and the media. Two questions: Will the FTC will get balanced information about the actual rights and wrongs within the industry, and will the town hall meeting cause local media frenzies regarding misperceived abuses by dealers and finance companies?

Industry and regulators aside, creditors do have something (or someone) to fear. The panelist serving as the representative of the consumer group is a brilliant attorney, a zealous consumer advocate and a formidable opponent to certain practices within the automobile finance industry. Congress, federal regulators and the future CFPB will likely consider her opinion and the opinion of her organization when looking toward new regulations. On her list of potential “wrongs” needing fixing are spot delivery, negative equity financing and dealer participation.

Consumer advocates, and this one in particular, have a name for spot delivery transactions – they call them “yo-yo” sales. They picture a consumer who is in a position of vulnerability on a string with the dealer holding the other end, yanking the consumer back to the dealership when the dealer can’t find the financing he originally anticipated or the financing he found fell through. Arguing that the practice of spot delivery should be banned, these consumer advocates call on Congress and regulators to severely restrict post-sale changes in financing terms.

Many people these days are “upside down” on their vehicles, owing more on them than they are worth as trade-ins. When traded in, those folks finance the negative equity, potentially resulting in a new vehicle financed at well over 100 percent of its value. Consumer advocates, and this one in particular, would like to limit the loan-to-value ratio in these transactions, thereby limiting the amount of negative equity and additional products that might be financed with a sale of a vehicle.

Finally, consumer advocates, and this one in particular, would like to ban dealer participation, analogizing the difference between the contract rate and the buy rate to yield spread premiums in the mortgage market. In testimony before Congress, this lawyer’s organization, the Center for Responsible Lending (CRL), claimed that “[i]n the mortgage market, we know that perverse market incentives encouraged brokers to steer their clients toward more expensive loans than the borrower would qualify for, because the brokers could increase their own compensation by doing so.” The CRL and other consumer advocacy organizations have made car buyers and house buyers synonymous, even though house buyers hired mortgage brokers to act on their behalf. Conversely, car buyers do not hire dealers to find them a loan; the dealers are the initial creditors on retail installment sale contracts.

Likewise, the consumer advocates believe that consumers don’t understand that car finance rates can be negotiated, despite a disclosure in 12-point italicized bold type that appears in nearly all contracts we review that “the rate is negotiable with the seller” and the “seller may receive a part of the finance charge.” It seems the same consumer advocates believe that dealers should not make a profit on their financing activities.

Regardless of whether you agree or disagree with the consumer advocates, they have a voice—one that is articulate, loud and clear. This voice will be heard and it will serve to change the way car deals are done today, unless dealers work together to defend the industry. By watching legislation and regulations, uniting with your dealer associations and looking to your attorneys to comment on proposed law changes, you can have a voice too.