With the Federal Trade Commission gearing up for a potential survey of consumers who recently bought a vehicle and financed that purchase through a dealer, the American Financial Services Association and the Consumer Bankers Association recently submitted a letter to the agency asking seven specific questions about what the regulator plans to do.
Stemming from concerns that there may be an element of bias in the survey that the FTC is proposing, AFSA shared the document the organization along with the CBA delivered to the regulator in its latest edition of Newsbriefs. AFSA executive vice president Bill Himpler and CBA regulatory counsel Kate Larson authored the letter that touched on what the organizations described as “the importance of objectivity” as well as “separating research and enforcement.”
Both AFSA and the CBA are hoping the FTC can answer these questions before proceeding:
1. What is the reason for this qualitative research project at this time?
2. Are additional phases of this project contemplated, and if so, what and when?
3. What is the relationship between this presumably preliminary part of the project and future phases?
4. What specific questions or issues will be investigated at each stage of the project?
5. What is the relationship of questions asked to documents to be collected? If, somehow, consumers’ responses and documents are to be related to some sort of enforcement regime, how will there be confidence that the experiences are accurately remembered and correct?
6. What is the purpose of purported diversity in the sample? There are enough proposed different dimensions to the proposed survey of forty or eighty individuals (credit score, race, sex) that there will be very little data for comparisons among subgroups (five or 10 individuals, depending on number of interviews, in each of eight subgroups). Under the circumstances, how will the diversity be useful to the research?
7. How are results of this project to be distributed and to whom?
Himpler and Larson closed the letter by writing, “We are not concerned about estimates, or methodology in making estimates, of ‘burden hours,’ as required by the Paperwork Reduction Act since the survey is voluntary (and, presumably, paid). We are much more concerned about the real burden on honest and law-abiding automobile dealerships, financing sources, and personnel if this project is not undertaken in an objective manner.”
The Federal Trade Commission recently rolled out a new resource catering to Hispanics in an effort to curtail what the regulator believes are potential pitfalls in the vehicle purchasing and financing process.
Officials highlighted their newest Spanish-language fotonovela — a small pamphlet similar to a comic-book format — is designed to explain how consumers can avoid vehicle-buying trouble.
“The fotonovela tells a story of what happens when a family buys a minivan with dealer financing, only to be told later by the dealer that the financing fell through and that, to keep the car, they have to accept a new, more expensive deal,” the FTC said about the material, titled, Manuel esquiva un lío al comprar un carro.
“Manuel esquiva un lío al comprar un carro is part of the FTC’s initiative to raise awareness about scams targeting the Latino community,” the regulator went on to say.
The material can be downloaded here.
There could be new curves for dealers to navigate this year on the regulatory road, a path that can sometimes wind and change course with little notice.
Some of those twists in 2016, says Randy Henrick of Dealertrack Technologies, may involve ramped up regulation of dealership aftermarket products, continued focus on deceptive advertising, and increased pressure from state attorneys general — a group dealers are more likely to hear from than federal agencies.
During a webinar this week, Henrick outlined regulatory enforcement by various agencies, looking back on their activities from the past year while also forecasting what may be on their respective radars this year.
About 20 minutes into the webinar — after recapping the 2015 actions from a couple of agencies and giving dealers some compliance tips — Henrick turned to what he called the “good news portion of our program.”
Believe it or not, that news was about the Consumer Financial Protection Bureau.
“We are winning the war on indirect auto dealer disparate impact credit discrimination, and rate participation is not going to go away,” Henrick said. “I’ve been saying that for two years, and it’s true.”
The CFPB, he said, had a rough 2015. And the start to 2016 wasn’t much better.
In fact, on the day of the webinar (Jan. 20), the U.S. House of Representatives reported there were CFPB documents indicating that number of people in protected classes were overestimated in a 2014 settlement the bureau made with Ally Financial, Henrick said.
He also referenced H.R. 1737 — the Reforming CFPB Indirect Auto Financing Guidance Act — that was passed by the House of Representatives in November.
“The House of Representatives voted on a bipartisan basis, 332-96 — when have they ever voted in that number before? — to repeal that 2013 auto finance guidance that claimed dealer rate participation was credit discrimination,” he said.
“I am told they have approximately 60 votes in the Senate, and that bill is going to be introduced this coming week,” Henrick said, referring to the final week of January. “It’ll get passed in the Senate; it’ll go to President Obama’s desk. He’ll probably veto it, but it sends a message to the CFPB.”
He also pointed out that the CFPB “backed down from the 2013 guidance” in both of its consent decrees from 2015. The guidance, Henrick explained, had said flat fees were the only way to halt credit discrimination.
“Both of those consent decrees allowed for dealer rate participation,” he said. “Now, they’ve limited it to 125 basis points on contracts up to 60 months, and 100 basis points on longer contracts. Now the door is open; it doesn’t have to be just flat.”
The CFPB has also “backed down” on not allowing for a legitimate business justification for lowering a rate, Henrick said. This lets dealers go below a finance company’s buy rate for competitive reasons.
However, bear this in mind: as of this past summer, the CFPB gained regulatory oversight of 34 finance companies, where previously their oversight was only banks with assets of more than $10 billion, Henrick said.
“So, they’re going to go after these finance companies. These finance companies are going to play along like the banks did, even though they know this is all nonsense,” he said. “And you’re going to be hearing from these finance companies wanting audits, wanting information.”
Additionally, the CFPB said in 2015 that it planned on issuing a rule that would ban waivers of class actions in the arbitration clauses of vehicle installment contracts.
“They are going to issue rules in early 2016 under the Administrative Procedure Act that comments on the rules. The final rule will get put out some time in 2017,” Henrick said.
Though he acknowledges this would be “down the turnpike a little,” Henrick said this move is on the way and would be a “major blow” to not have waivers of class action in arbitration clauses.
What’s next for CFPB?
Well, given the profit dealers can make from aftermarket products, Henrick said, that is likely the bureau’s next target.
The CFPB will likely “try to impute bad contact by dealers in selling aftermarket products (from) lenders and try the disparate impact theory that way,” he said. “Try and get you on an aftermarket product
“They’ve already done some of this in other consumer products,” Henrick said. “Here’s the ones they particularly don’t like: credit repair, identity protection, payment packing of credit insurance and service contracts. These are the ones they’ve most targeted.”
Additional predictions from Henrick were:
- Look for doc fee litigation to increase this year in states without established doc fee limits.
- The CFPB is likely to up its game on reporting to credit bureaus and debt collection. Even though many dealers may not work in those areas, they are likely to be “hot areas” for the CFPB and FTC, he said.
- FTC will continue to go after deceptive advertising.
- Watch out for hackers and similar criminal entities that are likely to target dealers to get consumer data. “Data security has never been a bigger problem … this would be a good time to look at your data security program.”
- CFPB will likely tone down its efforts to remedy disparate impact. However, it will turn to aftermarket products and unfair/deceptive sales.
- State attorneys will target advertising shortfalls on both a federal and state level, with the dollar figures they pursue only increasing.
Dealertrack Technologies said on Wednesday that the 2016 edition of the Dealertrack Compliance Guide is now available in print and online! For 11 years, Dealertrack has been the industry’s single best source of compliance guidance written for dealers and is free.
The company highlighted the seven attributes that are new to the 2016 version, including:
— New federal laws and regulations in effect for 2016
— A focus on new federal laws and regulations related to dealer advertising
— Advice regarding actions by agencies such as the Consumer Financial Protection Bureau, Federal Trade Commission, legislatures and courts
— Recommended practices for data safeguards and identity theft protection
— How to implement a compliance management system at your dealership
— New links to valuable online F&I compliance resources
— Immediate access to the new online version of the guide
“It is the only guide available in the market that combines current regulatory facts with trends and practical guidance that can be applied with little effort,” Dealertrack said.
“Dealers can use this guide on daily basis to protect their dealership from audits, fines and consumer fraud,” the company continued. “It also serves as a great reference for lenders, aftermarket providers, agents and more.”
The guide can be acquired online here.
The Federal Trade Commission is ramping up its efforts to regulate dealerships on a pair of fronts to begin 2016.
Remember what the FTC dubbed Operation Steer Clear? It was the commission’s action that punished 10 dealerships back in 2014 as part of the regulators’ nationwide sweep focusing on misleading advertising associated with the selling, financing, and leasing of vehicles.
To clarify exactly what the FTC deems to be wrongdoings by dealers and retailers in general, the agency recently issued an enforcement policy statement explaining how established consumer protection principles apply to different advertising formats, including “native” ads that look like surrounding non-advertising content.
In the Enforcement Policy Statement on Deceptively Formatted Advertisements, the FTC explained the general principles the regulators considers in determining whether any particular ad format is deceptive and violates the FTC Act.
The policy statement affirms the long-standing consumer protection principle that advertisements and promotional messages that promote the benefits and attributes of goods and services should be identifiable as advertising to consumers.
“The commission has long held the view that advertising and promotional messages that are not identifiable as advertising to consumers are deceptive if they mislead consumers into believing they are independent, impartial, or not from the sponsoring advertiser itself,” FTC officials said in the statement.
“Knowing the source of an advertisement or promotional message typically affects the weight or credibility consumers give it. Such knowledge also may influence whether and to what extent consumers choose to interact with content containing a promotional message,” they continued.
The entire statement from the FTC can be downloaded here.
FTC seeks public comment on proposed survey of consumers regarding their experiences buying & financing
In other regulatory news, the FTC is seeking public comment on a proposed qualitative survey of consumers to learn about their experiences in buying and financing vehicles at dealerships.
The regulator explained the comments will be considered before the FTC seeks clearance for the survey from the Office of Management and Budget, in compliance with the Paperwork Reduction Act.
“The FTC is committed to protecting consumers in automobile-related transactions,” officials said.
Since 2011, the agency has brought more than 25 cases in this area, including a law enforcement sweep of 10 actions against dealers for deceptive advertising, and a federal-state effort that yielded more than 200 actions for fraud, deception, and other illegal practices.
The regulator explained the survey is designed to assist the FTC by providing useful insights into consumer understanding of the purchasing and financing process at the dealership.
The FTC invites comments on whether the proposed consumer survey, which will include
— Consumer interviews and receipt of consumers’ purchase and finance documents, is necessary and useful
— The accuracy of estimates of the burden on consumers to be surveyed
— Ways to enhance the quality of the information to be collected
— Ways to minimize the burden of collecting information
More information about the FTC’s survey plans can be found here.
The Federal Trade Commission indicated this week that two Ohio dealers have agreed to settle charges from the agency that they deceived consumers with advertisements that touted low monthly vehicle lease payments but failed to disclose key terms of the offers.
The FTC’s administrative complaint alleged that Progressive Chevrolet Co., and Progressive Motors, of Masillon, Ohio, failed to properly disclose terms such as the total amount due at signing, whether a security deposit was required, and credit score requirements.
According to the agency, typical consumers could not qualify for the advertised terms. The dealerships are charged with violating the FTC Act and the Consumer Leasing Act and Regulation M.
Progressive Chevrolet Co., also does business as Progressive Auto Group, Progressive Jeep, and Progressive Chrysler, meanwhile Progressive Motors also does business as Progressive Ram and Progressive Chrysler Jeep Dodge.
The proposed settlement order, which will remain in effect for 20 years, prohibits the respondents from advertising misleading lease or financing terms. It also requires them to clearly and conspicuously disclose all qualifications or restrictions on a consumer’s ability to obtain the advertised terms. If the ad states that consumers must meet a certain credit score in order to qualify for the offer and a majority of consumers are not likely to meet the stated credit score, the ad must clearly and conspicuously disclose that fact.
The FTC added that the dealerships are also barred from advertising a payment amount, or that any or no initial payment is required, without clearly disclosing that the transaction is a lease, the total amount due at consummation or delivery, the number of payments and their amounts and timing, whether or not a security deposit is required, and that there may be an extra charge at the end of the lease where the consumer’s liability (if any) is based on the difference between the vehicle’s residual value and its value at the end of the lease.
The FTC vote to issue an administrative complaint and accept the proposed consent agreement was 4-0. The FTC will publish a description of the consent agreement package in the Federal Register shortly. The agreement will be subject to public comment for 30 days, continuing through Dec. 28, after which the commission will decide whether to issue the order on a final basis.
Dealertrack Technologies associate counsel for regulatory and compliance Randy Henrick will be hosting another free webinar to discuss updated rules and the latest enforcement actions brought against dealers by the Federal Trade Commission.
During the session titled, “Dealer Advertising: New Media, New Rules, New Enforcement,” Henrick will also share best practices associated with dealer advertising to help safeguard stores, focusing on:
• The current regulatory environment for dealers
• What does the FTC consider deceptive advertising?
• What specific advertising is the FTC targeting both in traditional media and online?
• What are the standards for clear and conspicuous advertising?
• Best practices for advertising to protect your business from penalties and violations.
The free hour-long webinar that’s set to include a Q&A session is scheduled for 2 p.m. ET on Nov. 19.
Free registration for the session can be complete here.
Consumer Portfolio Services chairman and chief executive officer Brad Bradley explained why the company’s noticeable rise in delinquencies stems from adjustments in collection practices that federal regulators forced the company to make.
To recap, back in May of last year, CPS reached a $5.5 million settlement with the Federal Trade Commission to squash charges that the subprime auto finance company used “illegal tactics” to service and collect consumers’ loans, including collecting money consumers did not owe, harassing consumers and third parties, and disclosing debts to friends, family and employers.
During the company’s quarterly conference call earlier this week, Bradley indicated that it took CPS about six months to modify its collections practices, acknowledging that some personnel in this department have been with the company for some so “trying to get them to learn and do it another way is a long process.”
As a result, CPS reported that its third quarter delinquencies greater than 30 days (including repossession inventory) jumped from 6.66 percent to 8.81 percent. The year-over-year movement triggered a series of questions from investment analysts who wanted to know how that metric was going to impact CPS’ defaults and recovery rates, which also softened year-over-year from 44.6 percent to 40.0 percent.
To quell concern, Bradley spelled out exactly how the collection process unfolds at CPS nowadays.
“Back in the day, you could call a customer up and say, ‘Hey, you are 30 days down or one payment down or two payments down. You need to pay me today or we are going to repossess your car,’” Bradley said. “The regulatory folks didn’t like us saying that to them. You don’t get to say that until they are about 90 days down, three payments. And shockingly when you say, then it works.”
Bradley indicated federal regulators described previous practices when a borrower was behind on payments as “threatening.” CPS has been forced to ease back on the demands for immediate payment but collectors still remain firm when the account hits 90 days past due.
“We may not particularly agree with the term threatening, but at least then you push (delinquent customers) to say, ‘Hey, ‘You need to pay us today or you’re in serious risk of losing your car.’ Then a lot of people pay,” Bradley said. “To the extent you say, ‘Hey, it’s really important you pay, and let’s work something out,’ shockingly they still pay, just takes an extra two months. That’s really fundamentally the exact difference of what we are doing.
“A lot of the way collections is driven in many companies including ours, is you want the collector to collect the payment today. You want them to get the customer to send something today,” he continued. “In the new world, that isn’t really the way to do it. So it’s taking us a dramatic amount of time to convince our collectors not to try and get them pay today.
“The customer says, ‘Hey, I can probably pay you next week.’ That wasn’t good enough in the old dynamic,” Bradley went on to say. “Eventually they do because at the end of the road, you got to tell him, you are in danger of losing your car and that’s when they pay.”
But analysts still wondered if CPS’ portfolio would deteriorate with delinquencies on the rise and recovery rates softening because of company officials conceding that rising off-lease volume is impacting what they can get back in the repossession lanes on the wholesale market. Bradley is confident funds eventually will flow into the company as payments; they might be just delayed.
“In the regulatory environment, you don’t push anymore,” Bradley said. “You give them the time not to string you along, but take some more time.
“There’s two aspects,” he continued. “One is the manner in which you have to address the customers, and two is the dynamic of how the collection arms work. The collection arms used to work to get the money in today, period. And now that’s not true.
“It’s a simple explanation at some level. It is a lot tougher to make it all work,” Bradley added.
Q3 financial report
CPS reported that its Q3 earnings came in at $8.8 million, or $0.28 per diluted share. Those figures are higher than a year ago when net income came in at $7.8 million, or $0.24 per diluted share. The improvement represented a 16.7-percent increase in diluted earnings per share.
The company generated a 22-percent rise in Q3 revenue, watching it climb from $77.1 million to $94.0 million. Meanwhile, CPS noted total operating expenses for the third quarter increased $15.1 million or 23.9 percent to $78.3 million
During the third quarter, CPS purchased $287.5 million of new contracts, an increase of 2.9 percent, compared to $279.3 million during the third quarter of last year. The company's managed receivables totaled $1.941 billion as of Sept. 30, an increase from $1.822 billion as of June 30 and $1.519 billion as of the end of last year’s third quarter.
“We are pleased with our operating results for the third quarter of 2015,” Bradley said. “Our managed portfolio is now in excess of $1.9 billion and we achieved our 16th consecutive quarter of increasing quarterly earnings.”
A West Virginia franchised dealer group again found itself involved in a regulatory matter with the Federal Trade Commission.
Ramey Motors recently agreed to pay an $80,000 civil penalty to settle a lawsuit the FTC brought last year.
The FTC recapped that it charged Ramey Motors with violating the terms of a 2012 consent order with the regulator that barred it from deceptively advertising the cost of buying or leasing vehicles
The civil penalty settlement resolves charges that Ramey Motors’ ads violated the consent order by concealing important terms of sale and lease offers, such as a required down payment, and failing to make credit disclosures clearly and conspicuously, as required by federal law.
The civil penalty order also prohibits Ramey Motors from violating the 2012 order. That matter included the FTC finding fault with claims such as “Ramey will pay off your trade no matter what you owe … even if you’re upside down, Ramey will pay off your trade.”
The commission vote authorizing the staff to file the stipulated civil penalty order was 5-0. The order was entered by the U.S. District Court for the Southern District of West Virginia, Bluefield Division, on Sept. 9.
The Federal Trade Commission recently reported two franchised dealers in Las Vegas agreed to settle charges that they used deceptive ads to promote the sale or leasing of their vehicles, including advertising heavily discounted prices that were not generally available to consumers.
According to the complaints, TC Dealership, doing business as Planet Hyundai, and JS Autoworld, doing business as Planet Nissan, violated the FTC Act by running ads that misrepresented the purchase price or leasing offers of their vehicles and the amount due at signing.
Officials pointed out their ads also violated the Consumer Leasing Act (CLA) and the Truth in Lending Act (TILA) by failing to disclose required lease terms and other credit information.
In promotions by Planet Hyundai for example, the FTC charged that the dealership misled consumers by prominently advertising a vehicle price for “$0 DOWN AVAILABLE”, and then in fine print noted that consumers must turn in a vehicle with a trade-in value of at least $2,500.
FTC officials noted the dealership also failed to disclose other information in its ads such as whether or not a security deposit was required.
Among the deceptive ads by Planet Nissan, the regulator said there were prominent offers for “PURCHASE! NOT A LEASE!” when in fact, many of the offers were for leases. Ads by the dealership also failed to disclose the amount of a down payment required, and the terms of repayment.
As part of the proposed consent orders, the dealerships are prohibited from misrepresenting the cost to purchase or lease a vehicle and are required to comply with CLA and Regulation M and TILA and Regulation Z.
The FTC vote to issue the administrative complaints and accept the proposed consent orders were 5-0. The agreements are subject to public comment for 30 days, continuing through July 29 after which the commission will decide whether to make the proposed consent orders final.
