A year or so ago, as the mortgage mess began to spin seriously out of control, I was asked to do an article on the topic of how the mortgage meltdown would affect the auto finance industry. At that time, before $4-plus gasoline and a steep recession, it seemed like the answer was “not much,” and that’s more or less what I said.
In a later article on the same topic, I got a little closer to the mark, pointing out that because of the emerging credit crisis, it might become a lot tougher for dealers to find banks and sales finance companies willing to buy the retail installment contracts that the dealers were producing.
Still later, I wrote that some of the abuses that were evident in the defaulting consumer mortgages might stir legislators to re-regulate the industry to ban some of the more egregious practices.
Finally, I predicted that if the Democrats gained control of both the executive and the legislative branches of the federal government, we could expect to see legislation aimed at particularly business-friendly parts of the federal code, such as the Federal Arbitration Act.
But I didn’t see this one coming.
Last month, Senator Richard Durbin (D-Ill.) introduced a bill (SB 566) that would create a federal agency to oversee the safety of consumer financial products, including mortgages, credit cards, car loans and other types of credit. That agency would be called the Consumer Credit Safety Commission, which, as envisioned by the bill, would oversee any category of lender that extends credit to borrowers. The bill renews an effort undertaken last year by Senator Durbin and Rep. Bill Delahunt in the House to establish the same Commission with similar legislation in the Senate and House, respectively.
To this point, federal law has generally been directed at regulating the entities that offer credit, rather than credit products themselves. Content to let the states regulate actual substantive limits on credit products, the federal legislators and regulators focused mostly on how creditors disclosed the terms and conditions of those products.
As envisioned by Durbin, the CCSC would focus on whether financial products offered to consumers are “safe.”
The Durbin bill provides for a five-member bipartisan agency that would oversee mortgages, credit cards, auto loans, savings accounts, checking accounts and other consumer credit. The CCSC would “prevent and eliminate practices that lead consumers to incur unreasonable, inappropriate, or excessive debt, and would focus on practices and product features that are abusive, fraudulent, deceptive or predatory.
In addition, the CCSC would collect data on the most harmful products, providing consumers with information to help them avoid “dangerous” financial products.
Specifically, the bill provides that the CCSC’s objectives are to:
- Minimize unreasonable consumer risk associated with buying and using consumer credit. Who could argue with minimizing unreasonable risk? But do we want government telling us what level of risk is reasonable, and what level of risk isn’t reasonable? Will the Feds prohibit the financing of negative equity?
- Prevent and eliminate unfair practices that lead consumers to incur unreasonable, inappropriate, or excessive debt, or make it difficult for consumers to repay existing debt, including practices or product features that are abusive, fraudulent, unfair, deceptive, predatory, anticompetitive or otherwise inconsistent with consumer protection. The first part of this mandate sounds like federal underwriting. The second creates a redundant enforcement mechanism, given that the FTC and most states already prohibit unfair and deceptive acts and practices. And we will have a federal agency that will make it easier for consumers to escape existing debt? Is a 120% LTV “excessive” debt?
- Promote practices that assist and encourage consumers to use credit responsibly, avoid excessive debt and avoid unnecessary or excessive charges derived from or associated with credit products. The bill doesn’t say whose practices it intends to promote – those of consumers or those of creditors, but here again, we’ll have a federal agency determining what is “excessive” debt and “unnecessary or excessive” charges. More federal underwriting? Is a $495 document preparation fee an “excessive” charge?
- Ensure that credit history is maintained, reported and used fairly and accurately. I thought that this is what the Fair Credit Reporting Act did. Will prescreening and “firm offer” mail campaigns constitute “fair” use?
- Maintain strong privacy protections for consumer credit transactions, credit history and other personal information associated with the use of consumer credit. Don’t the Gramm-Leach-Bliley Act and the FTC’s privacy regulations address these concerns?
- Collect, investigate, resolve and inform the public about consumer complaints regarding consumer credit. This would replicate duties of the FTC and state consumer protection agencies.
- Ensure a fair system of consumer dispute resolution in consumer credit. This is poorly-disguised consumer advocate code for eliminating the ability of creditors to use binding arbitration agreements to reduce the risk and costs of class action lawsuits.
- Take such other steps as are reasonable to protect consumers of credit products. This catch-all provides the Commission members with plenty of discretionary room to make mischief.
Just how the consuming public would be protected by the CCSC isn’t spelled out at this early date. Would we have an FDA-type approach, where companies that want to offer financial products have to have them approved by the CCSC? Or would it be a “crash-test” rating system, with the CCSC awarding five stars to the financial products deemed safest and no stars to the ones that would eat a hole in your wallet? The intrusiveness of the CCSC could depend a great deal on the implementation details.
Just what we need. Another federal regulator in Washington to keep all those mean old creditors in line. Time to give a call to your trade associations and crank up those lobbying machines.
Thomas B. Hudson, Esq., (tbhudson@hudco.com) is the author of a new book, Street Legal, and is the editor/author of the CARLAW® F&I Legal Desk Book. The books are available at www.counselorlibrary.com. He is the publisher of Spot Delivery®, a monthly legal newsletter for auto dealers, and the editor-in-chief of CARLAW®, a monthly report of legal developments in all states for the auto finance and leasing industry. He is also a partner in the Hudson Cook, LLP, law firm. Spot Delivery, CARLAW and the books are produced by CounselorLibrary.com, LLC. For information, call 410-865-5411 or visit www.counselorlibrary.com. Copyright CounselorLibrary.com 2008, all rights reserved. Based on an article from Spot Delivery, November 2008.