Insights

Today's Trends in Credit Regulation

Impressions from FTC’s Second Roundtable on Consumer Protection Issues in Motor Vehicle Sales, Leasing, and Financing
By Thomas B. Hudson

The Federal Trade Commission’s second roundtable on consumer protection issues in motor vehicle sales, leasing, and financing was held on August 2-3, 2011, in San Antonio, Texas. As in Detroit, where the first roundtable was held, a good crowd showed up. The audience included finance company representatives, class action lawyers, consumer advocates, academics, state and federal regulators, and lawyers, like us, who represent the industry.

In its press release issued before the event, the FTC announced that the second roundtable, intended to gather information on consumers’ experiences in the sale and financing of motor vehicles at dealerships, would cover topics related to military consumers’ experiences in buying and financing motor vehicles, the role of financial literacy in consumers’ understanding of that process, and fair lending issues. The FTC, as it did before the Detroit roundtable in April, characterized the event as part of a “listening tour.” In order to “listen,” the FTC divided the day into discussions by nine panels, each addressing a different subject. The panels and panelists are shown beginning on page 5. Below, I’ll summarize what I consider to be the most noteworthy points made by each panel.

Panel 1, titled “Military Consumers and the Auto Sales and Financing Process,” started by addressing the military’s authority to declare businesses that take advantage of servicemembers “off limits.” That power, wielded by the Armed Forces Disciplinary Control Board, is one, according to the military panelists, that is cumbersome to invoke and not used frequently.

Next, the panel discussed education of servicemembers, noting that, in some ways, servicemembers are in better shape than others to learn how the buying and financing process works because the military branches provide some level of financial education and servicemembers have access to those who can advise them.

The military panelists then identified a common problem that servicemembers face – lienholders won’t let cars go overseas, leading to voluntary repossessions. The panelists also noted a related problem – warranties and service contracts provided by some dealers sometimes cannot be enforced or honored overseas or out of state.

The next topic dealt with differences between civilian and military transactions. Specific questions dealt with the percentage of servicemember buyers who arrange their own financing, the degree to which servicemembers negotiate financing with the dealer, and whether menu presentations are conducted differently with servicemembers. The conclusion seemed to be that there were few such differences.

Holly Petraeus then raised the issue of dealer markups of finance charge rates. An industry panelist responded that there are expenses associated with the F&I process.

Panel 2, titled “The Online Auto Process for Military and Other Consumers,” addressed the online vehicle sales process.

After describing his dealership’s online process, Steve Hall noted that all consumers are seeking more control over the buying process and that the Internet provides important tools to increase that control. Consumer advocate Thomas Domonoske drew a distinction between information and advertising, and noted that real-time price comparisons are not possible on the Internet unless every dealer sells his vehicles at the advertised price. He asserted that while consumers can get a lot of information online, they can’t do comparison shopping online. Domonoske complained that some “finance” sites are really dealer lead sites and that some dealers advertise cars they don’t have. Finally, he observed that jurisdictional issues arise frequently in connection with transactions involving servicemembers when, for instance, a servicemember based in State A buys a car in State B and then moves to State C.

Jeremy Anwyl pointed out that consumers can negotiate online. He asserted that the tools are available but that few consumers avail themselves of them, in part because the buying public is stratified in terms of Internet savvy, Internet use varies by the consumer’s level of Internet sophistication, and the demographics of those using the Internet have worked their way toward the mainstream. Dwain Alexander voiced the opinion that education of servicemembers is important, but noted that he didn’t want the seller as the educator. He also noted that servicemembers are young, and while they use the Internet for social networking, they tend not to use Internet tools.

Hall observed that consumers tend to overpay with their wallets or overpay with their time. Consumers can research the dealer, the dealer’s website, vehicle photos, history reports, and financing availability over the Internet. The more information the consumer can get online, the more transparent the dealership is likely to be. Consumers arrive at the dealership knowing what competitive rates are and about extended warranties, GAP, and other products. Today’s online consumers, he said, are “everyday” consumers.

Panel 3, titled “Military Consumers, Sales Representations, and Financing Process Issues,” started with a discussion of how military transience affects a servicemember’s ability to buy and finance a vehicle. Michael Archer pointed out that younger servicemembers move more frequently early in their careers.
Alexander noted that the most vulnerable time for servicemembers is during the first tour. Car dealers, he said, say junior people don’t “push back.” Industry lawyer Shawn Mercer observed that servicemembers decide when they will buy cars and are aware that they are subject to transfer. He referred to the “20-week Rule,” evidently a prohibition against buying vehicles during the first 20 weeks of enlistment.

The discussion then turned to bird dog fees. The consumer advocates offered anecdotes about outrageous bird dog fee activity and outrageously high bird dog fees but, as usual, were unable to provide data showing that bird dog fee abuses were commonplace. Terry O’Loughlin pointed out that bird dog fees are illegal in many states, that during his tenure with the Florida AG’s office, bird dog fee issues were rare, and that when they occurred, bird dog fees usually involved amounts of $50 to $150. Mercer noted that bird dog fees are common in a lot of industries and that paying such fees is a widespread practice. The practice in the auto retailing business, though, can create licensing issues. Alexander then described the military’s “internal” bird dog fee problem that arises when servicemembers are steered to dealers by other servicemembers (who are sometimes retired servicemembers) and sometimes by their superiors, who are paid to do the steering. The “victims,” he said, are often reluctant to “squeal” on those who have received bird dog fees. Finally, he noted, placing a dealer off limits is sometimes not effective. When Mercer asked why the military doesn’t simply stop its internal bird dog problem, Archer complained that he does not have investigators, but has to wait for complaints. Archer identified procedural problems, as well, saying that he first has to send a warning letter and then has to wait for more complaints. In addition, the Control Board meets quarterly, so it can’t act quickly, and once a dealer agrees to stop doing bad things, the Board has to let the dealer off the blacklist.

The next topic was the practice of “spot delivery” (the industry term) or “yo-yo financing” (the consumer advocates’ term). This is one where the opposing sides regularly talk past one another, with the consumer advocates pointing out abuses by dealers in the spot delivery process and refusing to acknowledge that spot deliveries can be and are done fairly and ethically. Mercer described a spot delivery as the dealer allowing a buyer to leave the dealership with a car without financing in place. He asserted that all deals are conditional and that problems that result in financing difficulties are often created by the consumer (e.g., information provided by the consumer is wrong). Sometimes the incorrect information is identified by follow-up interviews by the finance company considering buying the consumer’s credit contract. Mercer noted that spot deliveries vary by the way they are documented and said that he doesn’t see spot deliveries as being a pervasive problem. When a deal falls through, the customer is within his or her rights to walk away, and we usually see that the price of the car goes down as a means of permitting the dealer to save the deal.

Domonoske then ranted for a few minutes but, in the process, made some valid points. He focused on the state of mind of the buyer as he or she leaves the dealership, claiming that the dealer seeks to mislead the buyer as to the possibility that the transaction might not be final. Domonoske’s remarks underscored the precautions that ethical dealers take to carefully disclose to the customer the fact that financing is not yet in place. Domonoske took the position that there is no reason for a spot delivery when the buyer is in the military.

Alexander asserted that some dealers make a customer sign a promissory note when a car is spot delivered, while others may charge fees when the deal goes south. He did not admit that these practices are already illegal in many states, nor did he offer anything to suggest such practices are prevalent. O’Loughlin opined that he does not see dealers frequently engaging in abusive spot deliveries and that nearly all deals go through as written. Most buyers, he said, know when a deal is contingent, and most dealers don’t want to see the customer have to return to the dealership when a deal falls through. Alexander then described a successful Norfolk-area program put together by the Better Business Bureau and the Virginia Independent Auto Dealers Association to combat dealer abuses, including price gouging and yo-yo sales.

The panel then turned to negative equity and add-on services and products, rehashing the same ground covered in the Detroit roundtable. Again, the consumer advocates railed about abuses using anecdotes, and the industry participants responded that such abuses already violate existing laws.

Panel 4, titled “Military Consumers, Vehicle Title Problems, and Repossessions,” was dullsville. We heard more anecdotes about consumers with title problems, often under circumstances in which the dealer had gone bankrupt. John Van Alst trotted out his laughingly ridiculous National Consumer Law Center “study,” “Repo Madness,” arguing that the violence that occurs in connection with repossessions justifies doing away with self-help repossession by vehicle creditors. He seemed impervious to the observation that his own “study” illustrated that such episodes of violence are rarer than hen’s teeth. Keith Whann observed that current law makes it illegal to breach the peace in the process of repossession.

Van Alst then criticized starter interrupt devices, claiming that a car could be made inoperable under dangerous circumstances. He then noted that self-help repossession is used as a threat by creditors. (Well, yeah!)

Duller than even Panel 4, Panel 5 was titled “Financial Literacy and Capability for Military Consumers.” Pam McClelland started the discussion by bemoaning the fact that there isn’t enough time to teach young servicemembers everything that needs to be taught. She stated that the military does have some teaching tools to help servicemembers learn about financing and gave, as examples, gaming and a cell phone application that provides five questions that a servicemember should ask at a dealership when buying and financing a car.

Panel 6, titled “Special Programs to Enhance Consumers’ Financial Literacy,” consisted of Susie Irvine promoting the American Financial Services Association’s MoneySkill program and its excellent consumer education booklet “Understanding Vehicle Finance.” Ever the constructive one, Van Alst opined that there is very little empirical evidence that such educational materials change consumers’ behavior and that what we need is – you guessed it – more regulation. Greg Zak pointed out that credit problems start at home and that the most effective training is one-on-one.

I couldn’t quite figure out how Panel 7, titled “Financial Literacy and New Approaches for Auto Sales and Financing,” was going to cover anything other than what Panel 6 had covered, so I was surprised when it started with the concept of simplifying credit scores, making them like school grades, so that it would be easier for consumers to understand them. Alan Mosher challenged the concept of education, saying that you could not create an educational program that would get consumers to care. Consumers, he said, care only about payments, down payment, and “Can I get a car?”

Anwyl opined that people are deluded that they know more about buying a car than they really do. He pointed out that describing a car online is the same for all customers, but dealing with credit ability and scores varies from person to person. Edmunds, he said, tries to “tease” consumers into looking at important credit information, but that creates frustration. He ended by stressing that consumers shouldn’t get fixated on any single aspect of the credit transaction. Irvine said that AFSA urges consumers to get their credit scores before they go to the dealership. AFSA also has middle school materials that teach about secured borrowing. When asked about whether consumers should be taught to focus on one specific factor in the credit transaction, she responded that she thought the proper analysis would be a holistic one.

The panelists then batted around a non-starter of an idea – creating an “invoice” for used cars. Mosher pointed out that there is nothing in the used car market that compares with a new car invoice because there are too many variables. There are some guides, but they contain ranges of prices.

We finally hit some fireworks with Panel 8, titled “Fair Lending - Interest Rates, Markups, and Payments.” First, Chris Choate, with some help from Andy Koblenz, explained the various components of the “buy rate.” Koblenz, in answer to a question from the moderator, observed that the ECOA applies to auto finance transactions and that he has not seen any broad-based fair lending problems. Kukla responded that we can’t verify that there is no fair lending problem because we don’t have a database comparable to the HMDA information available in housing finance. The available data is private.

The discussion then turned to the topic of dealer markups. Koblenz noted that retail installment contracts contain a disclosure that the APR may be negotiable with the dealer and that competition constrains dealers’ ability to mark up rates. Kukla responded that, by the time the consumer sees the disclosure, it’s too late to negotiate. Delvin Davis proposed that dealers should be required to disclose the amount of the markup, a proposal that the Federal Reserve Board has twice considered and rejected. This led to a blistering response from Koblenz, who argued that direct lenders don’t have to disclose the components of the rates that they impose.

From there, the discussion parroted the discussion on this topic that we heard in Detroit, with the consumer advocates pushing the same arguments and the industry representatives defending with their now-familiar themes. That is, with one teeny-weeny little exception. When Davis trotted out his “Under the Hood” Center for Responsible Lending “study,” economist Thomas Durkin shredded the work’s methodology, pointing out flaw after flaw and calling it an “advocacy study” that starts with a conclusion and ignores evidence that does not support the conclusion. Many of those listening, me included, had been critical of the so-called study, but no one had skewered it quite so well.

One continuing theme from the consumer advocates was that any discretion on the dealer’s part to increase the buy rate increased the risk of discrimination. If Kukla said that once, he said it a half-dozen times.

Panel 9, titled “Fair Lending - Compliance, Risk, and Liability,” featured Kukla again, with several more admonitions that dealer discretion increases discrimination risk. It also featured a pretty interesting monologue by Stephen Harvey, who held forth on the topic of “who should be liable for fair lending violations.” Harvey described intentional discrimination and disparate impact discrimination, which is difficult to prove, and concluded by saying that the question could not be answered in the abstract.

Jon Seward agreed with much of what Harvey said and, with respect to disparate impact cases, pointed to the limited data available for such cases. Seward said that Justice has current investigations under way. Seward mentioned the argument that dealers don’t discriminate because dealers “only see green.” But where you have discretion, discrimination risk goes up. Dealer turnover is high, and former employees will “rat out” a dealer. Sometimes discrimination patterns can break down to a particular finance officer with, for example, an individual officer regularly charging more to women. Justice has a current investigation of a buy-here, pay-here operation using reverse redlining.

The rest of Panel 9 was largely nonproductive, with two exceptions. The first involved a suggestion that dealers have a written mark-up policy and that they record deviations from that policy and the reasons for the deviations. Harvey retorted that it would be more effective to teach dealership employees the requirements of the ECOA. Harvey also got in the last word about discretionary pricing, stating that doing away with it would be a giant policy change and that there is no data to support such a change.

I haven’t tried in this limited space to report every comment by every panelist and have ignored many panel contributions that I thought failed to lead to anything worth reporting. If you want the blow-by-blow, the transcript and the video of the San Antonio proceedings are available on the FTC’s website (see box on page 4). If that’s the way you decide to go, block out a day and a half for the experience. The Panel List follows.

Panel 1: Military Consumers and the Auto Sales and Financing Process

Moderator: Malini Mithal, Assistant Director, Division of Financial Practices, FTC

Panelists

Mark P. Cross, Co-owner and G.M., Jordan Ford
Keith Whann, General Counsel, National Independent Automobile Dealers Association
Hollister K. “Holly” Petraeus, Director, Office of Servicemember Affairs, CFPB
Michael A. Wood, Chief, Transition Support Services, U.S. Army HQ Installation Mgt Command

Panel 2: The Online Auto Process for Military and Other Consumers

Moderator: Robin Thurston, Attorney, Division of Financial Practices, FTC

Panelists

Dwain Alexander II, Capt., U.S. Navy, Attorney, U.S. Navy Judge Advocate General’s Corps, Navy Legal Service Office – Mid-Atlantic
Thomas D. Domonoske, Of Counsel, Legal Aid Justice Center
Steve Hall, President and Founder, driverselect
Jeremy Anwyl, CEO, Edmunds.com

Panel 3: Military Consumers, Sales Representations, and Financing Process Issues

Moderator: Carole Reynolds, Attorney, Division of Financial Practices, FTC

Panelists

Dwain Alexander II, Capt., U.S. Navy, Attorney, U.S. Navy Judge Advocate General’s Corps, Navy Legal Service Office – Mid-Atlantic
Thomas D. Domonoske, Of Counsel, Legal Aid Justice Center
Shawn D. Mercer, Partner, Bass Sox Mercer
Michael Archer, Director and Attorney, Legal Assistance, USMC Installations East
Terrence J. O’Loughlin, Director of Compliance, Reynolds and Reynolds

Panel 4: Military Consumers, Vehicle Title Problems, and Repossessions

Moderator: Robin Thurston, Attorney, Division of Financial Practices, FTC

Panelists

Machelle Morris, General Counsel, American Lenders Service Co.
John Van Alst, Attorney, National Consumer Law Center
Keith Whann, General Counsel, National Independent Automobile Dealers Association
Rob Rice, Attorney, Texas Dept. of Motor Vehicles
Rosemary Shahan, President, Consumers for Auto Reliability and Safety

Panel 5: Financial Literacy and Capability for Military Consumers

Moderator: Carole Reynolds, Attorney, Division of Financial Practices, FTC

Panelists

Pam McClelland, Financial Education Specialist, Office of Servicemember Affairs, CFPB
David M. “Tanker” Snyder, Executive Director, Tampa New Auto Dealers Association
Michael A. Wood, Chief, Transition Support Services, U.S. Army Headquarters, Installation Management Command
Alberto Mesta Jr., Attorney, Texas RioGrande Legal Aid – El Paso

Panel 6: Special Programs to Enhance Consumers’ Financial Literacy

Moderator: Robin Thurston, Attorney, Division of Financial Practices, FTC

Panelists

Susie Irvine, President and CEO, AFSA Education Foundation
John Van Alst, Attorney, National Consumer Law Center
Greg Zak, President, Community Auto Finance Association, President, Horizon Automotive, Ltd.
Jerry Jackson, Personal Financial Management Program Manager, Lackland Air Force Base

Panel 7: Financial Literacy and New Approaches for Auto Sales and Financing

Moderator: Jim Chen, Attorney, Division of Financial Practices, FTC

Panelists

Jeremy Anwyl, CEO, Edmunds.com
Alberto Mesta Jr., Attorney, Texas RioGrande Legal Aid – El Paso
Alan Mosher, Senior Consultant, Constellation Automotive Solutions
Susie Irvine, President and CEO, AFSA Education Foundation

Panel 8: Fair Lending – Interest Rates, Markups, and Payments

Moderator: Jim Chen, Attorney, Division of Financial Practices, FTC

Panelists

Chris Choate, Executive Vice President & CFO, General Motors Financial Co.
Andrew D. Koblenz, Vice-President and General Counsel, National Automobile Dealers Association
Chris Kukla, Senior Counsel for Government Affairs, Center for Responsible Lending
Delvin Davis, Research Analyst, Center for Responsible Lending
Thomas A. Durkin, Economist

Panel 9: Fair Lending – Compliance, Risk, and Liability

Co-Moderators: Malini Mithal, Assistant Director, Division of Financial Practices, FTC, and Patrice Ficklin, Assistant Director for Fair Lending, CFPB

Panelists

Stephen G. Harvey, Partner, Pepper Hamilton LLP
Damon Lester, President, National Association of Minority Automobile Dealers
Jon Seward, Deputy Chief, Housing and Civil Enforcement Section, Civil Rights Division, U.S. Department of Justice
Chris Kukla, Senior Counsel for Government Affairs, Center for Responsible Lending

Thomas B. Hudson is a partner in the Maryland office of Hudson Cook, LLP. Tom can be reached at 410-865-5411 or by email at thudson@hudco.com.

Article Archive

2022   2021   2020   2019   2018   2017   2016   2015   2014   2013   2012   2011   2010   2009