Insights

The National Automotive Finance Association was meeting in Ft. Worth at the end of May, and I had been assigned the honor of “interviewing” Rick Hackett, an assistant director of the Consumer Financial Protection Bureau, in charge of the Bureau’s Installment and Liquidity Lending Markets section. The “interview” wasn’t really an interview – Jack Tracey, the NAF executive director, had solicited questions from NAF’s Board of Directors. My job was simply to put the questions to Rick. In order to make sure that Rick would be able to give his answers some thought, we submitted the questions to him in advance.

In any event, it was going to be a fun assignment. I’ve known Rick for 30 years or so as a lawyer in private practice who represented creditors, and I count him as a friend. I’d seen him in similar situations and knew that he’d be very informative. I was excited.

Then I had a better idea.

Our firm had just acquired a new partner. Joel Winston had been with the Federal Trade Commission for 30-some years and had traded in his regulatory hat for a private practice hat. (See Joel’s article on recent FTC activity regarding data security on page 5). Who better to interview a fellow who had just become a regulator after 30-some years in private practice? Here was a black-hat guy now wearing a white hat and vice-versa (I’ll leave it to you to assign colors to the guys).

That scenario was way too good to miss, so I asked Rick and Joel if they were OK with me bowing out and Joel stepping in. They were, and the result was one of the best and most informative industry sessions I’ve seen at any industry conference in recent years.

Here’s a recap of Joel’s questions and my best recollection of Rick’s answers.

Q1. How did a lawyer who has spent a career representing creditors end up as the top credit cop for installment credit at the Bureau?

A1. After a thanks for the flattery, Rick did his standard government disclaimer that he wasn’t speaking for the Bureau. He then explained that his unit of the Bureau isn’t a “cop,” but is more of an intelligence-gathering group to support the cops and other parts of the Bureau, combined with an outreach function to creditors. The “cops,” he explained, are in the Supervision, Enforcement, and Fair Lending Division. Rick pointed out that at least one of the Bureau’s “cops” was in the audience.

Rick described the SEFL Division’s mission in more detail. The Division, he said, will supervise companies within the CFPB’s jurisdiction and will couple the supervision with enforcement actions when appropriate. The Division has an enforcement office and two other tightly coordinated offices for supervision of large banks and certain non-banks. The Division’s office of fair lending will monitor lending by both large banks and non-bank institutions for prohibited practices. Rick noted that the large bank supervision effort is already underway, with examinations conducted at several institutions. He noted that the Bureau has published a basic exam manual with some product-specific exam guidelines and that more such guidelines are on the way.

Rick then discussed the Bureau’s examination of non-bank institutions in those industries Congress named in the Dodd-Frank Act, particularly payday lending and non-bank mortgage lending. He pointed out that the Bureau has proposed a rule to define additional markets and their “larger participants” who will be subject to supervision. So far, those “additional markets” are consumer reporting agencies and debt collectors – other industries may be added later.

Q2. Tell us where the Bureau is, so far as the process of “staffing up” is concerned? How many staffers? How many of those are lawyers? How much will the Bureau spend this year?

A2. Rick responded that the Bureau’s staff now numbers over 800, against the FY 2012 staffing goal of 1,095. He discussed the areas of the Bureau where staff is being added – bank and non-bank supervision – and described the Bureau’s efforts to hire more personnel. He wasn’t able to pinpoint the number of lawyers at the Bureau, but pointed out that many of the supervisors and some others have legal training but non-legal jobs.

As for budget numbers, Rick referred Joel to the Bureau’s website, which shows that the Bureau spent $102 million in Q1 of FY 2012. Rick said the expenditures were for people, technology, and vendor support for the Bureau’s consumer call center. Rick noted that the Dodd-Frank Act gives the Bureau an “up to” number of 11% of the Federal Reserve System operating budget from 2009, which is a bit more than $500 million. Rick said that the Bureau’s budget justification filed with Congress estimated $329 million for FY 2012.

Q3. Does the Bureau have any sort of priority schedule for addressing various types of credit? Will you focus on housing credit, credit cards, auto credit, military credit, student loans, etc. in any particular order, or should we expect to see the Bureau moving on multiple fronts at the same time?

A3. Rick’s rather lengthy answer to Joel’s multi-faceted question boiled down to “yes” as to the last part of the question. He said that if you take all of the direct mandates in the Dodd-Frank Act together with the grant by Congress of enforcement authority, you could say fairly that Congress told the Bureau to move on multiple fronts in multiple ways.

Q4. Automobile creditors require physical damage coverage to be maintained on the collateral during the life of the credit obligation. What are the Bureau’s acceptable guidelines to allow for the creditor to protect its interest in the vehicle by using creditor-placed insurance when the consumer fails to maintain this requirement?

A4. I suspected that Rick wasn’t going to get into a discussion of such a nitty-gritty question, but he surprised me with the scope of his reply. He noted that the requirements for insurance disclosures in the federal Truth in Lending Act didn’t really address the practice of force-placing insurance, pointed to a new rule in Dodd-Frank on force-placed insurance in the mortgage world, mused that there were, to his knowledge, no specific rules in the “enumerated statutes” that addressed the issue, and noted that he was unaware of any activity by the FTC to deal with these practices through its “unfair and deceptive” authority.

Q5. In an effort to identify consumer credit problems, the Bureau is soliciting consumer complaints. As it collects consumer complaints, what process, if any, will the Bureau use to determine which complaints are valid?

A5. Rick described the Bureau’s consumer response system by saying that the Bureau, upon receiving a consumer complaint, forwards it to the creditor for a response. The creditor then has a given time within which to acknowledge the complaint and then 60 days to close the complaint. When the complaint is resolved, the creditor reports the resolution to the Bureau. He said that the Bureau doesn’t try to judge the validity of the complaint and that when the consumer is satisfied, the Bureau’s participation is over. If the consumer isn’t satisfied, the Bureau then assigns the matter to an investigator, who will begin a dialogue with the creditor. That, he noted, is the current system, which he expects the Bureau will modify as it gains experience with the system.

Q6. Assuming that the aggregate number of valid consumer complaints will constitute some sort of rough numerator, how will the Bureau go about determining the appropriate denominator to go with the numerator to come up with data about the frequency of particular consumer credit problems?

A6. Rick responded that the Bureau’s “numerator” isn’t limited to the complaints it receives but includes the FTC’s Consumer Sentinel – Bureau offices that serve particular constituencies such as service members, students, older Americans, and the underserved – as well as information received from state AGs and other federal agencies.

He then pointed out that the Dodd-Frank Act instructs the Bureau to monitor for risks to consumers using means beyond complaints. Specifically, the Bureau is to gather and compile information from a variety of sources, including examination reports concerning covered persons or service providers, consumer complaints, voluntary surveys and voluntary interviews of consumers, surveys and interviews with covered persons and service providers, and reviews of available databases. He noted that the Bureau will be able to require covered persons and service providers who participate in consumer financial services markets to file with the Bureau reports, or answers in writing to specific questions, that furnish specified information.

Q7. As far as auto finance issues go, has the Bureau engaged in any fact finding, other than receiving consumer complaints, that has identified problem areas? If so, what problem areas are you seeing? If not, how do you intend to go about identifying problems?

A7. Before launching into an answer of this question, Rick pointed out that the auto finance market consists of many parts, from subvented prime financing to buy-here, pay-here, and that consumer experiences in the various parts of the market are different. He said that the Bureau would look at those different markets separately where that makes sense in identifying problems and setting priorities. With that warning, he identified military credit, rate participation, and prohibited discrimination as three areas of likely Bureau interest.

Q8. Consumer advocates have pressed for an “all-in” formula for the determination of finance charges and APRs. Is that a likely approach? If so, will such a change require congressional action?

A8. Rick deftly dodged this question, stating that he personally would want there to be more evidence gathered, chiefly by those who are expert in how consumers perceive and behave, before this issue results in changes in the law.

Q9. Is the Bureau going to give any further guidance on what constitutes an “abusive” practice in the auto finance field, or are you investigating possible enforcement proceedings on this issue in auto finance to do so?

A9. Rick noted that the definition of “abusive” in Dodd-Frank was pretty descriptive, and that the term is used in the context of two other words - “unfair and deceptive” - as to which the FTC has provided a lot of law over time. That being the case, he suggested that it makes sense to look at the development of law under section 5 of the FTC Act. He concluded by noting that the Bureau has not currently given advance guidance that certain practices are abusive but that such guidance might become a more obvious option after the Bureau gains more experience.

Q10. How would you characterize the nature and extent of the Bureau’s sharing of information on auto financing practice complaints with the FTC and state attorneys general? What degree of information and analysis does the Bureau share? Does the Bureau make a recommendation to the FTC or state AGs when sharing complaints on auto financing?

A10. Rick recapped the Dodd-Frank requirement that the Bureau have a close working relationship with the FTC and state AGs on a wide range of issues, including auto finance, and pointed to formal written agreements with some of those entities that govern the sharing of information and the manner of cooperation. He noted that although he had not yet been involved in many conversations with other agencies on auto issues, the conversations he has been involved in resulted in a cooperative exchange of information.

Q11. Who has the primary regulatory enforcement authority for claims involving auto financing abuses of service members, assuming the dealer in question is a franchised dealer?

A11. After clarifying the meaning of “franchised dealer,” Rick replied that the FTC has primary enforcement authority over such a dealer under the federal consumer financial laws, but warned the audience not to forget that state AGs also have parallel authority and have state laws to enforce as well. He pointed out that primary rule-writing authority for TILA and other federal consumer financial laws that have rules and are applicable to installment sales of vehicles would remain at the Federal Reserve Board for those dealers. The Bureau will still have influence over franchised dealers, he noted, because it has primary regulatory enforcement authority of the federal consumer financial laws, as well as rule-writing authority with respect to the auto finance companies that buy retail installment contracts from exempt dealers.

Q12. Does the Bureau have a projected timetable for its report and rulemaking on mandatory arbitration clauses in preprinted consumer contracts?

A12. Rick noted that the Bureau had just published a detailed Request for Information on this issue that signaled some of the issues that the Bureau is interested in. He warned that the RFI seeks guidance on data sources, but does not seek advocacy on the ultimate issue of where any rulemaking should go. He pointed out that a rulemaking is not mandatory, just the study is, so it would be premature to speculate about a schedule for something that might not happen.

Q13. When does the Bureau expect to complete its investigation of buy-here, pay-here dealers, and what can we expect as an outcome?

A13. Rick took the 5th on this one, making it clear that it was Bureau policy not to comment on or confirm the existence of a pending investigation. He took a drink of water and called for the next question.

Q14. Is it a fair assumption that the Bureau will gather input from many interested participants in the auto finance field prior to enacting rules?

A14. In response to this one, Rick pointed to the Administrative Procedures Act process that the Bureau would be required to use in connection with most rulemaking and explained that the APA process was designed to get widespread public input on proposed rules. He said that part of his job is to have a continuous, nonsupervisory dialogue with the industry, providing a means for input before any rulemaking is formally started.

Q15. Are there plans to override existing state regulations dealing with licensing of finance companies, usury rate statutes (where they exist), or repossession regulations?

A15. Rick responded to this question by observing that Dodd-Frank does not promote expanded use of federal law to preempt state law and, if anything, tends to lean in the other direction, giving states more power to deal with federally chartered institutions and their affiliates. Further, he observed that Congress specifically kept the Bureau out of the usury business and that he was not aware of any context in which the Bureau would be counteracting state usury laws. He noted that state licensing is unlikely to conflict with federal consumer financial laws.

Q16. Will the Bureau be collecting financial performance information from finance companies as some states do with annual reports to regulators?

A16. After responding that the Bureau has not yet taken a position on whether it will seek to define non-bank auto finance companies under the “larger participant” rules, Rick noted that the Bureau has authority to issue rules with respect to registration of companies, which might include information gathering, but that it has not moved in that direction. He wouldn’t predict what the examination or registration of auto finance companies would entail, but noted that states often have responsibility to look after safety and soundness, as well as consumer protection, and that, in the former role, they often gather and need financial performance information.

Q17. What types of depository institutions and affiliates can the Bureau supervise, including non-bank affiliates?

A17. Rick explained that the Bureau has supervisory authority over banks with over $10 billion in assets and any of their bank and non-bank affiliates, and thus has supervisory authority over those banks with $10 billion or less in assets that are affiliates of banks with over $10 billion in assets. He noted that the Bureau also has supervisory authority over subsidiaries of small insured depository institutions that are non-depository covered persons.

Q18. Can you comment on the Bureau’s general predisposition toward auto finance? Are there perceived problem areas that are considered to be serious? Are there plans to focus on independent finance companies more strongly than banks, credit unions, or captive finance companies? Are dealer-related finance companies of any special interest?

A18. Rick replied that the Bureau was “data-driven,” and he hoped it would not be motivated by a predisposition regarding any industry. He pointed out areas where we know there are historical issues – dealer participation and concerns regarding servicemembers. The Bureau’s objective, he said, is to promote a level regulatory playing field regardless of charter, and that, in carrying out its duties, the Bureau should be expected to focus its energy based on risks of harm to consumers, not charter type.

Q19. At a recent meeting, Richard Cordray stated that he expects financial institutions to be more transparent and that the required loan documentation needs to be more easily understood by the consumer. Does the CFPB understand how much of the current documentation is government mandated?

A19. I could have answered that one for Rick. He’s been in private practice, and I know that he has crafted many a consumer credit form that contains a great deal of federally mandated stuff. Rick didn’t disappoint. He confirmed that the Bureau understands the problem and pointed to the Bureau’s chore of tackling the TILA-RESPA simplification effort on the mortgage side. He also referred to the fact that the state-regulated vehicle installment sale business is subject to many state disclosure rules on top of the federal requirements and that there is always room for regulators to think about how the historical accumulation of disclosure practices may have produced disclosure overload.

On the other hand, he noted, there may be room for the language of installment sale contracts to be simpler, and he expressed his personal concern that very long combined contract and disclosure forms may make it hard for consumers to understand what they are getting into. He reiterated that virtually any change in TILA regulatory requirements for auto financing would be conducted under the APA, with plenty of opportunity for input, including from the forms automation folks, and said that, to his knowledge, no effort along these lines was in the works yet.

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