Today's Trends in Credit Regulation

Unforced Errors
By Michael A. Benoit

In July of last year, the Consumer Financial Protection Bureau announced a settlement it had reached with a company that financed consumer goods:

Rome Finance and merchants it worked with masked expensive finance charges by artificially inflating the disclosed price of the consumer goods being sold. As a result, they provided consumers with disclosures that had inaccurately low finance charges and annual percentage rates (APR). Consumers received disclosures, for example, indicating the APR was 16 percent when in fact the APR was 100 percent or more. That inaccurate information prevented consumers from making an informed decision about whether to take out credit.

Anyone reading this language from the CFPB's press release might think, "Wow, that's terrible!" Maybe in the particular instance it was, but then again, maybe not. For my purposes, it doesn't matter. It is merely illustrative of the CFPB's penchant for making unforced errors and the resulting economic snafus that can follow.

Substitute for "Rome Finance" any buy-here, pay-here auto dealer. Most sell cars for more than their book value and charge an interest rate well within state usury limits. What the CFPB says is that, as a matter of policy, the difference between the price goods are sold for and their "fair market value" is a finance charge. But only if you finance the purchase. For any cash buyer, the difference is referred to as "gross profit." Is the CFPB really trying to regulate the price of goods and services and limit the amount of profit retailers can make when a transaction happens to be financed?

Let's assume for a moment that this is where the CFPB is going. It has to be because the agency thinks consumers are harmed by higher purchase prices (which, per Rome Finance, create a Truth in Lending violation). If car dealers cannot price vehicles in excess of an appraisal guide value, the BHPH industry goes away. The BHPH customer base comprises the truly credit challenged, and without BHPH, those customers will not be able to buy transportation. The BHPH industry exists as its own market because the customer base can't qualify for traditional credit. If the customers can't buy a car, they can't get to work, or to the doctor, or to the grocery store. Is that merely collateral damage in pursuit of a higher principle? How does that help those consumers?

The Truth in Lending Act and its implementing Regulation Z (which the CFPB alleged that Rome Finance violated) never intended this result. The federal consumer credit laws recognize that the price of goods and services is market driven. If the CFPB has any confusion about that, I'd point it to its own Commentary to Regulation Z, which states:

Charges absorbed by the creditor as a cost of doing business are not finance charges, even though the creditor may take such costs into consideration in determining the interest rate to be charged or the cash price of the property or service sold.

In other words, you can price your inventory above fair market value in order to cover your costs of doing business, and that markup is not a finance charge. This is Economics 101. If you've ever bought a Coke at Disney World, you know that "fair market value" is a purely relative term.

One can posit that Rome Finance had no cash customers and that the markup on its goods was so great that no self-respecting cash buyer would buy goods at that price. Ergo, that higher cost of goods must be a finance charge since other establishments sell the goods for less. Let me disabuse the CFPB of that notion. The last time I checked, retailers could mark up goods as much as the market will let them - after all, markets exist to encourage competition on prices (the next time you fly, think about the wide fluctuations in the price of plane tickets among everyone on your plane). This is true whether or not the retailer finances the purchase price. And Regulation Z makes no mention that sellers are required to prove that their inventory is priced competitively.

As I've often said, I happen to agree with the CFPB's overall mission. Infrequent oversight inevitably leads to control lapses. Unfortunately, I'm no fan of its execution of that mission. With all of the low-hanging fruit out there, why try to implement a creative and unprecedented interpretation of a regulation, which contradicts that same regulation in the process? The CFPB has absolutely and unequivocally no business regulating the price of goods.

The political winds do not bode well for the CFPB right now, and I expect it will see its wings clipped a bit in the coming term. Congress reined in an aggressive regulator before - ask anyone who worked at the Federal Trade Commission in the '70s and '80s - and it pretty much seems poised to do so again. Continuing to ignore its core mission in favor of exotic theories is one unforced error I fear will only accelerate that process.

Michael A. Benoit is a partner in the Washington, D.C., office of Hudson Cook, LLP. He is a frequent speaker and writer on a variety of consumer credit topics. Michael can be reached at 202-327-9705 or by email at

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