Regulatory Influences to the Motor Vehicle Service Contract and Ancillary Product Industry

Transcription

1 Regulatory Influences to the Motor Vehicle Service Contract and Ancillary Product Industry Aaron E. Lunt, JD, CPCU, ARe Assistant General Counsel, Head of Regulatory Affairs The Warranty Group August 29, 2016

2 Presentation Overview Part I: Regulation of F&I Products Part II: CFPB activity related to the automobile industry Part III: What does the future hold? 2

3 Part I Regulation of F&I Products 3

4 Distribution Channel Stakeholders In the sale of an F&I product, there are many stakeholders involved in bringing that product to the market Retail Consumer Car/Product Car Dealership Agent Lender Obligor/Provider Insurance Company 4

5 Relevant Laws A Few Examples Federal Laws: Truth in Lending Act (TILA) Consumer Leasing Act Credit Practices Rule Equal Credit Opportunity Act (ECOA) Fair Credit Reporting Act State Laws: Insurance Codes Service Contract Statutes Lending/Banking Laws Consumer Protection Laws 5

6 Historical Regulators of F&I Products State Dept. Of Insurance State Attorney General State Banking/ Lending Regulator Federal Trade Commission 6

7 CFPB Creation (Dodd-Frank Act) The Consumer Financial Protection Bureau (CFPB) is an independent bureau in the Federal Reserve System Authorized by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act Enforcement of 20 consumer finance laws and regulations (e.g., ECOA) Created with a mandate to supervise consumer financial services companies and large depository institutions and their affiliates 7

8 Part II - Current Regulatory Environment CFPB and Everyone Else 8

9 Key Features of the CFPB Bureau instead of a commission Contrast to the SEC and FDIC among many other federal agencies which are led by a commission Funding comes from the Federal Reserve system (% of budget) rather than congressional appropriations Can enforce over 20 consumer financial laws and regulations and has supervision and rulemaking authority Auto Finance Larger Participant Rule and Auto Finance Exam Procedures, effective as of August 31, 2015 (effectively included largest non-bank auto finance lenders) 9

10 Exemptions From CFPB Jurisdiction: Auto Dealers Section 1029 of Dodd-Frank states: The Bureau may not exercise any rulemaking, supervisory, enforcement or any other authority, including any authority to order assessments, over a motor vehicle dealer that is predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles. 10

11 Auto Dealer Exemption cont. Auto dealers got a specific exemption from CFPB oversight, and it is no coincidence that auto loans are now the most troubled consumer financial product. Sen. Elizabeth Warren, April

12 Further Exemptions From CFPB Jurisdiction: Insurance The business of insurance is excluded from the list of financial products and services subject to the CFPB s jurisdiction The CFPB is prohibited from enforcing provisions of Dodd-Frank against any person regulated by a state insurance regulator 12

13 CFPB and the Auto Industry The consumer bureau has been waging a proxy war against car dealers by shaking down the banks that provide auto loans. The Wall Street Journal August 2,

14 Key Enforcement Actions in the Auto Industry Four main CFPB settlements in the auto lending industry Ally Financial American Honda Finance 2015 Fifth Third Bank 2015 Toyota Motor Credit

15 Impact of Enforcement Actions CFPB wants the settlements to become a blueprint for other auto lenders Pattern emerging of forcing a settlement that includes a cap on dealer markup in exchange for reduced monetary penalty Appears to be a systematic attempt by the CFPB to eliminate dealer discretion to mark up buy rates and impose a flat cap on the mark up/dealer reserve 15

16 What About Add-on/Ancillary Products? I think the CFPB is going to look at auto dealer aftermarket products. Gerald Sachs, former CFPB enforcement attorney Automotive News August 12,

17 What About Add-on/Ancillary Products? cont. Automobile Finance Examination Procedures were issued in conjunction with the final Auto Finance Larger Participant Rule and specifically mention GAP Insurance, Extended Warranty, and Vehicle Add-Ons CFPB may attempt to exercise authority over these types of products through unfair, deceptive or abusive acts or practice (UDAAP) violations 17

18 CFPB Supervisory Highlights Summer 2016 CFPB accused one or more finance sources of being deceptive in the marketing of GAP and the way payment deferral terms were disclosed Alleged that examiners found weak compliance management systems 18

19 Arbitration CFPB Proposed Rule on Arbitration would: Ban arbitration clauses with class action waivers; and Require companies still using arbitration clauses to submit arbitration data to the CFPB to monitor the fairness of the process 19

20 Small Dollar Loans June 2016 CFPB released Notice of Proposed Rulemaking First federal rulemaking focused on short-term lending industry which has traditionally been governed by state law Includes both short term loans (45 days or less) and loans longer that have a total APR of 36% Include but not limited to payday loans, auto title loans, and deposit advanced products Excluded from the rule are loans extended solely to finance the purchase of a car or other consumer good in which the good secures the loan 20

21 Part III What does the future hold? 21

22 Political Environment CFPB is focused on auto industry Currently a number of pieces of legislation in Congress (or recently introduced) would make meaningful changes to the CFPB Change from a bureau to a five person commission and place under the appropriations process (HR 5484) Repeal 2013 guidance on indirect auto lending and require a more transparent process (HR 1737/SB 2663) Based on how CFPB created, limited political power to erode effectiveness 2016 Presidential Election European Influence (U.K. s regulators focused on customer issues, such as product value ) 22

23 Thank You This slide presentation is for educational purposes only and any opinions therein do not represent the official position of the The Warranty Group, nor any of its subsidiaries. These slides should not be disseminated without the prior written consent of The Warranty Group. 23