Cliff Banks - The Banks Report

New Era as Dealers Come Under Increased Attacks for Alleged Non-compliance

January 27, 2014 — Compliance officer sounds so Big Brother-ish or something that dates back to the Soviet era, but it’s quickly becoming a must-have for car dealers – and perhaps even the advertising agencies that service dealers.

Here’s why: the Federal Trade Commission, the Consumer Financial Protection Bureau and the attorneys general from numerous states are going after car dealers. The areas of focus are advertising, financing and data practices.

And they are working together, sharing information and data about dealers, their practices and consumer complaints. The CFPB and the FTC recently agreed to a “memorandum of understanding,” and are meeting regularly to craft their game plans. The FTC primarily will share consumer complaint information regarding financial and lending matters with the CFPB.

Meanwhile, the FTC is mostly focusing on advertising violations. It’s also enlisting the help of state agencies and the attorneys general to monitor car dealers.

The FTC has gone after 17 dealers in the last two years – 10 last month in its “Steer Clear” operation. Jessica Rich, the FTC’s Director of the Bureau of Consumer Protection, during the press conference announcing the initiative, said the action is just the tip of the iceberg and that there were several investigations in the pipeline.

The Dodd-Frank act in 2010 gave the FTC increased oversight over car dealers and just now are beginning to execute its game plan.

This is important – automotive retail is an industry the FTC is targeting – aggressively targeting.

It doesn’t matter whether a consumer complains, if the FTC deems an ad to be non-compliant, it can and likely will go after the dealer. In the recent steer clear operation, one dealer who entered a consent agreement with the agency
did so because fighting it would have been costly and would have opened his dealership to years of negative publicity.

According to the dealer, only one ad that ran one time was non-compliant and that was because the disclaimer wasn’t close enough to the vehicles being advertised. The FTC indicated it had looked at numerous other ads his dealership ran and found none of the others to be non-compliant.

Another dealer says his dealership was following state guidelines but apparently the FTC had implemented tougher standards. What this amounts to is if a font isn’t big enough, or if a disclaimer is too far from where an FTC agent believes it should be, the FTC can come after that dealer.

So far, the FTC has used the tool of consent agreements in which the dealer is not fined for the initial offense but if at any point in the next 20 years (from the point of the consent agreement) the dealer happens to fall out of compliance, the fine could be as much as $16,000 a day for each occurrence. But there are rumblings that the agency might even go after dealer licenses if they deem violations to be severe enough.

Dealers who have a consent agreement are learning just how careful they need to be with their advertising. Every single ad, Facebook post and even tweets are being evaluated by their compliance teams – and the compliance directors are even beginning to educate the ad agencies on how to be compliant.

The CFPB, meanwhile, does not have direct oversight of car dealers, thanks to NADA’s heavy lobbying of Congress in 2010. But it does have oversight of banks and lending institutions.

And it’s using its power over the banks to gain control over dealer lending practices. The CFPB is convinced that dealers that make a profit off finding and arranging loans for customers are engaging in discriminatory practices. Hence, it seems to be encouraging the industry to move to a flat fee system in which customers are charged the same amount.

Recently, the CFPB entered into a “consent agreement” with Ally Bank claiming it was guilty of facilitating discriminatory lending practices that led to marginally higher interest rate markups by car dealers to certain “protected classes.”

Penalty and restitution amounts to $98 million, plus ongoing costs mandated by the CFPB to ensure continued compliance with the “agreement.”

Many believe Ally Bank was targeted because the government still holds a substantial stake in the company. Ally needed to be granted bank holding company status to allow them to float an Initial Public Offering (IPO) to raise capital to buy out U.S. Government ownership, making them a rather easy target for the CFPB. ALLY acquiesced to CFPB pressure, providing CFPB a precedent to use to hammer its next targets.

NADA is challenging the CFPB on its methodology for determining whether discriminatory practices are indeed occurring.

The problem with the CFPB is that it does not report to Congress so NADA has little to no leverage. The agency’s funding comes solely from the Federal Reserve which effectively means, the CFPB answers to nobody. The CFPB says actions against more banks are forthcoming.

Meanwhile, NADA introduced the Fair Credit Compliance Policy & Program last month designed to help dealers reduce the risk of being accused of discriminatory lending practices. The program includes a list of actions a dealership can take including setting a cap on the reserve it can make for arranging financing for a customer. It provides forms for dealers to document all exceptions. It’s based on 2007 agreement two Philadelphia-area dealerships put together with the Justice Department.

The state agencies and attorneys general are assisting the FTC in its monitoring of dealers. But one of the elephants in the room is data. At some point, some attorney general is going to get aggressive and go after a dealer for mishandling customer data.

Already, the New Jersey attorney general went after data vendor Dataium for selling online search data to other vendors. While dealers weren’t the target of the investigation, several paid in excess of $100,000 to comply with the subpoenas they received.

The point is, the industry is moving into a new era in which every ad, every finance transaction and even how data is protected and handled will be monitored.

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