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Car dealers mostly escape CFPB, but may face scrutiny elsewhere

Consumer Reports News: July 22, 2010 04:38 PM

Despite appeals from consumer groups and others, the Consumer Financial Protection Bureau created by the new financial reform law will not have jurisdiction over most car dealer-arranged financing.

But that doesn’t necessarily mean car dealers won’t see additional federal regulation and enforcement.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed by President Obama on July 21, gives the Federal Trade Commission improved powers to enact rules to regulate dealer financing.

The law authorizes the FTC to use the same rule-making procedures for dealers as other federal agencies use generally. That will reduce the FTC’s rulemaking to around one year, compared to an average seven years under its traditional rulemaking procedures. Those procedures have discouraged the FTC from rulemaking in the past.

Consumer groups say the change could mean that dealers will face stronger and faster regulation than had they been placed under the CFPB, which must focus on many areas of consumer protection, as well as establish itself as a new autonomous body within the Federal Reserve.

 “I think the auto dealers are going to rue what they wished for. The FTC can now just focus on auto dealers,”  said Lauren Saunders, managing attorney of the National Consumer Law Center.
Consumer groups had hoped that under the CFPB, dealers would have seen new rules and tough enforcement in connection with a variety of unfair practices in which some engage when obtaining loans for car buyers.

But dealers had lobbied Congress fiercely to exempt them from the CFPB, which they predicted would have burdened them with additional regulation, potentially limiting dealer-assisted financing as an option for consumers.

“The Dodd-Frank Wall Street Reform legislation  includes language that preserves dealer-assisted financing, which will continue to provide more convenience, more competition and more choices for car buyers,” the National Automobile Dealers Association said in a statement on its website.

The final legislation gives the CFPB authority only over dealers who make direct loans to consumers and who don’t traditionally transfer their loans to third parties, as most dealers do. The CFPB also would have authority over the lenders themselves, including major banks and auto finance companies such as Ally Financial Inc., formerly GMAC.

Also under the new law, the Federal Reserve will continue to oversee dealer compliance with the Truth in Lending Act, authority over which will move to the CFPB for other types of lenders. Unlike the Federal Reserve, the FTC will not automatically lose staff to the CFPB.

Effect remains to be seen

Consumer groups say it remains to be seen how aggressive the Federal Reserve Board, and especially the FTC, will be.

“I think the FTC has a real opportunity here in a long time to protect consumers in the area of auto financing,“ said Cora Ganzglass, legislative director of the National Association of Consumer Advocates.

The FTC itself did not take a position on whether oversight of car dealer financing should be transferred to the CFPB. But now that Congress has decided, the FTC welcomes the quicker rule-making authority,  said Joel Winston,  associate director of the FTC’s division of financial practices.

Winston said the FTC is concerned about possible deceptive and discriminatory practices involving dealer-assisting financing.

“Whether or not we would do a rulemaking depends on the extent of the problem,” he said.

He pointed out that the FTC retains its power to take legal action against dealers under its long-held authority to fight deceptive practices. Because dealers typically are local businesses, he noted, most actions are brought by the states.

Military concerns addressed

The new law also attempts to address complaints by the military that service members and their families are sometimes victimized by the financing practices of dealers located near military bases.

The law requires the Federal Reserve and FTC to coordinate with a newly-formed CFPB Office of Service Member Affairs to monitor dealer financing complaints from service members and to make sure military personnel “are educated and empowered to make better informed decisions” about dealer financial products and services."

That protection would be in addition to other protections provided by the FTC and the Fed to the general public.

The Defense Department had joined consumer groups in calling on Congress to place dealers under the CFPB.—Anthony Giorgianni

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