New Roads Traveled
Franchise dealers were justifiably ecstatic when they learned that they were excluded for the new Consumer Financial Protection Bureau’s (CFPB) jurisdiction. Before the celebrations get too crazy, however, let’s take a closer look.
With all the hoopla concerning the creation of the CFPB, there is one little-noticed provision that may have a big impact on auto finance operations. Section 1071 of the Act amends the Equal Credit Opportunity Act (ECOA) as of July 21, 2011 to require the collection of specific information from small business, minority-owned business, and women-owned business credit applicants.
The stated purpose of the requirement is to “facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.” I’m willing to accept that statement, but the cynic in me says it’s nothing but fodder for the plaintiff’s bar.
Section 1071 will require that creditors do the following:
· Inquire whether the business applicant is a women-owned, minority-owned, or small business; and
· Maintain a record of the responses to such inquiry, separate from the application and accompanying information.
The CFPB is required to amend Regulation B (which implements the provisions of the ECOA) to provide for the means that should be used to compile and maintain a record of the information. Such information must be itemized in order to clearly and conspicuously disclose the following:
· Number of the application and the date on which the application was received
· Type and purpose of the loan or other credit being applied for
· Amount of the credit or credit limit applied for, and the amount of the credit transaction or the credit limit approved for such applicant
· Type of action taken with respect to such application, and the date of such action
· Census tract location of the principal place of business of the women-owned, minority-owned, or small business loan applicant
· Gross annual revenue of the business in the last fiscal year of the women-owned, minority-owned, or small business loan applicant preceding the date of the application;
· Race, sex, and ethnicity of the principal owners of the business
· Additional data that the CFPB determines would aid in fulfilling the stated purpose of the collection requirement
In compiling and maintaining the information, you may not include in the record the name, specific address, telephone number, electronic mail address, or any other personally identifiable information concerning any individual connected with the women-owned, minority-owned, or small business loan applicant.
The record of the information must be maintained for three years, and must be made available to any member of the public, upon request, in the form required by the CFPB.
Did I mention this was fodder for the plaintiff’s bar?
Those of you who are franchise dealers may be saying, “Wait a minute—I thought the CFPB doesn’t have jurisdiction over me? How can they write a rule to make me do anything?” Well, you’re absolutely right, but there are many roads that can be taken to apply CFPB rules to franchise dealers.
First, Section 1071 amends the ECOA—a statute that applies to all creditors (including dealers). So, the requirement is actually embedded in a federal law. Second, while franchise dealers are excluded for CFPB rules, they are not excluded from rules adopted by the Fed. The Fed wrote Regulation B in the first instance, and they have not lost their authority with respect to creditors not regulated by the CFPB.
The result? Expect to see a concurrent rule making by the Fed that applies whatever information collection rules the CFPB comes up with to franchise dealers. And expect the same when the CFPB decides to amend existing regulations, like Regulation Z (implementing the Truth in Lending Act) and Regulation M (implementing the Consumer Leasing Act).
I doubt anyone in the federal regulatory community wants rules with such broad applicability to apply differently to different classes of creditors. I also wonder whether finance sources will be willing to buy paper from dealers that comply differently with laws and regulations they themselves would have to. Either way, the result would be the same—franchise dealers would be required to comply with CFPB rules of broad applicability either through regulation by another agency or through contractual agreements with their finance sources.
The bottom line is that the CFPB dealer exclusion, while real, is somewhat illusory. The CFPB may not be able to drive right into your showroom, but there are plenty of other federal agencies that can do it in their stead.
Michael 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 email@example.com. Nothing in this article is intended to be legal advice and should not be taken as such All legal questions should be addressedto competent counsel.