The Consumer Financial Protection Bureau's decision to redefine its approach to "abusiveness" in supervision and enforcement provides much-needed clarity on how the bureau will leverage its power. By setting reasonable measures for businesses to comply, the new direction will provide auto lenders and dealers with peace of mind.
The CFPB was given broad jurisdiction to pursue and penalize businesses in the consumer financial product industry for practices it considered abusive, unfair or deceptive after passage of the Dodd-Frank Act following the financial crisis of the late 2000s. But what constitutes an "abusive" business practice has been debated in industry circles for years, says Terry O'Loughlin, director of compliance for Reynolds and Reynolds. An opaque definition left dealers in the dark on compliance needs, O'Loughlin said, and caused undue confusion.
"Anytime you replace 'enforcement by litigation,' you are putting dealers in a better position," O'Loughlin said. "It places limitations on what abuse could be, to provide defenses, and limitations on costs of violations."
The bureau said in January in a statement that it will label business practices as abusive "only when the harm to consumers outweighs the benefit" and will avoid doubling up on abusiveness violations if an activity has already been cited as unfair or deceptive.
Perhaps most notable for businesses is the bureau's decision to seek monetary relief for abusiveness "only when there has been a lack of a good-faith effort to comply with the law," the statement also said.
Michael Benoit, a partner at Hudson Cook law firm, agrees the term required clarification.
"The CFPB has somewhat treated abusiveness under a pornography standard: 'I know it when I see it.' They're trying to put guardrails around it," Benoit said.
Still, it's unlikely franchised car dealerships will be impacted directly because their businesses operate outside CFPB jurisdiction. The same can't be said, however, for their auto lender partners, which may think twice about working with a franchised dealer who submits deals with abusive elements.
The CFPB's new approach to abusive practices presents a clear and attainable direction for how to comply with the law. As long as dealerships and lenders put in a good-faith effort to provide financial products that benefit consumers and to protect their interests in financial transactions, they have nothing to fear.