Addressing Concerns in New Auto Consumer Protection Rule

0:02 You're listening to Leaders and Lending from Upstart, a podcast dedicated to helping consumer lenders grow their programs and improve their product offerings. Each week, here decision makers in the finance industry offer insights into the future of the lending industry, best practices around digital transformation, and more. Let's get into the show. Welcome to Leaders and Lending. I'm your host, Jeff Keltner. This week, I'm joined by Paul Metry from the National Automobile Dealers Association. Paul, thanks for taking the time and joiners here employer. I'm excited that we would talking at a lot of stuff on the podcast, but auto is top of my mind. But I wanted to start with the FTC ruling that you guys are talking a lot about, So give me the background. I'm not an expert in this space. I mean, like a little bit of regulatory, a little bit of auto, but I my ven diagram of automobile regulatory is somewhat limited. To help me understand what's going on here, sir Lane, Well, the Federal Trade Commission, which is the primary regulator for dealers.

0:57 Last June, they proposed a trade r elation rule and they are concerned about consumer protections. They believe a rule that would impose new duties and restrictions on dealers would help to further protect consuwers. And we have been very critical of it for a number of reasons, and maybe I can just take off a few of those for you. And it really comes down to the process that the FTEC followed in developing this posed rule, also the support for it. Both of these we think were extraordinarily thin, and then of course it led to what we think are very poorly thought out substantive provisions. So just to quickly hit on those from a process standpoint, the FTEC was proposing a rule or has proposed a rule that is nontracted by Congress, and they did not proceed the notice of proposed rulemaking with any type of advanced issuance to inform themselves on the subject. So there was no advanced notice of proposed rulemaking, no request for comment, no outline or proposals for which they sought comment. There is nothing on the front end to gather information to help inform the rule.

2:05 In addition, when they put it out, they also had very little coordination, certainly with industry. We meet with FTC staff all the time, but these individual provisions they proposed were never discussed, and we believe even with other agencies that have authority of this area. One area that they touched on have to be with credit disclosures and for dealer purposes. That's really in the domain of the Federal Reserve Board, it's not in the domain of the FTC. There was no apparent coordination there, and they're applying this on top of a host of existing disclosures not just under the Truth of Lending Act, but also at the state level. For example, California, they have a requirement that before you'd entered into a transaction you would have to make all kinds of disclosures related to voluntary protection products, which were a big focus of this rule.

2:54 It's not clear that there was really any meaningful coordination of the states on how this will affect them, because even though preemption would apply with a direct conflict, in most cases, there's not going to be a direct conflict. In other words, a regulated entity comply with both the federal and the states the end. And you really got to think through if you pile out a bunch of disclosures and other obligations, how is that going to play out, So we believe the coordination was very thin, which was a problem. In addition, the comment period this was very rushed. It was only sixty days. Now the FTC will do a sixty day comment period for much less consequential items. I mean, it might be like the extension of a Paperwork Reduction Act request, which is only a couple of pages in the Federal Register. This is a proposed rull cut out a whole cloth. So they go ahead, they put that in there, we have sixty days to respond. Naturally, we saw an extension, as did many others, including SPA's Office of Advocacy, and to us inexplicably that was denied. It's also surprising because the proposed rule was accompanied with forty nine questions and answers, or they were seeking answers to forty nine questions. Many of these you would do on the front end to help inform the POSH rule. It was surprising to see that they're in there. But they asked a lot of questions about the impact on business and that type of thing, and we wanted more time to be able to do an assessment. Unfortunately that was shut off. Also, as I'll point out here, a moment. They propose a number of disclosures consumer disclosures, and it appears there is no consumer testing of those disclosures. And for any federal

4:25 agency, that is a very basic step. You want to make sure that if you're going to propose new disclosures to help inform consumers, that they actually are going to serve their intended purpose, and you've got to look at what the effect on the consumers. So it's very routine for these federal agencies to go ahead and test the effect of any particular disclosure on consumers to see is this going to enhance their understanding or detract from it. Unfortunately, that never happened, So a lot of steps here were really short circuited. You know, one thing I would say really highlights this. They did a purported cost benefit analysis of what this rule would do in the market place. Obviously it's going to cost business money to sure, but they say it's also going to provide benefits to consumers. And the figure they used was thirty one billion dollars over a ten year period. And you might ask where they come up with that, and it is a too complex for us to cover in a short podcast like this. Well, it really is not because it was done in a very cursory fashion. They looked at three variables. They said, this is going to save these disclosures and everything else we're doing. It's going to save consumers three hours per transaction. They assume that. They say that in the role and then those role making that's based on nothing. There's no support for it. They just say it's going to save three hours. They then come up with a value of someone's non work time, so they multiply those two and then they multiply that by the number of transactions that motor vehicle dealers do with consumers, and they used a greatly inflated figure for that. You take us three variables, it comes out to thirty one billion dollars. So

5:58 it's that then it's that cursory really not well thought out, and unfortunately that's really indicative of the whole exercise. So on the process side, a lot of concerns and many that actually go well beyond that. Can I can I ask a simple question here, how does the addition of disclosure. Not that I want to bash the agency, because you can do that, but I I want to stand at that business. But I'm curious how they're how does adding disclosures to a transaction reduce the time of consumer spence? Like, what's the logic behind that? Well, you would have to ask them the question because I certainly know see if it's certainly not in this case when you consider the disclosure. I'll hit on those in a little bit. But to your Yeah, to your point, I think the only shaare estimation is that it would inject quite a bit more time into it. When we talked about actually what the disclosures are so or no more time and no more understanding, which is like I remember when I bought my car. There's it's not a lot of paperwork. And I hate to admit this on the podcast, I didn't read at all in great depth and there were a number of disclosures that I definitely like put my John Hancock on and said, this is just what you do right, well, mssive thing. Sometimes as a sem more disclosures are going to be more helpful to consumers, but that's why they consumer test and they find out that that's not always the case. They lead there with a better understanding of the process, and sometimes it requires more, sometimes it requires fewer. With much testom yeah, and by the way, just one quick footnote on that the FTC knows how to do this. The Bureau of Economics in two thousand and four was looking at a HUD proposal in which they said that a mortgage broker of the compensation they own, that is something that should

7:30 be disclosed not just in a HUD one, not just at closing, but during the shopping process. So they did quantitative testing of over five hundred consumers and they found out that even though it's very well intentioned, many of them were selecting more expensive mortgage products because they were fixating out in this figure and not the overall fosting mortgage. So they really said they should go back to the drawing board of it. And that's why you do that type of thing. It's just for this reason you try to figure out, yes, this is well intentioned, but is it going to enhance hundred it does it really help the under lying without a doubt. Now, in terms of the support for the rule. That also, and we've been very critical of this, and we could talk about that for some time, but I'll just give you one quick example. They largely supported their rule with and reference to qualitative testing.

8:16 Consumer testing that was dotten, and let me just tell you how thin this was. So in twenty seventeen, the FTC did qualitative testing of thirty eight consumers and a single market washing DCU market nineteen that had bought new vehicles nineteen that had brought us and based on that they came to some conclusions and they came out with a report in twenty twenty which was a very large portion of what they pointed to and supported this rule. Now, as many people know, qualitative testing is not quantitative tests. Qualitative testing is usually used to develop quantitative testing. You measure prevalence through quantitative testing, so to they skip that quantitative step and they use this to help support the rule, and there were problems with it. B on that the survey design plan for the qualitative testing had a lot of flaws in it, and even more to the point, the report that came out in twenty twenty on this qualitative testing, it stated that it is not suitable for generalizable conclusions. And of course we know that our rulemaking is an exercise in a generalizable conclusion, you're applying something to an entire marketplace. It's not targeted at any one person. So real concerns with the support for the rule. Now to your point about you know what's in it and is this actually going to speed up or slow down the pins or what effect is it going to have. Well, the rule does several things, very broad. I'll get to the disclosure piece. But initially they said that they are going to prohibit certain misrepresentations. Of course, misrepresentations are already prohibited. In doing this to confer themselves confer upon themselves the ability to

9:50 find a dealer over fifty thousand dollars per violation, And the real concern here is the clarity with which they defined the misrepresentations. Obviously there are certain things out there that should never happen and should be penalized, but the way that many of these things are worded, it's unclear what a regulated entity can or cannot do. And when you now have fine authority of over fifty thousand dollars per violation, remember these are dealers, not banks, so the capacity to be able to a suit or absorb these violations would be much more difficult. That is an issue. They also prohibited the sale of valueless quote unquote add on products. Well, of course, no one should sell the valueless add on product but it's very poorly defined, particularly in areas like gapway. They have real concerns about the value that the GAP product would provide to a consumer.

10:39 Will, of course be extraordinary value. We've seen that mover and over, but the way they defined is a big concern. So they've done that type of thing. They have new advertising standards that would apply to dealers and only dealers, not other regulated entities. But then to the point that you have, which is disclosures, here's what they've required to happen in any type of transaction. A few things they say, any time a consumer inquires into a specific vehicle or from that matter, of monetary term or any financial obligation, upon the dealer's first response, the dealer would have to provide the offered price. Now the offering price is everything except for governmental feeds. Now you have to do that whether the inquiry comes in writing words, comes in the world. So that means if I'm a salesperson and you run into me at the Bowling Alley and you make an inquiry into a specific vehicle, upon my first response, I have to provide that information. It could be you're using the chat feature on our website. It could be a text message you said you could be in the showroom. It could come up from a variety of different ways, and when you think about it, then the liability that attaches to these violations. Trying to make sure that you're actually providing an offering price on the first response when this can come up through so many different channels is a real concern, and one has to wonder what's the value of you know, if you think about it the first time, you and it's if I had to give the offering price, I'm not going to know if you qualify for certain rebates. I'm not going to know if other discounts are applicable, So I'm probably going to default to something like the MSRP, which is higher

12:11 than when you're going to end up getting. So you'd have to ask what's the purpose of the disclosure if you're going to have something more favorable. So they've done that. Certainly, having to do those disclosures every time someone inquires into a specific vehicle and a customer can ask about two, three, four or five vehicles really ties up the process. But even more so, any time that a dealer would sell a volunteer detection product, they would have to get from you up to four additional written disclosures. So that is certainly a time consuming exercise, and there's other concerns with it. I mean they use terms in there like cash price that differ from the way it's to finding the truth of lending act. So there's just some inherent confusion with it. We just don't think this was well thought out. We think we would build a lot of time into the process. They've also said with websites, a dealer would have to go ahead and identify all of its voluntary protection products and the price associate. Now that might sound benign, but consider how they define a voluntary protection product. It's really anything that's not put on the vehicle or sold directly by manufacture. So when you think about it, any part that comes with a vehicle is something that is considered to be an add on product that you would have to separately disclose with pricing. Now, dealers sell hundreds and hundreds of potential parts and accessories with vehicles. This is a requirement that would require when you consider all the different products they sell, probably over ten thousand separate line item disclosures with pricing, and you have to ask yourself, is that enhancing consumer understanding. And if what you're really trying to get to is

13:43 like the price of a prepaid maintenance plan or a gap waiver, is that going to be something that's salient and available to a customer when you loaded up all these other disclosures. And the other quick point on that is, if you're a manufacturer like Kessler Arivian, even though you can be considered a motor vehicle dealer under this particular proposed rule, you would not be subject to that disclosure requirement because of the way they define it. Add Up, you know you're the manufacturer, you'll quit in the product on the vehicles selling it directly. So they say they want to level the playing field between regulated entities, but here they've driven a wedge into it. And the last quick thing to comment on is record keeping being would require dealers to keep the slew of records from twenty five months, records of all those communications I reference, among many other things. And that's unfortunate because they say that they're really trying to protect the honest dealer. You know, I'll tell you the FTC over the last ten years has taken thirty seven enforcement actions against enforcement against auto dealers. There would be required here tens of thousands of dealers to keep a huge cash of documents and the unlikely to bet that there's an enforcement action when none of their current enforcement actions to our knowledge, have suffered from a lack of documentation.

14:54 So really, we think it's not selting that's helping the honest dealer. It's hugely burning the on a stealer. And if there were a good cost benefit analysis that would come out. So a lot of concerns with it. Again, a poor process and very poor support, and we think it's supplant zomping that it's not gonna be help. Yeah, I think your point of it is pretty clear on the Yeah, yeah, you have and I have been shy. I'm curious when I hear a story like that, and obviously I'm sure there's a different perspective on it somewhere, But do you have an underlying sense of what's driving the agency to move as quickly as they are towards something that is not like, what's the driver for moving this thing through so quickly without some of the more traditional analyzes, cost benefit analysis, more rigorous quantitative studies, consumer testing, and disclosures. Is there a driver for why that's not being done anything in this case. Well, well, they have a very aggressive agenda. There's all kinds of things that they have expressed concerns with and they launched rolemathe with for example, as you may have heard, non compete clauses, they proposed a role to eliminate those, by the way, not just with existing employment contracts, but future ones. And there's a notification requirement. So they're they're very disposed to try to go after a lot of phase through the rulemaking process, and here they feel that they need to address concerners in the marketplace. You know, it's odd to us because none of the things that are addressing lack of remedies today if there's some type of abuse, so they really do not have to plug in the type of down.

16:21 So we think it's definitely overkill. We don't think it's wealth n out and we think if they did go through that more deliberate process, they would find and see any of the things they propose really or not. Let's shift a little bit from rulemaking such an exciting I think, to enforced MAXs because there's been a number of enforcement actions or lawsuits from Attorney's General in the auto auto dealer auto finance space recently, what's your take on what's going on out there, Like, I mean, you could go to specifics or just generally like what's what what are the kind of trends that you're seeing, because it's been like I feel like I open up the paper and every now and then I'm reading more frequents out of headlines in the space than typical. Sure, yeah, certainly. Well, the FTC has one area they're very concerned about is exercise a pricing discretion, And certainly pricing discretion does have to be managed.

17:07 You want to make sure it's not done an arbitrary fashion or something that could lead to discrimination. So that concerned is certainly a genuine concern, although the measures they've taken to address it, we think are also poorly thought out. But really you see anyse enforcement actions that there is concerned about price and discretion. And one of the actions last year was always a year ago, it was against a large dealer group. They had stated that they're looking not just at pricing discretion as relates to a dealer participation, to the dealers the dealer's portion of the finance. Yet also they're looking at other products that were sold, you know, some of these voluntary protection products. Yeah, that's not something we're aware of having happened. So they are applying it to that.

17:47 They did that again in a two in another action, or they look beyond simply credit. It is beyond simply dealer participation. And also the Massachusetts Attorney General under state law actually just took an action this year that involved voluntary protection products based on the violation and state law. They had looked at whether or not the pricing was done fairal and so there's a lot of focus on the exercise of price and discretion. Yep. Certainly a lot of focus on voluntary protection products as it relates to things like disclosures and consuer consent, those type of issues. They've been very focused on that. Another thing the FDC also has done is they have improsed individual liability and a number of these cases really so it's not just against the corporate entity. In that case, from about a year ago, they took action against the general manager of two of the stores of the Stealership group. That was an addition to the corporate entity.

18:38 And then in October they actually took the action against the owner of the dealership group as well as the vice president. So that's a trend that I think will continue to see. Are you seeing I know that there's this interesting the ecotomy between the regulations that apply to the dealer in terms of the finances financing of the vehicle, and then the regulations that apply to the entity. Often a bank that ends up purchasing and owning that contract with the longer term, right, it's usually the risk that's originated the dealer then purchased by a bank that has maybe a different set of fair lending standards. Testing that's being done, and I'm curious if you're seeing as these things happened, any reaction from the lender side in terms of their comfort working with dealers, how they're thinking about managing the risks that they have on their side of the house. As these kinds of questions are being raised, I think it's it changes the dynamic a little bit. Is a great question to most of the federal laws that are out there are applicable to both end. So the dealer is the initial creditor and then the bank ask the creditors. So Truth in Lending an Act and Federal Consumer Releasing dutt Ram Leach Bliley. We could go right down a lot. These are things that apply to both, although the liability standards can different. And also there is this FTC holder rule, so that somebody holds a contract would be subject to the same claims and defenses that we're initially if they pull against a dealer. So they do sometimes look at that from different ways. But in terms of ways to mitigate views concerns, you know, we have come out with a program. It's an optional program because it gets into pricing, but it's based on DJ can set orders on this whole issue of pricing discretion, one that pertains to deal with participation, a protus of

20:12 volunteary of auditorcract fox, and those are ones that we believe can be very helpful and actually they've been referenced many times. So for example that actually the FTC took against the Dealership group a year ago, they actually said them on a go forward basis, if the dealership is going to dealer anticipation that they would need to adopt a program that's similar to the optional program that we developed that's modeled on that DOJ approach. And then even in October, the dealership had actually adopted that program, but they said they did not properly implement it, so they did not make that an option of vailable tale. So there's definitely been a focus on those types of mechanisms. And then the Massachusetts ag action with regard to our Voluntary Protection Products program stated that on a go forward basis, the dealership would go ahead and to adopt that program by name to help mitigate concerns about the exercise of pricing discression. And we have found that many banks find a lot of appeal on They think, yeah, I know, if you if you have something that's allowing consumers to benefit from appropriate discount it's not based on a prohibited basis, but otherwise is kind of standardizing the process, making sure there's more consistency. It's a good way to keep competition in the marketplace alive, make sure it's based on appropriate factors, and otherwise kind of smooth out what otherwise could be differences in price. Got it interesting?

21:33 Any of the other recent enforcement actions come to mind when you think, you mean, there's also the case in New York wisident here is one against a credit acceptance corps. Yeah, correct, Now, that's not against dealers. They certainly referencedealers, but dealers are the dealer against I think that one's an internest with the pricing discussion and who's getting out ultimately liability for her right. They do take a look at that. Now. Of course, that's a little different from some of the other things we've talked about because that actually is not a consent order. That's a lawsuit. Yeah, front of acceptance is responding to that. That will be sett them in court, So we'll see where that goes. Those other ones are all consent orders, so well they did. Yeah, I'd prefer consentator, I think, to being sued by a sturning gen on. I'm sure we're none of the sound like fun experience is to be honest, Um, there are state level regulatory Actually we talk about about the FTC, But what's happening the state level from a regulatory actions rule making point of view other than the enforcement actions? Are there other other trends? Are things you're saying going on that are impacting the space?

22:27 Well, certainly a number of states very active. We've we've certainly seen that with things like gap waver, California's hats in legislation. But I think it doesn't underscore a point. And this is something by the way on that FTC where we follow very extensive comments, so anyone that wants more detail on that can look at that. But really, the States really do have a and it differs from location location, and they really have a very robust regime of harments that apply to bolitary protection roducts to the sales process channel into things like gaff wave and those really are place and we do see activity with that, so that trend is still there that tends to pick up generally speaking, and certainly there has been some enforcement theres SEA. I would love to get your take on. Most of the listeners podcasts are in the on the banking side of the house, on the dealers side of how I'm sure there's a few dealers who popped in now and then. But when you think about, you know, the totality of what we've been talking about and how that impacts how banks should be thinking about their relationships with dealers, their relationships to the audit finance side. What should they be thinking about keeping their eye on over the next couple of months, for the next year or two as they're thinking about how do I support my local dealers, but also manage my risk as a related party, but to but not directly and the dealers. Just a great question, and I think you know some of the areas that are really very important. I think we've touched on, certainly the exercise of price and discrection to really engage the dealer to make sure that that is something where the way it's being applied is structure and there is any approach to it that is going to protect the consumer, the dealer and the bank. Of course that's important.

24:00 And then things like gapwaver refunds, there's been a lot of discussion on that. That's really something that you can have multiple entities involved in the process. You certainly have the bank that is servicing the agreement, so if you do have something like a default or repossession a pre payment, that's something where the bank first learns about it. But there's other circumstances where something can be canceled, and it really requires good communication between the dealer, the bank, and oftentimes the program administrator take their product and doing that to try to make sure that the consumers may hold that any refund rights are actually exercised and fulfilled, any obligations are met. Is very important. So those are two of the areas that we've think a tricklo sale. All right, and then I'll ask you one more question, which is I'm kind of curious to talk a lot about things that are going on that are you know, we don't like, or rules we think or learners. But I want to give a chance to switch to the positive sign Like what are the you know, is the association of auto dealers, Like what are the trends you're saying that are positive?

24:59 That like changes the market that are they're positive the consumer, positive dealers, things that are like where's the future headed, not just on the regulatory side, but in general for the space, because it feels like actually a quite exciting time. It'd been a very weird time over the last couple of years, like lack of inventory and like, you know, a lot of dealers struggling with just you know, too many salespeople and not tough cars to sell, not because they didn't just couldn't could get them. And I feel like that, combined with digitization, it's a really fascinating time for the space in terms of how the car buying experience is going to ship. Give me a let's let's end on a more positive struct You're like, what are what are the positive trens you're seeing on the space? No other great question. I mean there they're certain there are many positive trends we are seeing. Just in terms of online impeachment with consumers. What are you're seeing as consumers get more and more comfortable with shopping and learning about products and they're online, the ability to provide all the information clear disclosures kind of give them all a good snapshot of what it's going back, it's stronger role time and that's a great process. More broadly, when you look at kind of a trend with evs and that type of thing, I mean, that's something that dealers have been very supportive of as considered demand for evs goes up, so certainly they are working with the factories to try to make sure that that demand doesn't mean as for inventory and the supply chain of disruptions and some of those challenges. Yes, that's you know, trying to make sure that you can meet considered demand, and there are expectations that regard. That is kind of an evolving situation, but there seems to be a little bit easy with that where in terms

26:29 of you know, some of the supply chain shortages that had before haven't proved. It's not something that happens overnight, but I think we're certainly seeing that. And as for the transitions to EV as, a lot's going on. The factories are certainly trying to build more evs and the fleet. They're trying to get more of a charging infrastructure in place, and different factories are going about the different ways, but certainly dealers have been at the forefront of trying to make sure that happens. You know, one thing we've always stressed our dealers are indispensable to that process because at the moment, the EV purchasers tend to be in your more urban areas. It's ones where the income level might be much higher. But when you talk about a fleet that's vainly if not exclusively uvs, then you're talking about past market penetration and trying to make sure that consumers understand us there are concerns about range anxiety are addressed and actually you can sell them they understand the benefits tone Doing all those things can be a real challenge, and having in our case a network of over sixteen thousand franchise dealers in the local communities to kind of guide them through that process is supported, we think is indispensable, and so we're excited about that prospect and we think experience us excellent. Well, Paul, thanks for taking the time and join us today. It was a lot to cover. I learned a lot, I'm sure the audiences well. I appreciate you making the time and sharing your perspective. Thank you so much. Plugging with you help Start partners with banks and credit unions to help grow their consumer loan portfolios and deliver a modern all digital lending experience. As the average consumer becomes more digitally savvy, it

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