The rise of state-level CFPBs

In the months after Mick Mulvaney's November 2017 appointment as acting director of the Consumer Financial Protection Bureau, several states said they would develop similarly functioning divisions.

Though those states were already active in auto regulation, the fledgling divisions have set their sights on dealer operations.

Many car dealers believed that when President Donald Trump appointed a Republican to head the CFPB — Kathy Kraninger was confirmed as the bureau's permanent director in December — "that compliance was going to take a back seat and be left on the shelves," said Randy Henrick, compliance counsel at Mosaic Compliance Services. With less CFPB oversight, "quite a few dealers are being lulled into a false sense of security."

Auto retail operations in states with consumer financial protection divisions are likely to experience an uptick in activity, Henrick said, because auto dealers are low-hanging fruit for regulators. Auto retail remains lucrative, he said, and it's rare to find businesses that are 100 percent compliant.

"I've had one dealer tell me he gets a visit every quarter from the state attorney general representative, and his first question to him is, 'OK, how much of a check do I have to write you for this month?' " Henrick said. "It's gotten to the point now where it's beyond the cost of doing business. I haven't seen a consent decree of less than $100,000 in a while."

Pennsylvania, New York and New Jersey, for example, operate consumer financial protection divisions. California Assemblywoman Monique Limon said in March that she is looking into developing a division in the state, according to American Banker. The New York Department of Financial Services established its Consumer Protection and Financial Enforcement Division in April, combining two divisions in the department.

While New York's division is getting organized, the New Jersey and Pennsylvania agencies have concentrated on investigating auto dealers, while providing customers a platform to seek redress against dealers, compliance experts said.

One year after its establishment, the New Jersey Division of Consumer Affairs under Attorney General Gurbir Grewal filed a lawsuit against two buy-here, pay-here dealers accusing them of using predatory sales and financing tactics.

Paul Rodriguez, acting director of the division, said in a statement that the lawsuit reflects the state taking a more active role in protecting consumers of financial services and products "at a time when federal enforcement is on the decline."

"We are prepared to use the broad enforcement powers of New Jersey's Consumer Fraud Act, and other laws and regulations at our disposal, to hold financial predators in every industry accountable for their unlawful actions," Rodriguez said.

The Pennsylvania state attorney general's Bureau of Consumer Protection settled with a Honda dealership in April for allegedly selling a valueless F&I product. Faulkner Honda agreed to pay $10,000 in fines plus restitution to customers who had paid $1,000 on average for the coverage.

It was the first action against a dealer for Pennsylvania's consumer protection bureau, which was formed in July 2017, according to Nicholas Smyth, who leads the bureau. Smyth was a former enforcement attorney at the CFPB.

"We're on the lookout for issues around financing, and that includes markup," Smyth said.

In a victory for dealers, Trump in May 2018 signed a measure nixing a CFPB rule aimed at limiting dealerships' retail margins on auto loans, which the bureau alleged may have led to minority borrowers being charged more on loans. Smyth believes the change at the federal level may have opened a door for companies looking to take advantage of consumers.

Last month, Pennsylvania Attorney General Josh Shapiro's office settled with a used-car and motorcycle dealership in Mechanicsburg for more than $50,000 for, among other charges, improper advertising, selling vehicles with noncompliant contracts and operating without a valid dealer license.

"Unscrupulous business dealers can't dodge our Bureau of Consumer Protection," Shapiro said in a statement. "I'm grateful for their hard work to put a stop to the defendants' shady practices and deliver results for the people of Pennsylvania."

In addition to finding what it considers unfair markups, the Pennsylvania bureau conducts compliance checks at dealerships, seeking deceptive or unfair practices involving the sale of F&I products, such as the coverage sold by Faulkner Honda.

"We know that consumers often don't shop around, and they may not understand that when they're being encouraged to purchase an add-on product that it's optional," Smyth said. "We want to make sure that dealers are complying with the law and not trying to force consumers to buy things that they don't have to buy."

The creation of Pennsylvania's Bureau of Consumer Protection did not require jurisdiction to be shifted from other agencies as the creation of the CFPB did at the national level, Smyth said, but there are many similarities in how the agencies approach the law on consumer protection.

The federal CFPB and state attorneys general, for example, enforce the Federal Consumer Financial Protection Act and work with the state's Department of Banking and Securities — the department that licenses dealers to organize indirect financing for customers.

Another differentiator is that while the CFPB often acts alone, state attorneys general collaborate more often with the state-level units when deceptive activity is believed to be present across state lines. Multistate investigations, and if necessary, multistate litigation efforts, are fairly common, Smyth said.

Actions by regulators such as state consumer financial protection divisions, state attorneys general and the Federal Trade Commission prove, Henrick said, that neglecting compliance is "a big mistake."