On April 22, the Consumer Financial Protection Bureau (CFPB) requested the U.S. District Court for the Southern District of New York to remove the bureau as a plaintiff in CFPB v. Credit Acceptance Corporation, a case that could have widespread impacts on the commercial sale and purchase of contracts in the secondary auto finance market. The Biden-era CFPB and New York Attorney General’s Complaint made many novel legal arguments that did not align with law or regulations, sparking concern from the legal community, lawmakers and regulated industries. Last year, Congressman Andy Barr, chairman of the Financial Institutions Subcommittee for House Financial Services, sent a letter to the CFPB outlining grave concerns with the efforts to impose industrywide changes to longstanding practices in the auto finance industry through litigation against a single auto finance company. While the CFPB has withdrawn from the case, the State of New York remains as a plaintiff.
Case Overview
The case centers on claims that Credit Acceptance’s business model incentivized car dealers to inflate vehicle prices and add expensive products. The CFPB created a “proxy for a vehicle’s cash price” (the down payment paid by the consumer and the amount paid by the finance company to acquire the contract) to reach the conclusion that a “hidden finance charge” arises anytime a dealer sells commercial paper to a finance company at a discount, referred to as an assignment discount. The CFPB did not allege that dealers offered this “cash price proxy” to consumers in the ordinary course of business. In fact, the CFPB did not even allege that Credit Acceptance actually “deceived” or “abused” consumers, but rather that it “allowed and incentivized” car dealers to do so by failing to place tighter restrictions on dealer car prices or otherwise prevent dealers from engaging in deceptive practices. No statute, regulation or other source of law places a duty of oversight on third-party financing sources along the lines sought in this action.
The lawsuit also attempted to rewrite and reimagine the Truth in Lending Act (TILA), later implemented under Regulation Z. Congress and corresponding regulations created a uniform system of consumer credit disclosures that the industry has relied upon for decades. This official interpretation of Regulation Z has, since 1981, expressly provided that assignment discounts do not need to be disclosed as finance charges. Additionally, the Consumer Financial Protection Act of 2010, the CFPB’s authorizing statute, expressly excludes auto dealers from the CFPB’s “rulemaking, supervisory, [and] enforcement” authority. Through the action, though, the CFPB attempted to indirectly regulate thousands of independent auto dealers by charging one of their financing sources with not doing enough to prevent those dealers from allegedly engaging in deceptive practices.
Next Steps
The CFPB’s exit from the case signals another step from current leaderships towards more due process for the industry and a step away from attempts to create new law by enforcement. Despite the CFPB’s withdrawal, the New York Attorney General remains as the plaintiff, and the case should continue on for New York consumers only. The CFPB’s exit appears to be part of a broader effort by the CFPB to not pursue “novel legal theories,” focus its enforcement efforts “on pressing threats to consumers,” and step away from actions where its jurisdictional or statutory authority is in dispute. The exit is in line with the CFPB’s view that disclosure statutes (like TILA) should serve as its “primary consumer enforcement tool,” not “pricing controls.”
Industry stakeholders warn that unclear rules and “gotcha” enforcement activity lead to higher costs and uncertainty that have broader implications, potentially limiting the availability of auto financing for consumers with limited credit options and increasing cost for consumers in the secondary auto finance market. Brownstein’s team was proud to support the efforts of Credit Acceptance Corporation seeking fairness and due process.
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