SAN ANTONIO – Attorney Tom Hudson says it shows something when a federal regulator with a reputation of aggressiveness found its way to a used-car dealership in northern Colorado.
His legal object lesson: You can no longer fly under the regulatory radar just because you’re a small operator.
Not that the Consumer Financial Protection Bureau is ubiquitously all-knowing and all-seeing. But it zeroed in on Herbies Auto Sales in Greeley, CO, after a local newspaper write-up on the business.
As part of a consent agreement, the buy-here, pay-here store ended up paying $700,000 in restitution to about 1,000 customers. That payout “made me blink,” says Hudson, a dealership attorney who had defended Herbies in the case.
Both small and large dealerships come under the same compliance requirements, Hudson notes during a presentation entitled “Does Size Matter?” at the DealerSocket User Summit here.
Hudson is no fan of the CFPB, a 5-year-old agency that is the creation of the Dodd-Frank Financial Reform Act. “It’s a big bully that looks for people who won’t fight back.”
A federal appeals court recently ruled the watchdog bureau’s structure is unconstitutional because its director isn’t answerable enough to the president.
But the agency has its supporters, particularly among consumer advocates. “We fought hard for the creation of the CFPB, a government agency with a mandate to protect everyday people from unfair financial practices,” says Liz Ryan Murray, a policy director for People’s Action Institute.
Dealers who arrange indirect loans between customers and lenders are exempt from direct CFPB oversight. Not exempt are buy-here, pay-here used-car dealers who do their own vehicle financing.
Herbies got into trouble for what the CFPB uncovered after questioning how the store could finance poor credit risks for only 9.9%, a rate touted in ads. “The CFPB said that doesn’t make sense,” Hudson says.
The bureau investigated and discovered, among other things, the store was requiring credit-risk customers to separately buy a vehicle-service contract as well as a GPS-locator device that aids in potential repossessions.
“Those charges weren’t figured into the APR, so the CFPB alleged Herbies hid financial charges,” Hudson says.
The bureau cited Herbies for “abusive financing schemes, hiding auto finance charges and misleading consumers.” It claimed Herbies “lured” customers. Hudson says that’s luridly overstating the case.
“All he did was make a mistake about how to handle disclosure,” Hudson says of
Herbies owner Lee Yoder, who said in an open letter: “It was certainly never our intention to deceive our customers.”
Herbies also got into hot water for charging one price for cash deals and a higher price for credit deals on the same car. Herbies does only a handful of cash deals, but regardless it’s legally taboo to price the same car differently. “Price is the price,” Hudson says.
Yoder signed the consent order to avoid facing law-enforcement action. Hudson says the $700,000 in restitution was “negotiated down substantially.”
Herbies has its defenders, even at the conference session in Texas where Hudson outline the case as a cautionary tale to other dealers.
“Herbies has a reputation for being a real honest dealer,” a session attendee says. “A lot of the stuff he is accused of doing, he didn’t do on purpose.”
Hudson says, “A lot of these things, if they had sat down and thought about them, they wouldn’t have done.”
He cites other so-called “compliance strategies” that are outdated and risk-filled today. Those include:
- “The famous ‘we-tried-to-comply.’” That will not stop the CFPB from pressing forward but “it might help in figuring out how much money it will take out of your wallet.”
- “Those are just technical violations.” The problem with that thinking is “virtually all of the Truth in Lending Act consists of technical requirements,” Hudson says.