George Washington and the FTC’s Fair Lending Ambuscade

To paraphrase George Washington, in its recent action against Passport Auto Group it could be said of the FTC:

The FTC is not reason, it is not eloquence, it is force! Like fire, it is a dangerous servant and a fearful master; never for a moment should it be left to irresponsible action.

The newly announced Fair Lending antidiscrimination policy of the FTC, applying Section 5 of the FTC Act to allegedly combat discrimination, is irresponsible action. All organizations, including vehicle dealers, should be on high alert regarding this new, legally errant, announced policy.

Government Regulators and Consumer Attorneys Adore Unfair and Deceptive Trade Practices Acts (UDAP)
Section 5 of the Federal Trade Commission Act (FTC Act) (15 USC 45) prohibits ”unfair or deceptive acts or practices in or affecting commerce.” The prohibition applies to all persons engaged in commerce, including banks and dealers.

The various states have also passed similar laws, sometimes called “little FTC Acts.” These state acts include the same prohibition as indicated above. In a nutshell, commercial activity, such as arranging financing for a vehicle purchase, that has the tendency or capacity to mislead a consumer, could violate the law. This is an incredibly broad standard and allows for attorneys general, class action attorneys, and private plaintiffs to sue merchants. Applying this standard to fair lending and discrimination can considerably broaden the potential liability to financing sources and dealers.

However, Section 5 of the FTC Act bears no resemblance to the various antidiscrimination laws Congress has passed.

FTC Commissioner Noah Joshua Phillips states it well in his dissenting opinion:

The FTC Act is not an antidiscrimination statute. When Congress wishes to make discrimination illegal, it says so. The Civil Rights Act of 1964 makes it unlawful to “discriminate.” The Equal Pay Act of 1963 bars “discrimination.” The Americans with Disabilities Act says it is illegal to “discriminate.” Congress knows how to tell the public (and law enforcers) when it is addressing discrimination. There is simply nothing to suggest that, in the 1938 Wheeler-Lea amendments to the FTC Act, Congress did so. Nor is there anything to suggest that, in 1994 – after Congress had adopted numerous antidiscrimination laws – its clarification of “unfairness” did.

The progressive members of the FTC, Chairman Lina Khan, and Commissioners Slaughter and Bedoya, opine far differently as they state in their Joint Statement:

[The alleged discriminatory imposition of higher borrowing costs to minorities] …is a straightforward application of Section 5. Section 5(n) of the FTC Act states that an act or practice is unfair if it “causes or is likely to cause substantial injury to consumers or competition which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or competition.”
The fact that harmful conduct may be subject to other legal or regulatory regimes does not in itself limit (or lessen) the FTC’s responsibility to use all of our available authorities to target such conduct. Where Congress passes laws prohibiting conduct that also violates the FTC Act, the FTC often charges violators with the full range of law violations, including Section 5. Section 5 does not wilt when Congress legislates. (emphasis added)

In other words, the FTC is grandiosely applying its authority in a manner never intended by Congress.

It is a sinister ploy and could provide ammunition for attorneys, of all stripes, to file many lawsuits against financing sources and dealers for enormous sums of money, in all phases of fair lending, especially including disparate impact, a favorite CFPB theory. Although Section 5 of the FTC Act is enforced by the FTC, and not plaintiff’s attorneys, creative state attorneys general, and consumer attorneys, may apply state UDAP statutes in possibly the same way. Moreover, the FTC often partners with state attorneys general to prosecute cases. Precedents of this nature provide a prosecutorial model for other practitioners to emulate in new creative ways.

Fair Lending and You
This new FTC legal theory is supposed to advance fair lending.

What is fair lending? Fair lending prohibits creditors from considering your race, color, national origin, religion, sex, familial status, or disability when applying for credit. These are the prohibitive factors which are the bases of discrimination prosecutions. Fair lending warrants similar lending opportunities to all consumers. The overly broad Dodd-Frank Act defines “Fair lending” as “fair, equitable, and nondiscriminatory access to credit for consumers.”

The laws, which address fair lending, cover every phase of the lending process and, consequently, are comprehensive. Applications for credit, administration, and debt settlement are included. Dealers and financing sources need to be acutely aware of potential liabilities in each of these phases.

There are three types of discrimination cognizable by regulators: overt, disparate treatment, and disparate impact.

Overt Discrimination
Overt Discrimination, which occurs when a financing source or dealer openly and/or actively discriminates against a consumer on a prohibited basis factor. It is patently offering more favorable terms and conditions to one group versus another based upon a prohibited factor such as sex. Overt discrimination should not be confused with deliberate discrimination and can be entirely unintentional. Although it is a fair lending issue, due to its comparative clarity to financing sources and dealers, it is usually not a prosecuted issue since these organizations recognize the legal peril. However, specific target marketing may yield examples of overt discrimination that these businesses may not recognize.

Disparate Treatment
Disparate treatment occurs when members of protected class, a prohibited basis group, are treated differently than others. Disparate treatment produces inconsistencies or differences based upon one or more of the prohibited factors that are not fully clarified by related non-discriminatory elements. Unintentional, subtle, or inconsistent treatment underscore this legal theory.

These inconsistencies may precipitate the application of this legal theory, for prosecutions, and highlight financing sources and dealer vulnerabilities. Key issues such as underwriting, pricing, and steering may, through auditing and statistical analysis, be utilized to demonstrate disparate treatment. It is commonly targeted in fair lending reviews. The cost of defending against this allegation is compounded by the need for organizations to internally audit these alleged statistics.

Disparate Impact
Disparate impact is defined as a seemingly applied neutral policy, or protocol, which disproportionately excludes or burdens certain consumers on a prohibitive basis. It is where a consistent policy application results in an adverse result regarding a protected class. For example, if a financing source has an extremely consistent application of a required minimum credit score, but it adversely impacts a protected class, it could be construed as disparate impact. A defense might be a business necessity for this protocol. The concept of equity enters into the government’s rationale. Equity, in this context, is for the regulating community to seek similar results for all consumers, especially the distinct and insular minorities.

Thwarting the Threat
For dealers the initial course of action is abundantly clear. Every dealer, franchise, independent, or BHPH/LHPH dealer, should adopt and properly implement the NADA’s “Fair Credit Compliance Policy & Program” and “Voluntary Protection Products: A Model Dealership Policy.” Both programs will provide legal defenses to alleged fair lending failures. These programs do not guarantee complete defenses but should provide a dealer with the ability to mitigate fair lending risks.

Terry O’Loughlin, J.D., M.B.A., director of compliance for The Reynolds and Reynolds Company, has nearly 30 years of legal and regulatory experience in motor vehicle-related fields. From 1989-2006, O’Loughlin served with the Florida Office of the Attorney General, investigating and prosecuting automobile dealers, manufacturers, and financing and leasing companies. He led a task force that examined more than 100,000 motor vehicle files and settled with over 1,600 vehicle dealers for more than $15,000,000.00. O’Loughlin helped to draft and served as mediator of Florida’s Motor Vehicle Lease Disclosure Act. He has served as a consultant to the Federal Reserve Board’s Leasing Education Committee and has routinely advised numerous states’ agencies on motor vehicle fraud. Admitted to both the Pennsylvania and Florida Bars, O’Loughlin graduated from the University of Pittsburgh and received his graduate degrees from the University of Dayton.