Auto lenders, like many private citizens, began 2017 curious as to what change the impending Trump administration would bring. In the landscape of government enforcement, however, the consensus amongst industry participants was that the Trump administration would bring loosened regulation for the consumer finance industry. Many industry insiders mused about the potential sea change that would result if CFPB Director Richard Cordray was terminated, with or without cause, by the incoming administration.

While the Trump administration’s first year has certainly changed the nature and extent of federal industry oversight, arguably even greater change took place at the state enforcement level for auto lenders in 2017. The industry saw state attorneys general begin to fill the void they anticipated would be left by an altered CFPB mission. The auto finance industry also saw the genesis of a new state UDAP theory based upon the need to account for a consumer’s ability to repay an installment contract at origination. In review, three trends have emerged from 2017 that portend an active 2018 for state enforcement actions directed towards the auto finance industry.

Filling the Perceived Void

Even before the start of 2017, leading state attorneys general reacted to the impending Trump administration by proclaiming their intent to protect consumers if the federal government failed to do so. New York Superintendent of Financial Services Maria T. Vullo reacted to the election results by declaring that her agency would not shirk from its responsibility of protecting its citizens. Likewise, New Mexico Attorney General Hector Balderas requested that his associates identify areas where prospective Trump administration policies could harm his state’s citizens.

Plans for an enforcement ramp-up did not end at state borders. Instead, much like after the mortgage crisis, state attorneys general networked together and openly discussed a desire to form a multistate task force to focus on the auto finance industry and, more specifically, the industry’s subprime segment. The cooperation between state attorneys general was seen throughout 2017 in various segments of the financial services industry. In the auto finance space, the most notable cooperative investigation resulted in one lender’s settlements with Massachusetts and Delaware for indirect origination practices underlying its subprime installment contracts.

A New Enforcement Theory

The collaboration between Massachusetts and Delaware brought a novel UDAP theory to the forefront of the auto finance industry. For the first time in 2017, state attorneys general successfully prosecuted claims that an indirect lender’s subprime installment contracts were unfair and deceptive because the lender failed to consider the borrowers’ ability to repay.

It was common belief, prior to 2017, that state regulatory regimes did not expressly require prospective indirect lenders to analyze a borrower’s ability to repay. Courts in a small number of jurisdictions (including the District of Columbia, New Jersey, and Massachusetts) had previously allowed UDAP or consumer protection claims to proceed based upon conduct resulting in a high likelihood of consumers being unable to repay their credit obligations. These cases, however, concerned other areas of consumer finance outside of the context of auto loans and were few and far between.

Massachusetts and Delaware settlements represented the first time an indirect auto lender was penalized for its failure to analyze the borrowers’ ability to repay. Other states have indicated that they will now seek to expand application of this theory. For instance, Mississippi’s attorney general engaged outside counsel in 2017 to investigate an indirect subprime lender under this same UDAP theory.

One other enforcement theory also became more prevalent in 2017. Multiple state attorneys general consummated settlements with auto dealer groups based upon the deceptive practice of bundling aftermarket options into installment contracts. For instance, New Jersey entered into an August settlement and consent order based upon a dealership’s “jamming” of certain aftermarket options into installment contracts for subprime borrowers. Massachusetts entered into a similar settlement in September based upon a dealership’s sale of defective vehicles with high-cost subprime loans and bundled packages included in the amount financed. New York also entered into settlements and consent orders with two dealerships based upon illegal bundling of credit repair and identity theft protection services into installment contracts.

The Rise of the “Mini-CFPB”

Sensing the potential for an enforcement void in a Trump-influenced CFPB, some state attorneys general took even greater measures in 2017 in an effort to protect consumers. State attorneys general have been empowered since 2012, through Dodd-Frank Section 1042 (12 U.S.C. § 5552), to bring civil actions to enforce the Dodd-Frank Act and regulations promulgated under the act’s authority against entities within their jurisdiction. From a practical perspective, this power allows states to bring certain actions to enforce CFPB rulemaking if the CFPB fails to do so. States also have the authority to bring enforcement actions under specific federal consumer protection statutes, including TILA, RESPA, and the FCRA. State attorneys general, of course, also may enforce state laws – including state UDAP provisions.

The most novel related development in 2017 has been the emerging willingness of state attorneys general to explicitly seek a greater role in enforcement. Notably, Virginia’s attorney general created a Predatory Lending Unit in March. Pennsylvania created a Consumer Financial Protection Unit (labeled by some observers as a “mini-CFPB”) in July. Maryland followed suit by creating a Financial Consumer Protection Commission. Even where explicit structural changes were not made, other states ramped up their presence. For instance, Washington’s attorney general has increased staff from 11 attorneys to 27 attorneys over the past four years.

What Will 2018 Bring?

Building upon the trends set in 2017, we expect even more state attorneys general to continue to expand their auto finance enforcement activity in 2018. This trend appears to be even more likely in light of the appointment of Mick Mulvaney as acting director of the CFPB and the departure of Richard Cordray from the bureau. We expect to see more states pursue task forces or other “mini-CFPB” entities to fill any perceived enforcement void. We also expect to see the “ability to repay” UDAP theory gain traction in additional states in 2018.

Additionally, the recent GAO ruling that the CFPB’s 2013 Indirect Auto Lending Bulletin is subject to congressional override under the Congressional Review Act likely means that states take action in its place. It will be interesting to see whether state attorneys general will pursue enforcement of disparate impact assignee liability claims based upon dealer markup practices in 2018. It is very possible that some states will attempt to issue similar rulemakings to replace the CFPB’s Bulletin.