Hackett: Will Buy-Here, Pay-Here Fall Like Rome?
"Hard cases make bad law" is a maxim attributed to Oliver Wendell Holmes, an associate justice and acting chief justice of the U.S. Supreme Court at the turn of the last century. The maxim suggests that cases with extreme facts often prompt courts (and regulators) to stake out extreme legal positions in response.
On July 29, the Consumer Financial Protection Bureau and 13 state attorneys general announced a consent order that represents just such "bad law," and the case should be of great concern to the buy-here, pay-here auto retail industry.
The case is known as Rome Finance, and the facts are quite extreme.
According to the CFPB's press release and earlier investigations conducted by the New York attorney general, Rome was a group of finance companies and related retailers that targeted service members with “guaranteed credit” to purchase large-screen TVs, computers and gaming systems.
Allegedly, Rome's affiliated retail store employees would go to the local big box store, buy merchandise at retail, mark it up 225 percent to 325 percent and then sell it on credit to active duty service members and their families (at 10 percent to 20 percent APR). Credit was provided on an affiliate's open-end plan.
Stores allegedly refused returns of unopened merchandise, pursued aggressive and abusive collection tactics and even collected on debt for merchandise that actually had been returned. Finally, to add an ultimate insult, Rome used the military's own pay system to deduct payments directly from a service member's salary.
By the time the CFPB became involved, more than one state attorney general had succeeded in obtaining relief for service members; Rome's retail outlets had gone out of business; and the finance companies were in bankruptcy — but still trying to collect old debts.
Much of that collection was for the benefit of creditors of Rome. It was this collection — some of it flowing to the individual principals of Rome — that the latest consent order shut down, along with banning the principals of the company from ever engaging in the consumer finance business.
Most readers would agree that regulators should take action against Rome's scheme of targeting vulnerable service members, and the CFPB has a statutory mandate to protect that class of consumers. The CFPB does not, however, have the authority to regulate the retail price of goods and services. The legal principles the Bureau used to finally sack Rome are very close to claiming that authority.
Here is what section 20 of the consent order declares:
"The prices of the consumer goods disclosed in the financing agreements were inflated to hide the true cost of the credit provided. The inflated goods prices resulted in inaccurate finance charges and annual percentage rates in disclosures provided in Corporate Respondents' financing agreements, in violation of Regulation Z."
The consent order goes on to allege that the same practice was both deceptive and unfair, terms that have particular legal meaning under the Dodd-Frank Act and include the idea that a reasonable consumer could not reasonably avoid the harm caused by the practice.
Here's the rub. In order to find a hidden finance charge in a retail price, a regulator must necessarily have the evidence and the authority to declare what the actual reasonable retail price is.
There begins a slippery slope abandoned by most economies in the late 1980s in markets other than regulated public utilities. The CFPB's consent order does not explain facts to support its assertion that prices contained finance charges.
Indeed, most of the facts in this article come from press reports about earlier state enforcement actions. Nor does the CFPB explain how consumers were unable to go to the big box store and thus avoid the "deceptive" pricing. Just how are consumers in this Internet age deceived as to the going prices for new, mass market consumer goods?
What does all of this have to do with buy-here, pay-here? Like Rome, the buy-here, pay-here industry provides credit to credit-challenged consumers by offering goods at higher-than-Internet-market prices. One can fairly argue that a portion of the price of a BHPH vehicle is, in microeconomic terms, a hedge against the high defaults that occur as a result of the financial instability of the lives of nonprime consumers, and that it is a credit cost.
Microeconomics, however, is not coterminous with legal principles. Until Rome, a posted retail price was a "cash price" for Truth in Lending Act purposes, absent some other compelling facts. Regulators relied on a consumer's ability to go down the street for a better price (and they still do) if the price on a used car was too high. That may no longer be true, especially if other compelling facts are present to support a legal argument that some portion of the price is a hidden finance charge.
What might some of those facts be?
- If a BHPH dealer allows a consumer to walk on the lot and pay a discounted price (below the posted BHPH price) for a cash sale, then regulators will argue with some validity that they can determine the portion of the posted price that is a finance charge.
- If a BHPH dealer aggressively promotes "interest-free financing," when everyone knows that credit costs are loaded into the vehicle price, a regulator will have a colorable case that the marketing scheme is deceptive (although this is a harder case to prove).
- If a BHPH dealer grants credit to every customer, regardless of the customer's ability to pay, relying solely on the value of the collateral to support the business model, a regulator will have a distinct legal "unfairness" argument and will be tempted to step further down the slippery slope of declaring posted retail prices "deceptive."
When I speak at BHPH industry conventions, I highlight these practices as asking for trouble.
One other strategic factor is critical. Like most regulators, the CFPB will use technical violations (of TILA, for example) as leverage to push creditors into agreeing to more systemic changes in the way they operate a business.
BHPH dealers should use great care to assure that technical issues like TILA disclosures, adverse action notices and other "forms" issues are airtight.
Will the BHPH business model fall like Rome? The CFPB is charged with balancing consumer protection and access to credit. There is a reasonable argument that BHPH is unique in the high economic utility it provides to consumers for its high price.
A payday loan's economic utility may be quickly eroded when fees paid equal the cash provided in two months or less (which is a fair example for online payday). In contrast, a responsible BHPH dealer provides the consumer with transportation to work, a value that is many multiples of the (admittedly high) cost of the nonprime credit cost involved.
One can only hope that the CFPB sees this side of the microeconomic argument when using its hidden finance charge detector.
Rick Hackett is a partner in the Maine office of Hudson Cook. He can be reached at (207) 541-9556 or by email at firstname.lastname@example.org.