Consumer advocates are urging the Federal Trade Commission to expand longstanding protections for borrowers who have defaulted on certain debts. Feeling the heat are mortgage originators and providers of auto leases, both of which are currently exempt from consumer challenges.
The emerging fight centers on a four-decade-old FTC regulation that addresses situations in which a shopper finances the purchase of a product or service that turns out to be defective or fraudulent.
If the consumer decides to stop making loan payments, the FTC's rule offers some measure of protection. Specifically, the seller's misconduct can be raised by the consumer in the ensuing dispute with the lender. Loans to pay for cars, furniture, home improvements and college tuition are all covered.
"It's the most significant piece of consumer protection the FTC has ever enacted," said Jonathan Sheldon, a staff attorney at the National Consumer Law Center.
Now his organization and other prominent consumer groups want the FTC to go substantially further, and their aggressive posture has put lenders on the defensive.
In a recent letter, the NCLC and more than two dozen allied organizations asked the FTC to apply its rule to the auto-leasing business. The groups noted that auto leasing was rare in the 1970s, but today it accounts for about one-third of all financing for new vehicles.
The 16-page letter also suggested that residential mortgages should carry similar borrower protections, though it stopped short of explicitly calling for their inclusion in the FTC's regulations.
The consumer groups, which include the Center for Responsible Lending, the Consumer Federation of America, and the U.S. Public Interest Research Group, argued that mortgage fraud was rampant during the 2000s because securitization trusts that purchased home loans had no incentive to police misconduct.
"Mortgage loan brokers and loan originators were given a green light for fraud on a scale never before seen in this country," the joint letter stated.
In the decades since the FTC developed its borrower-protection rule, the regulatory landscape has changed substantially. Notably, the Consumer Financial Protection Bureau was created in 2010, and it subsequently issued sweeping new rules for the mortgage market.
The new order in Washington may explain why the National Consumer Law Center and its allies - despite their concerns about the mortgage market - did not call on the FTC to take action with respect to home loans.
"We just did not sense this was the forum to do it," Sheldon said.
But in a separate letter, the National Association of Consumer Advocates did urge the FTC to consider whether its rule should be expanded to cover mortgages.
Homebuyers during the pre-crisis mortgage boom would have benefited from an expanded version of the FTC's rule, argued Christine Hines, the group's legislative director. "Maybe the agency should also look at that," she said in an interview.
The letters from consumer groups came as part of a periodic review of the regulation, which is known as the Holder Rule. The agency asked for public input in November, and comment letters were due Feb. 12.
Financial industry groups anticipated some of the arguments offered by consumer advocates, and sought to rebut them preemptively.
The Mortgage Bankers Association argued in its letter that expanding the rule into the mortgage realm would disrupt the confidence of investors in the secondary market.
"That would have, we think, a chilling effect on investor interest," Pete Mills, a senior vice president at the Mortgage Bankers Association, said in an interview.
Homebuyers would ultimately pay higher interest rates if the FTC decided to cover mortgages, argued Stephen Newman, an industry lawyer at Stroock & Stroock & Lavan.
"Maybe the agency believes that additional price is appropriate to ensure compliance. But many consumers would probably prefer to just have the lowest rate they could get," he said.
Wells Fargo, the nation's largest mortgage lender, pointed out that certain high-cost mortgages are already subject to borrower-protection rules, enacted in 1994, that mirror those provided by the FTC's regulation.
Congress made the choice to apply those rules narrowly in the mortgage market, and the FTC should not override that decision, Wells Fargo stated in a letter to the agency.
Separately, the American Financial Services Association, which represents nonbank auto finance companies, argued against expanding the FTC's regulation to include vehicle leasing.
The industry group noted that auto-lease providers are already subject to related, though more limited, rules, and added that those regulations are functioning adequately.
Fraud in auto leasing might involve misrepresentations by the dealer about the financial terms of the lease. For example, a dealer might falsely tell the consumer that an expensive service contract is required.
The FTC has not said whether it will open a new rulemaking process in response to the comments it received. Consumer advocates are hoping that the agency will make revisions, and they used the recent comment process to seek a laundry list of changes.
For example, the National Consumer Law Center wants the FTC to make clear that a recovery cap, which limits the lender's liability to the amount the borrower has already paid, does not apply to attorney fees. Other commenters want the agency to go further and lift that cap altogether.
The consumer groups argue that the FTC's regulation offers consumers a crucial avenue of recourse when they're defrauded. They also maintain that it gives lenders a strong incentive to monitor the conduct of merchants with whom they do business.
By contrast, they argue, U.S. consumers in the 1950s and '60s often had little recourse when fly-by-night salesmen sold them faulty goods.
Some observers are skeptical that the public input will compel the FTC to act.
"I don't think there's any tremendous drive to revisit this," said John Culhane, a lawyer at Ballard Spahr.