For the most recent edition of Supervisory Highlights, the Consumer Financial Protection Bureau focused on examiners’ findings in the auto finance sector. Several of these practices were identified by the CFPB in prior Supervisory Highlights. Many of the CFPB’s concerns relate to trends in the marketing, sales, financing, and refunds related to add-on products like optional vehicle- or payment-protection, and to consumers’ difficulty in cancelling those products or receiving refunds. The Federal Trade Commission and state regulators also have prioritized these areas, and several states have recently passed legislation addressing add-on products (including refunds, cancellation and notification). In several of the findings, the CFPB noted that the failures related to inadequate oversight of service providers, reflecting another recurring theme in CFPB’s compliance management expectations.
The CFPB has framed many of these targeted practices as unfair, deceptive or abusive acts or practices (“UDAAP”), which is consistent with certain of the agency’s recent consent orders or suits related to auto servicing practices.
In response to the findings, the CFPB generally demanded ceasing the allegedly noncompliant practices, developing policies and procedures to ensure compliance going forward, and in some cases refunding amounts to consumers.
Motor vehicle dealers, auto finance companies, servicers and secondary market purchasers of auto loans should take note of these highlighted practices when evaluating their policies and procedures.
Findings of Abusiveness
The CFPB notoriously has authority to prohibit certain acts or practices that it deems to be abusive. The agency issued a policy statement in April 2023 providing a framework for analyzing the acts, practices, or omissions of covered financial services providers to determine whether they meet that abusiveness threshold. In this latest set of Supervisory Highlights, the CFPB relies on that framework to assert that certain auto financing acts or practices fall into that category.
- Charging for Unwanted Add-On Products: Examiners found that certain auto finance companies contracted with service providers to offer refinancings to borrowers. Those contracts required the provider to secure a minimum number of extended service contracts or other add-on products. To the extent those service providers sold those products without disclosing or explaining that the cost would be included in the refinancings, the CFPB deemed that practice to be abusive.
- Charging for Add-On Products on Salvage Title Vehicles: A vehicle may have a so-called “salvage” title if the vehicle has been significantly damaged or otherwise has very little value. States may prohibit such vehicles from being operated on public roads, lenders generally will not provide financing for those vehicles, and contracts for add-on products are generally void in connection with those vehicles. However, the CFPB found servicers suspended their title check process and financed add-on products in connection with salvage title vehicles. In those instances, the consumers paid for add-on protections but did not benefit from the coverage because of the exclusion for salvage vehicles.
- Denying or Failing to Appropriately Allow Cancellation of Add-On Products: Several of the CFPB’s findings of abusiveness related to auto finance servicers that reportedly denied consumers’ request to cancel add-on products in accordance with the contractual terms, or that servicers imposed significant hurdles to cancellation. The CFPB reported that in connection with add-on product contracts that allowed for cancellation with a pro rata refund within the first year, certain servicers denied consumers’ cancellation requests or refused to provide refunds. The CFPB also reportedly found servicers that required consumers to make two in-person visits to a dealership to cancel contracts for add-on products, the cost of which had been financed. The consumer had to visit the dealership and meet with the manager, and then had to return in order to receive the refund check. The agency’s findings of abusiveness under those circumstances harkens back to its enforcement action against an auto finance company last year. In that case, the CFPB stated that consumers who wished to cancel add-on products were routed to a “retention hotline.” The hotline personnel would continue promoting the product until the consumer voiced three affirmative cancellation requests, after which the personnel instructed that cancellation could only be effectuated in writing. If the consumer sent a written cancellation request, the company would provide the refund only as a principal payment on the loan, so the consumer would get no immediate benefit from the cancellation. The CFPB deemed that practice to be abusive.
Findings of Unfairness or Deception
In addition to the CFPB’s supervisory findings of abusive acts or practices, the agency found unfair and deceptive ones, too.
- Unfair Repossession Practices: The CFPB asserted that certain auto financing servicers erroneously repossessed vehicles when consumers had made payments or obtained extensions, deferments, or loan modifications. This wrongful repossession may occur if the servicers are unsuccessful in canceling repossession orders or in acting on those cancellations. The CFPB also claimed that it found instances of unfair repossession of vehicles when there was no verification of a valid, recorded lien. The CFPB has highlighted the issue of unfair repossessions in a prior compliance bulletin.
- Unfair Failure to Provide Refunds on Add-On Products: The CFPB also found that servicers failed to ensure consumers received refunds of unearned premiums for add-on products upon early termination of their auto loans, by either failing to provide the refund themselves or failing to ensure that dealers or administrators provided them. The CFPB also found that certain servicers failed to timely apply refund amounts (highlighting a delay of 664 days in at least one instance) or miscalculated them. The agency explained that upon loan payoff, credit protection products have no further value, and upon repossession or if the vehicle was deemed a total loss, neither credit protection nor vehicle service contracts have value. While some states address pro rata refunds, the CFPB asserts that it is the servicer’s responsibility in all states to ensure the refunds are provided.
- Unfair Failure to Apply GAP Coverage: Examiners found that servicers collected monthly payments when they knew the GAP waiver would cover the outstanding balance. GAP stands for “guaranteed asset protection,” a credit protection product that pays off the financing if the car is totaled or stolen (auto insurance typically only covers the actual value of the vehicle at the time of the loss). The CFPB found that certain servicers continued to collect consumer payments, instead of waiving those payments in accordance with the GAP contract, or the servicers miscalculated refunds upon discovering their error.
- Unfair Delay in Providing Title Upon Payoff: Examiners found that servicers’ policies are generally to provide title documentation within two business days but in some cases delivery times significantly exceeded that timeline.
- Deceptive and Unfair Payment Allocation Processes: The CFPB found that an auto loan servicer’s website stated that the consumer’s payments would be applied first to the current payment due, including both interest and principal, before applying a payment to outstanding late charges. However, for postmaturity loans, the servicer actually applied payments to the most recent payment due, then to other charges (such as late fees), and then to other payments due, which in certain cases caused the consumer to incur additional late fees.
- Deceptive Marketing: Prescreened advertisements marketed rates “as low as” specified annual percentage rates (“APRs”), but consumers in fact had no reasonable chance of qualifying for or being offered rates at or near that level. While the CFPB offers no bright lines for measuring the reasonable accuracy of advertisements (for example, what percentage of consumers must be able to qualify for an advertised rate), the CFPB reported that the lowest interest rate offered to consumers was more than twice the advertised rate, which the CFPB found to be deceptive.
Other Compliance Findings
While the CFPB found that the acts and practices described above ran afoul of unfair, deceptive, or abusive acts or practices (“UDAAP”) principles, the examiners also found some more straightforward compliance errors related to Truth in Lending Act (“TILA”) disclosures and Fair Credit Reporting Act violations.
- Inaccurate TILA Disclosure: The CFPB reminded us that accuracy is paramount when considering TILA disclosures, and that includes disclosing that the car buyer will incur a prepayment penalty when the installment contract does not provide for such a penalty. It also includes identifying the payee for optional products purchased by the consumer in the disclosed itemization of amount financed.
- Credit Bureau Furnishing Errors: Examiners found that auto financing servicers furnished credit reporting companies inaccurate information, including inaccurate past due amounts, monthly payment amounts, payment ratings, dates of first delinquency, or payment amounts upon payoff or settlement. Examiners also found that servicers failed to promptly correct and update incomplete or inaccurate information with credit bureaus, in some cases continuing for months to furnish bad information even after identifying the error. (The CFPB has highlighted similar furnishing failures in the past.)