CFPB focuses on auto finance practices in latest Supervisory Highlights #NewsUnitedStates

On October 7, the CFPB released the Fall edition of its Supervisory Highlights, “Special Edition Auto Finance,” focusing on the auto finance market. The report highlights various supervisory observations and enforcement actions taken to address issues the CFPB asserts it has seen in the auto finance sector, including deceptive marketing practices, wrongful repossessions, and failures in servicing and add-on product administration.

According to the report, auto loan debt now exceeds all other household debt categories except for mortgages, citing to data from the Federal Reserve showing a total of more than $1.6 trillion in auto loans as of Q2 2024.

The report covers examinations conducted between Nov. 1, 2023 and Aug. 30, 2024. The CFPB said that its examiners made the following supervisory observations:

Origination Disclosures

Examiners identified issues with how auto-finance companies disclosed annual percentage rates (APRs) and prepayment penalties at origination:

• The Bureau alleged that subprime loan originators engaged in deceptive practices by advertising “as low as” APR rates that consumers had no reasonable chance of qualifying for.
• Examiners alleged that prepayment penalty disclosures were inaccurate and violated the Truth in Lending Act (“TILA”), as the TILA disclosure that a consumer may have to pay a penalty if they paid early was inconsistent with the statement in the retail installment sales contract that there was no finance charge if the loan is paid early.

Repossession Activities

The report highlights repossession practices it alleges are unfair, including:

• Wrongful repossession of vehicles due to service providers failing to cancel orders to repossess when consumers had made payments or had obtained a loan deferment, loan modification, or extensions that should have prevented repossessions.
• Repossession of vehicles without having a valid recorded lien to the vehicle.

Servicing Practices

The Bureau identified two servicing issues: improper payment allocation, and excessive delays in providing vehicle titles:

• According to the report, some servicers misallocated borrowers’ auto loan payments, such as applying payments to late fees first instead of applying to the loan principal and interest, which resulted in borrowers having to pay erroneous late fees.  The CFPB alleged that this constituted both a deceptive and unfair practice, as consumers incurred late fees due to payments being applied in a different order than that disclosed on the servicers’ website.
• The CFPB also alleged that servicers engaged in unfair practices by failing to timely deliver title to vehicles after loan payoff, causing harm to consumers who could not legally sell their vehicles or faced additional insurance expenses.

Add-On Products

The CFPB alleged a number of abusive and unfair acts and practices related to add-on products, including:

• Charging consumers for optional add-on products that the consumers did not agree to purchase, which examiners alleged was abusive as consumers did not know or consent to being charged.
• Failing to identify the payee of add-on products in the itemization of the amount financed, which the Bureau alleged violated Regulation Z, 1026.18(c)(1)(iii), by failing to itemize amounts paid to other persons by the creditor on the consumer’s behalf.
• Imposing onerous requirements to cancel add-on products, such as  requiring borrowers to make two separate, in-person visits to a dealership to cancel an unwanted add-on product, which prevented consumers from exercising their cancellation rights.
• Failing to honor contractual cancellation rights following early termination of a loan by not providing refunds or credits to consumers for the unused portion of the cancelled product and failing to ensure refunds of unearned premiums.
• Providing incorrect refund amounts for add-on products after early termination, denying consumers the refunds to which they were entitled.
• Failing to timely provide add-on refunds in some instances when they were provided. For example, the Bureau alleges that in one matter, refunds were applied an average of 84 days after the post-repossession sale of vehicles, with at least one refund coming 423 days after sale.
• Continuing to collect monthly payments when consumers are covered by a GAP product, and miscalculating reimbursements to consumers who made those payments.

Furnishing Deficiencies

The CFPB alleged that auto lenders and servicers furnished information to credit reporting agencies that violated the Fair Credit Reporting Act and Regulation V, including:

• Reporting information with actual knowledge of errors, such as incorrect amounts past due for charged-off accounts, inaccurate dates of when borrowers fell behind on payments, and inaccurate actual payment amounts following a payoff or settlement. In some cases, lenders relied on computer systems that were not designed to report information about auto loans.
• Failing to promptly update or correct inaccurate information, in some cases for several months or over a year after determining through monitoring or audit activities that the information was incomplete or inaccurate.

Supervisory and Enforcement Developments

The report also highlighted several advisory opinions, circulars, and proposed rules recently issued by the CFPB, including FAQs on Buy Now Pay Later products, an advisory opinion on consumer protections for home sales financed under contracts for deeds, a proposed rule to standardize data submitted to federal financial agencies, a circular warning about the use of non-disclosure agreements that could deter whistleblowers, and the proposed interpretive rule on Earned Wage Access products.

Finally, the report noted several enforcement actions against financial institutions related to student loans, credit reporting, mortgage servicing, and lender-placed insurance on auto borrowers and opening fake accounts.