Alert

CFPB Issues Auto Finance Supervisory Highlights Sharing Marketing, Servicing, and Add-on Findings

October 15, 2024

A new “Auto Finance Special Edition” of the Consumer Financial Protection Bureau’s (CFPB or Bureau) Supervisory Highlights was released on October 7, 2024, and it is important for those overseeing compliance in their auto finance companies to pay close attention. The report summarizes the agency’s supervisory observations on issues that affect the entire auto finance lifecycle including marketing disclosures, repossession activities, servicing practices, and practices of data furnishers. The CFPB also emphasizes its ongoing interest in how regulated companies handle add-on products. Below, we have highlighted some relevant issues—some of which include COVID-19 deferment and repossession practices coming back to roost.

“As Low As” Marketing of APRs in Pre-Screened Advertisements

The Bureau refers to this as being an issue for subprime finance companies; however, it is a worthwhile compliance and marketing topic for all creditors that make pre-screened offers or make them available through service providers. The Bureau describes mailing pre-screened offers of credit that included marketing claims that APRs “as low as” a specified rate were available, even though the recipients of the pre-screened offer had no reasonable chance of qualifying for or being offered rates at or near that level. Because the marketing materials indicated that the recipients had been pre-screened based on information in their credit reports, the Bureau found it reasonable for prospective applicants to interpret the “as low as” rate as a rate for which they had a reasonable chance of qualifying. In this instance, the Bureau states that the lowest rate offered to consumers was more than twice the advertised rate.

For companies that market directly to consumers, it is highly recommended to review any potential disparity between advertised rates and actual rates offered, as well as the parameters for the pre-screened offers and the marketing claims included in the offers. Companies that use service providers are also encouraged to review their oversight procedures to ensure pre-screened offers are consistent with financing terms that can reasonably be obtained.

Wrongful Repossession

The Bureau does not detail the particular circumstances, but as in many prior editions of the Supervisory Highlights, it addresses alleged repossession misconduct, including (1) failing to cancel repossession orders promptly enough after the consumer had made payments or obtained extensions that should have prevented a repossession, and (2) repossessing vehicles after the servicer had approved a COVID-19 related deferment or modification. The report states that loan holders and their servicers are responsible for compliance with repossession laws and that holders should also ensure their service providers do not violate the law.

It is unclear exactly how the COVID-19 relief processes played into these repossessions, but it likely warrants a review of the extension and related customer assistance policies and procedures that were in place at the time, as well as how repossessions for impacted customers were handled. In short, the Bureau’s expectation is that every repossession is justified by the underlying contract and applicable law, and any finance company and its servicer follow established procedures in conducting the repossession.

Repossessing Third-Party Vehicles Absent a Perfected Lien

The Bureau identified instances of servicers failing to check whether their lien had been perfected prior to assigning an account for repossession, which resulted in vehicles being repossessed from consumers who had no prior relationship with the servicer (i.e., bona fide purchasers). This issue highlights the risk that can occur when dealers are not diligently resolving unperfected title issues, servicers are not utilizing remedies available in the underlying dealer agreement when a dealer is in breach of the dealer agreement, or a servicer’s repossession approval process does not include a title check that may reveal that a newer title has been issued since the date of the contract.

Payment Application Issues

The Bureau identified instances of servicers applying post-maturity payments differently than the order of payment application stated on the servicer’s website. The Bureau has, over the years, criticized servicers across all industries for not being clear about how payments are applied—particularly in the context of partial prepayments—so this focus on payment application is not new. In this context, the Bureau alleges that servicers’ websites state that payments would be applied to the current payment due, including interest and principal, before any outstanding late charges. After maturity, 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. This resulted in consumers being assessed late fees because their principal balances were not paid off on schedule. In previous Supervisory Highlights, the Bureau has also identified where servicers did not apply payments in the order stated in the contract, which caused customers to incur additional late fees as well. Servicers may want to review what their website, contract, and scripts say about payment applications compared to the servicer’s actual practices throughout the entire lifecycle of the contract.

Title Delays

The Bureau identified instances where servicers did not timely provide vehicle titles after an account was paid in full, or process title documentation quickly enough when a customer moved to a different state. Interestingly, the Bureau makes no reference to state law in the summary. Presumably, this suggested delay would not violate the timeline permitted by applicable state law; however, the Bureau was critical of the servicer involved here because the servicer’s policy was to provide title documentation within two business days, but the actual delivery times significantly exceeded this timeline. Accordingly, it may be prudent to review the applicable policy and procedure to ensure that it clearly defines the date when the servicer considers an account to be “paid in full” in the absence of a state law requirement (i.e., what is the time period to confirm that the payment is not returned, etc.), and how long after this date, in the absence of a shorter period imposed by state law, does the servicer release its electronic lien and/or deliver the title documents.

Add-on Products Issues

Consistent with the Bureau’s focus on the expectations of a servicer related to any add-on products financed in the contract, the Bureau identifies several issues related to the sale and financing of add-on products:

1. Collecting and retaining amounts for add-on products consumers did not agree to purchase.

2. Financing of void add-on products on salvage vehicles.

3. Failure to identify payee of add-on products.

4. Onerous requirements to cancel add-on products.

5. Failure to honor contractual cancellation rights.

6. Failure to ensure refunds of unearned premiums.

7. Inaccurate add-on product refund amounts.

8. Delays in applying add-on product refunds.

9. Continuing to collect payments when consumers are covered by a GAP product and miscalculating refunds.

In general, the Bureau believes that financing the sale of add-on products that the consumer did not explicitly agree to purchase is an abusive practice. A practice is “abusive” when it (1) materially interferes with the ability of a consumer to understand a term or condition of a product or service, or (2) takes unreasonable advantage of one of the three statutorily specified market imbalances. Those market imbalances are (1) a consumer’s lack of understanding of the material risks, costs, or conditions of a product or service, (2) a consumer’s inability to protect their interests in selecting or using the product or service, or (3) a consumer’s reasonable reliance on a covered person to act in their interests. 

The Bureau was particularly critical of supervised entities who sold these products themselves or through service providers as part of a refinance program, in which recorded calls revealed that the service providers did not disclose or explain add-on products that had been included and financed as part of the loan. The failure of regulated entities to conduct comprehensive compliance monitoring of how service providers market and originate add-on products was also a repeated issue of note by the CFPB.  

Further, the Bureau criticized finance companies for failing to conduct a title check or other processes to verify that a vehicle was not ineligible for coverage under a GAP waiver or other voluntary protection product because of a salvage title or other title brand, making the add-on product “useless.”

The Bureau continues to hold the servicers responsible for product cancellation and refund issues when the finance company has the necessary information or is in the best position to obtain it, despite what state law says about cancellation and refund obligations under these circumstances. The Bureau’s expectation is that the servicers cancel and provide the refund directly, or ensure that dealers or administrators do so, regardless of state law.

Data Furnishing Deficiencies

Consistent with the CFPB trend of credit reporting and credit dispute examination and complaint focus, the Bureau identified numerous instances of furnishing data that the furnisher knew or had reasonable cause to believe was inaccurate. This included inaccurate past due amounts for charged-off accounts, scheduled monthly payment amounts for paid or otherwise closed accounts with zero balances, outdated payment ratings, inaccurate dates of first delinquency, and inaccurate actual payments following a payoff or settlement.

Importantly, the Bureau found that furnishers that disclosed only general-purpose corporate addresses or other methods of contact on their websites did not clearly and conspicuously specify an address for consumers to send notices relating to disputing inaccurate information on their credit report. Furnishers who do not conspicuously disclose such an address only violate their duty to furnish accurate information after being notified by the consumer of an alleged inaccuracy. Accordingly, furnishers are encouraged to confirm that such addresses are clearly and conspicuously disclosed, whether in the contract, on monthly statements, or on their website.

For more information or to discuss how these developments may impact your business, please reach out to the authors or to McGlinchey’s Consumer Financial Services Compliance team. We are ready to help you navigate these issues and ensure your compliance strategies align with evolving regulatory expectations.