In January, the Consumer Financial Protection Bureau, New York’s attorney general, and Colorado’s attorney general announced enforcement actions concerning lender add-on product practices. Building on prior actions and statements, these actions reflect intensified state and federal interest in the auto industry and add-on products.
Heightened concern over the cost of automobiles and the size of auto loans during the pandemic, coupled with the potential for unfair or deceptive practices in sale and financing of add-on products, provide a platform for federal and state agencies to keep pursuing their consumer protection agendas. Auto lenders should prepare for further scrutiny.
Over the last decade, the CFPB steadily asserted that entities involved in auto finance may have committed unfair, deceptive, or abusive practices by:
- Marketing that an add-on product would only add a few dollars to a consumer’s payment (when it adds much more), or that it broadly covers repairs (without clearly disclosing exclusions from coverage)
- Marketing that a guaranteed asset protection product covers the consumer’s remaining loan balance in the event of vehicle loss, when it would only cover amounts below a certain loan-to-value threshold
- Selling GAP to consumers who lenders “knew” would receive no benefit from the product
- Miscalculating rebates for premiums paid in the event of a total vehicle loss or repossession, resulting in collection of inflated deficiency balances
- Failing to request refunds for premiums paid in the event of a total vehicle loss or repossession, while communicating to borrowers that any deficiency balance reflected all available credits and rebates of which the servicer was aware
- Failing to request and apply a refund of unearned GAP fees, where the vehicle was repossessed, or contract was cancelled, or where the consumer paid off the contract early
The CFPB’s penultimate enforcement action of 2022 and first action of 2023 underscore the agency’s continued interest in auto lenders’ add-on product practices.
In December, the CFPB announced a consent order with a large bank resolving, among other things, allegations that the bank failed to ensure that unearned GAP fees were refunded where borrowers paid off their loans early.
Consequently, the bank was required to implement a policy to ensure unearned GAP fees would be refunded to borrowers “regardless of state law.”
More recently, in January, the CFPB and New York’s attorney general filed a complaint. It alleged that an indirect auto lender provided “substantial assistance” to the deceptive acts and practices of dealers, in violation of the Consumer Financial Protection Act—by failing to take sufficient action after receiving complaints alleging that dealers “were requiring borrowers to purchase add-on products in order to obtain” financing, and that consumers were unaware an add-on product was included in their contract until after the transaction was completed.
Coincidentally, the same day, Colorado’s attorney general resolved allegations that two credit unions failed to provide pro-rata refunds of add-on product premiums in violation of state law.
These follow several Colorado attorney general actions related to credit unions’ add-on product practices as well as a Massachusetts attorney general action alleging that a global auto lender failed to refund “to certain consumers interest on unearned [GAP] premiums” as required by state law.
Rapid changes in the auto market have drawn increased attention from federal and state regulatory and enforcement agencies.
Much of this attention has been on add-on products, suggesting that auto lenders and dealers should take equal note of the practices that the CFPB and state attorneys general have targeted for potential risk mitigation.
While these considerations were already important, they may become even more critical as the CFPB seeks to enhance “public data on auto lending” by building “a new data set that will allow for a more robust understanding of market trends.”
The CFPB recently doubled down on this data collection commitment by issuing marketing-monitoring orders to certain auto lenders “to provide information about their auto lending portfolios.” Notably, the sample order published by the CFPB includes specific requests related to the price paid by consumers for add-on products.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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Jessica Pollet is special counsel at Cooley, where she advises banks, non-bank lenders, fintech companies, and other financial services in connection with complex regulatory and enforcement.
Michelle Rogers is partner at Cooley. She advises financial institutions in government investigations, regulatory examinations, class action, complex litigation, and internal investigations.