Notice2024-24093
Supervisory Highlights: Special Edition Auto Finance
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 18, 2024
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Bureau (CFPB or Bureau) is issuing its thirty fifth edition of Supervisory Highlights.
Full Text
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<title>Federal Register, Volume 89 Issue 202 (Friday, October 18, 2024)</title>
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[Federal Register Volume 89, Number 202 (Friday, October 18, 2024)]
[Notices]
[Pages 83842-83849]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-24093]
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CONSUMER FINANCIAL PROTECTION BUREAU
Supervisory Highlights: Special Edition Auto Finance
AGENCY: Consumer Financial Protection Bureau.
ACTION: Supervisory highlights.
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SUMMARY: The Consumer Financial Protection Bureau (CFPB or Bureau) is
issuing its thirty fifth edition of Supervisory Highlights.
DATES: The findings in this edition of Supervisory Highlights cover
select examinations related to auto-finance that were generally
completed from November 1, 2023, to August 30, 2024.
FOR FURTHER INFORMATION CONTACT: Jaclyn Sellers, Senior Counsel, at
(202) 435-7449. If you require this document in an alternative
electronic format, please contact <a href="/cdn-cgi/l/email-protection#4f0c091f0d100e2c2c2a3c3c262d2623263b360f2c293f2d61282039"><span class="__cf_email__" data-cfemail="4a090c1a08150b29292f393923282326233e330a292c3a28642d253c">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
1. Introduction
This edition of Supervisory Highlights focuses on the Consumer
Financial Protection Bureau's (CFPB's) work to put the brakes on
wrongdoing in the auto-finance market. The impact of this market on
American families is significant. Auto loan debt exceeds all other
household-debt categories except for home mortgages. As of the second
quarter of 2024, Americans owe $1.616 trillion in auto loan debt.\1\
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\1\ Federal Reserve Bank of New York, Household Debt and Credit
Report (Q2 2024), <a href="https://www.newyorkfed.org/microeconomics/hhdc.html">https://www.newyorkfed.org/microeconomics/hhdc.html</a>.
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The auto-finance market enables people to buy vehicles necessary
for important life functions, such as driving to work, school, and
medical appointments. But when auto-finance companies violate the law
it can have serious consequences for families, from having to pay money
they do not owe to losing their vehicle.
This Supervisory Highlights issue covers significant findings
across all aspects of consumers' experiences with the auto-finance
market. It reports on consumers being lured in through deceptive
advertising about available loan terms and failing to receive accurate
and complete disclosures at origination, having their payments
misapplied or incorrect information
[[Page 83843]]
about their payment history reported to credit reporting companies
(CRCs), and finding their car had been repossessed, though they had
made their payments as promised.
This issue also highlights a trend of significant violations
related to the handling of add-on products, also known as optional or
ancillary products. Consumers generally finance these add-on products
at loan origination, with the product premium paid upfront and then
included in the amount financed. Auto-finance companies profit from
these products through the original cost, the finance costs over the
life of the loan, and, in some cases, from the failure to ensure
refunds when consumers can no longer use the products. Although add-on
products may benefit some consumers, examiners have identified unfair,
deceptive, and abusive acts or practices throughout the lifecycle of
add-on products. From auto loan originators including add-on products
without consumers' consent, to servicers failing to allow consumers to
cancel the products during the initial cancellation period, failing to
provide the benefit of the product, or failing to ensure consumers
receive refunds when the loan terminates early, add-on product
administration represents a significant risk to consumers that the CFPB
will continue to monitor.
The auto-finance market is subject to various laws and regulations
the CFPB enforces. Under the Consumer Financial Protection Act (CFPA),
all covered persons or service providers are prohibited from committing
unfair, deceptive, or abusive acts or practices. Examiners' findings of
unfair, deceptive, and abusive acts or practices in auto-finance
reviews are included in this issue of Supervisory Highlights.
The findings in this edition of Supervisory Highlights cover select
examinations related to auto-finance that were generally completed
between November 1, 2023, and August 30, 2024.
To maintain the anonymity of the supervised institutions discussed
in Supervisory Highlights, references to institutions generally are in
the plural and the related findings may pertain to one or more
institutions.\2\ We invite readers with questions or comments about
Supervisory Highlights to contact us at <a href="/cdn-cgi/l/email-protection#bbf8fdebf9e4e8cecbdec9cdd2c8d2d4d5fbd8ddcbd995dcd4cd"><span class="__cf_email__" data-cfemail="1d5e5b4d5f424e686d786f6b746e7472735d7e7b6d7f337a726b">[email protected]</span></a>.
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\2\ If a supervisory matter is referred to the Office of
Enforcement, Enforcement may cite additional violations based on
these facts or uncover additional information that could impact the
conclusion as to what violations may exist.
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2. Supervisory Observations
2.1 Origination Disclosures
Examiners identified two issues with auto-finance companies'
disclosures at origination. Specifically, examiners identified issues
with how auto-finance companies marketed annual percentage rates (APRs)
and how they disclosed prepayment penalties.
2.1.1 Misleading ``as low as'' ARP Marketing
Examiners found that subprime auto loan originators engaged in
deceptive acts or practices. A representation, omission, act, or
practice is deceptive when (1) the representation, omission, act, or
practice misleads or is likely to mislead the consumer; (2) the
consumer's interpretation of the representation, omission, act, or
practice is reasonable under the circumstances; and (3) the misleading
representation, omission, act, or practice is material.\3\
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\3\ Whether an act or practice is deceptive is informed by
decades of precedent including that involving section 5 of the
Federal Trade Commission Act. See CFPB Exam Manual at UDAAP 5.
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Examiners found that subprime loan originators engaged in deceptive
acts or practices through service providers when the service providers
mailed prescreened advertisements marketing rates ``as low as''
specified APR rates to consumers who in fact had no reasonable chance
of qualifying for or being offered rates at or near that level. The
lowest interest rate offered to consumers by the servicers was more
than twice the advertised rate. These marketing materials were likely
to mislead borrowers. Borrowers would be reasonable to interpret the
``as low as'' rate as a rate for which they had a reasonable chance of
qualifying or being offered since the advertisements indicated the
recipients had been prescreened based on information in their credit
reports. And the prominent ``as low as'' rate was material to the
prospective borrowers' decision whether to pursue the offer.
In response to these findings, the auto loan companies were
directed to: (i) cease the deceptive practice, whether by the
originators directly or through their service providers, of advertising
specified ``as low as'' rates to consumers who in fact have no
reasonable chance of qualifying for or being offered rates at or near
that level; (ii) revise policies and procedures to ensure service
providers offer prescreened marketing advertisements that include
financing terms that are not misleading and are consistent with the
type of financing terms the companies' borrowers have a reasonable
chance of obtaining; and (iii) ensure against originating consumer
contracts through service providers that advertise and market rates not
offered by the companies.
2.1.2 Inaccurate Disclosures About Prepayment Penalties
The origination of automobile loans is governed by the Truth in
Lending Act (TILA) as implemented by Regulation Z.\4\ Examiners found
that auto-loan originators violated section 1026.17(c)(1) of Regulation
Z because their disclosures did not accurately reflect the terms of the
prepayment penalty. Section 1026.17(c)(1) states that the disclosures
shall reflect the terms of the legal obligation between the parties.
The TILA disclosure stated ``Prepayment--if you pay early, you may have
to pay a penalty.'' In contrast, the associated retail installment
sales contract stated that there was no finance charge if the loan is
paid early.
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\4\ 12 CFR part 1026.
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In response to these findings, the entities modified their
disclosures to come into compliance with Regulation Z.
2.2 Repossession Activities
To secure an auto loan, lenders require borrowers to give creditors
a security interest in the vehicle. If a borrower defaults, a creditor
may exercise its contractual rights to repossess the secured vehicle.
The magnitude of repossessions is significant, with the number of
repossessions in 2024 estimated to reach 1.6 million.\5\ Servicers
collect and process auto loan or lease payments from borrowers and are
either creditors or act on behalf of creditors. Generally, servicers do
not immediately repossess a vehicle upon default and instead attempt to
contact consumers before repossession, usually by phone or mail.
Servicers may give consumers in default the opportunity to avoid
repossession by catching up on past-due payments or making promises to
pay. Servicers generally use service providers to conduct
repossessions. While some repossessions are unavoidable, Supervision
pays particular attention to servicers' repossession of automobiles.
Loan holders and servicers are responsible for ensuring that their
repossession-related practices, and the
[[Page 83844]]
practices of their service providers, do not violate the law.\6\
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\5\ Cox Automotive, Q2 Manheim used vehicle value index call
(July 9, 2024), <a href="https://www.coxautoinc.com/wp-content/uploads/2024/07/July-9-Q2-2024-Manheim-Used-Vehicle-Value-Index-Call-Presentation.pdf">https://www.coxautoinc.com/wp-content/uploads/2024/07/July-9-Q2-2024-Manheim-Used-Vehicle-Value-Index-Call-Presentation.pdf</a>.
\6\ CFPB, Bulletin 2022-04: Mitigating Harm from Repossession of
Automobiles (Feb 28, 2022), <a href="https://www.consumerfinance.gov/compliance/supervisory-guidance/cfpb-bulletin-2022-04-mitigating-harm-from-repossession-of-automobiles/">https://www.consumerfinance.gov/compliance/supervisory-guidance/cfpb-bulletin-2022-04-mitigating-harm-from-repossession-of-automobiles/</a>.
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2.2.1 Wrongful Repossession
Examiners found that servicers engaged in unfair acts or practices.
An act or practice is unfair when it causes or is likely to cause
substantial injury to consumers; the injury is not reasonably avoidable
by consumers; and the injury is not outweighed by countervailing
benefits to consumers or to competition.\7\
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\7\ 12 U.S.C. 5531.
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Examiners found that servicers engaged in unfair acts or practices
when they erroneously repossessed consumers' vehicles (a) when their
representatives or service providers failed to cancel orders to
repossess vehicles, or act on those cancellations, when consumers had
made payments or obtained extensions that should have prevented
repossessions; and (b) when consumers had requested, or the servicer
had approved, a COVID-19 related loan deferment or loan modification,
consumers had otherwise made timely payments, or consumers made
arrangements to pay an amount sufficient to cancel the repossession.
These practices cause or are likely to cause substantial injury
because they create a substantial risk that consumers will be
erroneously deprived of their vehicles. Borrowers who are deprived of
their vehicles are likely to suffer injury in the form of inability to
travel to work and resulting lost wages and by inability to use their
vehicles for other critical daily needs. Consumers could not reasonably
avoid the injury because borrowers had no control over the servicers'
repossession practices, including errors relating to payment
processing, repossession orders, repossession holds, and their COVID-19
related deferment practices. The injury was not outweighed by any
countervailing benefits to consumers or competition.
In response to these findings, the servicers were directed to cease
repossessing vehicles and failing to promptly return vehicles when
consumers have made timely payments or payment arrangements or have
obtained a loan modification sufficient to prevent repossessions. Some
servicers also have implemented policies and procedures to ensure that
they do not repossess vehicles when consumers have made payments or
obtained extensions sufficient to prevent repossessions.
2.2.2 Repossessing Third Parties' Vehicles Without a Recorded Lien
Examiners found that servicers engaged in unfair acts or practices
when they failed to record liens and then repossessed vehicles without
a valid lien. When assigning vehicles for repossession, servicers did
not verify that they had a valid lien. As a result, they repossessed
vehicles from consumers who did not have any prior affiliation with the
servicers. Servicers had no right to repossess these vehicles because
they did not have a valid lien and, by repossessing them, they caused
substantial injury in the form of lost wages, the costs of arranging
alternative transportation, or being deprived of the ability to meet
other important needs. Consumers could not reasonably foresee that
their vehicle would be repossessed by servicers with which they did not
have any prior relationship or affiliation. The injury to consumers was
not outweighed by countervailing benefits to consumers or competition,
including the cost of implementing controls to prevent wrongful
repossessions.
In response to these findings, servicers implemented policies and
procedures to ensure that they recorded liens for all vehicles and
repossessed vehicles only when they had recorded a lien.
2.3 Servicing Practices
Examiners identified two issues related to general servicing
practices. First, servicers failed to adhere to their disclosed
payment-allocation methodology for post-maturity loans. Second,
servicers failed to timely provide consumers with title after loan
payoff.
2.3.1 Improper Payment Allocation
Examiners found that servicers engaged in both a deceptive and
unfair act or practice by applying borrowers' auto-loan payments to
post-maturity loans in a different order than that disclosed to
consumers on their websites, which resulted in borrowers having to pay
late fees. The websites disclosed a particular payment allocation order
with no indications that the disclosed order did not apply to post-
maturity loans. For post-maturity loans, the servicers applied payments
in a different order than that disclosed on the websites. The websites
stated that payments would be applied to the current payment due,
including both interest and principal, before outstanding late charges.
The servicers, however, applied payments on post-maturity loans first
to the most recent payment due, then to other charges (such as late
fees), and then to other payments due. Examiners found that the payment
allocation order the servicers used for such payments resulted in the
principal balance not being paid off on schedule, and that the
servicers then assessed late fees.
The representation on the websites was likely to mislead consumers
with post-maturity loans because it was a false statement, and there
was no indication that the disclosed order did not apply to post-
maturity loans. Consumers may reasonably take the websites at face
value regarding the payment-application order. The disclosures are
material because consumers may use information about the payment-
application order to make decisions about the amount and timing of
their payments. Borrowers may use this information to attempt to avoid
late fees and ensure that their loans are fully paid off as planned.
This practice was also unfair. It was likely to cause substantial
injury because it prevented consumers from submitting payments in a way
that could allow them to pay off their principal balances on schedule
and avoid late fees. The injury was not reasonably avoidable because
consumers had no reason to anticipate that the servicers would apply
their payments in a manner that contradicts the information on its
website. The injury is not outweighed by any countervailing benefits to
consumers or competition.
In response to the findings, servicers revised their policies and
procedures to ensure that payments are applied to all loans in the
order that is disclosed to consumers and ensured full remediation for
all accounts that incurred late fees due to payments being applied in a
different order than that disclosed on the website.
2.3.2 Excessive Delay in Providing Title
Examiners found that auto-loan servicers engaged in unfair acts or
practices because consumers suffered substantial injury when the
servicers failed, through service providers, to timely deliver the
titles to vehicles after a loan or lease payoff or when consumers
requested the title in connection with transferring vehicle
registrations to a different State. Examiners found that the servicers'
policies are generally to provide title documentation within two
business days but that delivery times significantly exceeded this
timeline.
[[Page 83845]]
Consumers who do not have possession of their vehicle title document
suffer harm, most significantly the inability to legally sell their
vehicles, the incurrence of additional insurance expenses, and the
threat of having their vehicles towed. Consumers had no ability to make
the servicers, or the service providers, more quickly process or
deliver the titles. And the injury was not outweighed by countervailing
benefits to consumers or to competition.
In response to these findings, the servicers were directed to cease
delaying the delivery of vehicle titles after a loan payoff, lease
buyout, or request to transfer registration to a different state.
2.4 Add-On Products
When consumers purchase an automobile, auto dealers and finance
companies typically offer consumers add-on products. These products
generally fall into one of two categories, credit products and vehicle
products. Credit products will assist with the remaining loan balance
owed by the consumer under certain circumstances; these products cease
to provide any benefits when the loan is terminated. For example,
``guaranteed asset protection'' (GAP) products are credit products that
are offered to help pay off the loan if the car is totaled or stolen.
Vehicle products relate to the vehicle itself; these products may
continue to provide benefits after the loan is terminated. For example,
consumers may purchase a vehicle service contract to pay for the cost
of certain repairs. The add-on products apply only for specific
periods, and only under certain circumstances.\8\
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\8\ See generally CFPB, Supervisory Highlights, Issue 28 (Fall
2022), Supervisory Highlights, Issue 28, Fall 2022 [verbar] Consumer
Financial Protection Bureau (<a href="http://consumerfinance.gov">consumerfinance.gov</a>).
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Dealers and finance companies often charge consumers all payments
for add-on products as a lump sum at origination. Dealers and finance
companies generally include the lump sum cost of add-on products as
part of the vehicle financing agreement, and consumers typically make
payments for these products throughout the loan term. The add-on
products often allow consumers to cancel early for a partial refund of
the product cost.
Upon early termination, the account generally is eligible for a pro
rata refund of the prepaid premiums for the unused portion of the
products--often called ``unearned'' premiums. In the default scenario,
the refund amount should be applied to any deficiency balance, and the
borrower receives any remaining refund amount. For early payoffs, the
full amount of the refund should go to the borrower.
When the loan terminates early, credit products no longer offer any
possible benefit to consumers because coverage is tied to the financed
loan, which is paid off. Absent a refund, consumers may wind up paying
for services they can no longer use, as the relevant products terminate
when the loan terminates. In addition, vehicle products such as service
contract coverage terminate upon default, when the borrower no longer
possesses the vehicle.
2.4.1 Collecting and Retaining Amounts for Add-On Products Consumers
Did Not Agree To Purchase
Examiners found that subprime auto-finance companies engaged in
abusive acts or practices. The CFPA prohibits two types of abusive
practices. First, materially interfering with the ability of a consumer
to understand a term or condition of a product or service is abusive.
Second, taking unreasonable advantage of one of the three statutorily
specified market imbalances is abusive. Those market imbalances include
(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 a product or service, or
(3) a consumer's reasonable reliance on a covered person to act in
their interests.\9\
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\9\ 12 U.S.C. 5531(d).
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Examiners found that subprime auto-finance companies engaged in
abusive acts or practices when they collected and retained amounts for
optional add-on products that consumers did not agree to purchase. The
companies contracted with service providers to market refinance loan
options to existing borrowers and prepare origination documents. The
companies' contracts with the service providers included provisions
requiring that refinanced loans include a minimum number of so-called
``tangible benefits.'' The tangible benefits included add-on products,
such as an extended service contract or other vehicle protection
product, and an optional GAP waiver product. Recorded calls between the
service providers and borrowers during which the service providers
walked the borrowers through the process of signing the refinanced loan
agreement electronically revealed that the service providers had failed
to disclose or explain the add-on products that had been included and
financed as part of the refinanced loans. The companies had failed to
conduct comprehensive compliance monitoring of the service providers.
By collecting and retaining amounts for add-on products that
consumers did not agree to purchase, without policies or procedures to
ensure or verify that consumers authorized these purchases, servicers
took unreasonable advantage of consumers' inability to protect their
interests in selecting or using a product or service. Consumers who did
not know about or consent to being charged for add-on products were not
able to protect their interests.
In response to these findings, the entities were directed to cease
collecting and retaining amounts for optional products that consumers
did not agree to purchase or that they agreed to purchase based on
misrepresentations as to products' voluntary nature or cost. The
entities were also directed to engage qualified external consultants to
advise, report, and evaluate the entities' remediation plans to ensure
that they captured all consumer harm related to these findings, and to
provide remediation to all consumers identified by the external
consultants. In addition, the entities were directed to update and
revise language in contracts with their service providers to set forth
clear expectations about the service providers' compliance with and
consequences for failure to comply with applicable Federal consumer
financial laws.
The companies were further directed to enhance their risk-
management program to mitigate unwarranted risks to consumers from
service providers and to ensure that service providers understand their
consumer compliance responsibilities and comply with Federal consumer
financial laws. The entities were directed to enhance compliance
monitoring and audit practices for all consumer-facing service
providers and any staff that facilitate the purchase of optional
products to ensure compliance with all applicable Federal consumer
financial protection laws.
Finally, the entities were directed to ensure that consumers
understand the voluntary nature and cost of optional products and that
there are no efforts in place to coerce consumers into buying such
products. They were directed to include, as part of compliance
monitoring and audit practices, the recording of all calls. They were
further directed to conduct second-level reviews of all retail
installment contracts prior to funding and to regularly review calls
between service providers and consumers where the terms and features of
potential auto loans are discussed.
[[Page 83846]]
2.4.2 Financing of Void Add-On Products on Salvage Vehicles
Certain add-on products, like GAP products, are void, and therefore
lack any value to the consumer, if the vehicle has a salvage title,
meaning it had loss events recorded on the vehicle's title history
(e.g., a record of an accident or damage associated with the vehicle).
Before financing a vehicle, servicers may perform a title check to
determine whether a vehicle has a salvage title.
Examiners found that auto servicers engaged in abusive acts or
practices by taking unreasonable advantage of consumers' lack of
understanding of material risks, costs, or conditions by suspending
title check procedures for certain originating dealers and then
financing GAP products that were void due to loss events recorded on
the vehicles' title histories. As a result of not checking title
histories, the servicers financed auto loans with GAP products that
delivered no benefit to consumers but increased the amounts financed
and the monthly payments. Additionally, servicers paid for title checks
in some situations but not when financing GAP contracts originated by
certain preferred lenders. Failing to conduct title checks in these
instances also provided servicers with cost savings. In obtaining these
benefits, servicers took unreasonable advantage of consumers' lack of
understanding of material risks, costs, or conditions associated with
the GAP product. The consumers paid for GAP coverage but did not
benefit from the coverage because of the exclusion for salvage
vehicles.
In response to these findings, the entities were directed to
develop and implement policies and procedures to conduct title history
searches to determine the condition of vehicles' eligibility for add-on
products.
2.4.3 Failure To Identify Payee of Add-On Products
Examiners found that auto loan originators violated section
1026.18(c)(1)(iii) of Regulation Z because the itemization of the
amount financed disclosures failed to identify the payee for optional
products purchased by the consumer. Section 1026.18(c)(1)(iii) requires
a separate written itemization of amounts financed that includes any
amounts paid to other persons by the creditor on the consumer's behalf.
The provision also requires the creditor to identify those persons. The
entities did not identify (or bought retail installment sales contracts
that did not identify) the payee for optional products purchased by the
consumer in the itemization of amount financed.
In response to these findings, the entities changed their practices
to come into compliance with this provision of Regulation Z.
2.4.4 Onerous Requirements To Cancel Add-On Products
Examiners found that servicers engaged in abusive acts or practices
by requiring consumers to make two in-person visits to a dealership to
cancel contracts for add-on products. An act or practice may be abusive
when it takes unreasonable advantage of the inability of the consumer
to protect the interests of the consumer in selecting or using a
consumer financial product or service.\10\
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\10\ 12 U.S.C. 5531.
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Servicers sold and administered add-on products that were included
in the financed amount and were cancelable for a pro rata refund. The
contract required consumers to visit the dealerships in person to
cancel the product. The servicers' practice was to require consumers to
make two in-person visits when cancelling the product, one visit to
cancel where the servicers required the consumers to speak to the
general manager of the dealerships and a second to pick up the refund
check.
Servicers took unreasonable advantage of consumers by requiring
consumers to make two in-person visits and speak with the general
managers of the dealerships to cancel the add-on products. The
servicers gained an advantage because they avoided paying a refund when
the consumer could not make the two in-person visits and the advantage
was unreasonable because the servicers controlled the process and
created onerous refund processes involving multiple in-person visits to
prevent consumers from exercising their cancellation rights. Consumers
were unable to protect their interests because the contracts for the
add-on product required cancellation in-person but did not disclose a
requirement that consumers make two trips to the dealership. Requiring
two separate visits can interfere with consumers' ability to protect
their interests because of the excessive time and effort needed to
extricate themselves from the contract.
In response to these findings, servicers updated their policies and
procedures to be consistent with contractual terms.
2.4.5 Failure To Honor Contractual Cancellation Rights
Examiners found that servicers engaged in abusive acts or practices
when add-on product contracts allowed for cancellation with a pro rata
refund within the first year, but the servicers denied consumers'
cancellation requests.
Servicers sold and administered add-on products that allowed
consumers to cancel the product for a pro rata refund within the first
year. Despite the contract allowing for refunds, servicers refused to
provide refunds when consumers requested them.
Servicers took unreasonable advantage of consumers by refusing to
allow consumers to cancel add-on products when the products were
cancellable under the contract. The servicers gained an advantage
because they avoided paying refunds and the advantage was unreasonable
because the servicers controlled the process and prevented consumers
from exercising their contractual cancellation rights. Consumers were
unable to protect their interests because even though the contract for
the add-on product allowed for cancellation the servicers did not honor
the provisions and consumers had no alternative method to obtain
refunds.
In response to these findings, servicers updated their policies and
procedures to be consistent with contractual terms.
2.4.6 Failure To Ensure Refunds of Unearned Premiums
Examiners found that servicers engaged in unfair acts or practices
by failing to ensure consumers received refunds of unearned premiums
for add-on products upon early termination of their auto loans in all
States, either by ensuring that dealers or administrators provided
refunds or by providing the refunds themselves.
This practice caused or was likely to cause substantial injury to
borrowers because these products were of no value once borrowers' loans
were terminated due to early payoffs, repossession, or total loss (or
in the case of some products, such as service contracts, only once the
vehicles were repossessed or declared a total loss), and thus borrowers
ended up paying for products they could no longer use. This practice
results in inflated payoff and deficiency balances. Consumers could not
reasonably avoid the injury because the servicers retain substantial
control over their refund processes and the calculation of payoff and
deficiency balances, and consumers may not understand that they cease
to retain any benefit from the products following early termination of
their auto loans or that they are eligible for a refund. The injury is
not outweighed by any
[[Page 83847]]
countervailing benefits to consumers or competition.
In response to these findings, servicers implemented processes to
ensure consumers receive refunds of unearned premiums for ancillary
products in all States, including those that do not mandate such
refunds. This applies in instances of default or total loss, and upon
early payoff where the products no longer provide benefits at the
termination of the loan. Servicers also identified and remediated
consumers from all States who did not receive such refunds.
2.4.7 Inaccurate Add-On Products Refund Amounts
Examiners found that servicers engaged in unfair acts or practices
by failing to provide the correct refund amount for add-on products
after early termination of auto loans.
In certain cases, servicers cancelled consumers' add-on products
and provided refunds but miscalculated the refund amount due. This
happened when, for example, the servicers used the date of a deficiency
notice for making a pro rata calculation instead of the date of the
repossession. In other instances, servicers rely upon calculations
performed by third parties that were not consistent with the terms of
the add-on product contract.
This practice caused substantial injury to consumers because they
did not receive refunds to which they were entitled. Consumers cannot
reasonably avoid the injury because they do not have control over how
servicers calculate the refunds and consumers reasonably relied upon
their servicers to correctly calculate the refunds. The injury is not
outweighed by countervailing benefits to consumers or competition.
In response to these findings, servicers remediated consumers and
implemented revised policies and procedures to ensure accurate
calculations.
2.4.8 Delays in Applying Add-On Product Refunds
Examiners found that servicers engaged in unfair acts or practices
by failing to timely apply refunds of the unused portion of add-on
product premiums to borrowers' accounts. In one matter, for example,
refunds were applied an average of 84 days after the post-repossession
sale of the vehicle sale, with at least one up to 423 days afterwards;
in another matter, the refund delays ranged from 150 days to 664 days.
Even if a consumer is ultimately granted a refund, the consumer may be
injured by the delay in the interim, during which the consumer does not
have access to funds to which they are entitled.
This practice caused or was likely to cause substantial injury to
borrowers because many consumers were unable to access funds to which
they were entitled for significant amounts of time. The injury was not
reasonably avoidable because the servicers controlled their refund
processes. The injury is not outweighed by any countervailing benefits
to consumers or competition.
In response to these findings, servicers updated their policies and
procedures to ensure consumers receive timely and accurate refunds of
unearned premiums for add-on products.
2.4.9 Continuing To Collect Payments When Consumers are Covered by a
GAP Product and Miscalculating Refunds
Examiners found that servicers engaged in unfair acts or practices
by collecting monthly payments even after they knew the GAP waiver
would cover the outstanding balance, and then failing to accurately
reimburse consumers who made these payments.
Consumers often purchase GAP waiver agreements at the time they
finance the vehicle in an effort to prevent owing a balance on their
loan if the vehicle is totaled. After a total loss event, proceeds from
auto insurance typically cover only the actual value of the vehicle at
the time of loss, which generally is less than the amount financed. The
GAP waiver generally waives the amount owed under the retail
installment contract or loan as of the date of the total loss, less any
unpaid loan payments or similar charges, and less the actual cash value
of the collateral as of the date of a total loss. Servicers continued
to collect monthly payments from consumers for months after a total
loss event despite knowing that these consumers purchased GAP waivers
to cover the outstanding balance. The servicers eventually refunded the
payments made after the total loss event after the GAP waiver claim was
finalized, but miscalculated the amount owed to consumers, resulting in
underpayments.
This practice caused substantial injury to consumers in two ways.
First, servicers injured consumers because consumers were deprived of
the use of funds for the months between the improper payment and the
insufficient refund. During this period consumers may be forced to make
multiple car payments, one for their totaled vehicle and another for a
new vehicle. Second, servicers injured consumers when servicers
miscalculated the amount due back to consumers after the GAP waiver
processed, causing insufficient refunds. Consumers could not reasonably
avoid the harm because they had no control over servicers' practices.
If consumers ceased making these payments servicers would furnish
negative credit reporting information. And the injury is not outweighed
by countervailing benefits when servicers are aware that the amounts,
they are collecting will be waived under the terms of the GAP waiver.
In response to these findings, servicers remediated consumers and
implemented new policies and procedures to cease collecting these
amounts.
2.5 Furnishing Deficiencies
Auto lenders and servicers that furnish information to CRCs for
inclusion in consumer reports (auto furnishers) are subject to
requirements under the Fair Credit Reporting Act (FCRA) and its
implementing regulation, Regulation V.\11\ For example, the FCRA and
Regulation V require auto furnishers to reasonably investigate disputes
and to furnish data subject to the relevant accuracy requirements. In
recent reviews, examiners found deficiencies in auto furnishers'
compliance with the FCRA accuracy requirements.
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\11\ 12 CFR part 1022.
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2.5.1 Reporting Information With Actual Knowledge of Errors
Section 623(a)(1)(A) of the FCRA prohibits furnishers from
furnishing any information relating to a consumer to any CRC if the
furnisher ``knows or has reasonable cause to believe that the
information is inaccurate.'' \12\ However, a furnisher is not subject
to this prohibition if it ``clearly and conspicuously specifies to the
consumer an address for'' the submission by consumers of notices that
specific information is inaccurate.\13\ The FCRA does not require a
furnisher to specify such an address. Though, if a furnisher clearly
and conspicuously specifies such an address, the furnisher is instead
subject to section 623(a)(1)(B) of the FCRA, which provides that a
furnisher violates its duty to furnish accurate information to the
extent it furnishes information after it has been notified by the
consumer, at the address specified for such notices, that certain
information is inaccurate and such information is, in fact,
inaccurate.\14\
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\12\ 15 U.S.C. 1681s-2(a)(1)(A).
\13\ 15 U.S.C. 1681s-2(a)(1)(C).
\14\ Id. (cross-referencing 15 U.S.C. 1681s-2(a)(1)(B)).
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In reviews of auto furnishers, examiners found that furnishers
[[Page 83848]]
furnished information to CRCs while knowing or having reasonable cause
to believe such information was inaccurate because the information
furnished did not accurately reflect the information in the furnishers'
systems and/or conflicted with other information the furnishers
reported about consumers' accounts. For example, examiners found that
furnishers reported inaccurate information about hundreds, and in some
cases thousands, of consumers, including: inaccurate amounts past due
for charged-off accounts; inaccurate scheduled monthly payment amounts
for paid or otherwise closed accounts with zero balances; outdated
payment ratings that corresponded with prior reporting cycles rather
than the current reporting cycle; inaccurate dates of first
delinquency; and inaccurate actual payment amounts following a payoff
or settlement. In some instances, the furnishers' reporting errors were
attributed to the furnishers utilizing systems not adequately designed
to accurately furnish information about auto loans.
Examiners also found that auto furnishers did not clearly and
conspicuously specify to consumers an address for notices relating to
inaccurate information, and thus were subject to the stricter
prohibition under section 623(a)(1)(A) of the FCRA against furnishing
information the furnishers know or have reasonable cause to believe is
inaccurate. For example, furnishers disclosed a general-purpose
corporate address or other methods of contact on their websites;
however, examiners found that the furnishers did not specify to
consumers the relevant address for notices relating to inaccurate
information.
In response to these findings, auto furnishers are conducting
lookbacks and correcting the furnished information for all affected
consumers.
2.5.2 Failure To Promptly Update or Correct Inaccurate Information
Furnishers, including auto furnishers, also are subject to section
623(a)(2) of the FCRA, which requires furnishers to promptly correct
and update furnished information after determining that such
information is incomplete or inaccurate.\15\ Examiners are continuing
to find that auto furnishers are violating the FCRA duty to promptly
correct and update incomplete or inaccurate information when the
obligation arises. Specifically, in recent reviews of auto furnishers,
examiners found that furnishers continued to furnish information for
several months, and in some cases over a year, after the furnishers
determined through monitoring or audit activities that the information
was incomplete or inaccurate.
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\15\ 15 U.S.C. 1681s-2(a)(2).
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For example, examiners found that furnishers continued to furnish
inaccurate amounts past due and balance information relating to certain
consumers' charged-off accounts for over a year and a half after
identifying the furnished inaccuracies through internal audits.
Examiners also found that furnishers continued to furnish inaccurate
payment history profiles and/or account statuses for certain accounts
for over a year after identifying the inaccuracies through monitoring.
Although the furnishers eventually corrected the inaccuracies after
significant delay, examiners determined that the auto furnishers'
delayed remediation of, including failure to submit prompt corrections
to CRCs with respect to, the identified furnishing inaccuracies was
inconsistent with the FCRA duty to promptly correct and update
furnished information after determining that such information is
incomplete or inaccurate.
In response to these findings, auto furnishers are enhancing
policies and procedures, including with respect to internal issue
management, to ensure they promptly correct or update furnished
information after determining it is incomplete or inaccurate.
3. Supervisory Developments
Set forth below are select supervision program developments
including advisory opinions, circulars and proposed rules that have
been issued since the last regular edition of Supervisory Highlights.
3.1.1 CFPB Issues Buy Now Pay Later Product FAQs
On September 17, 2024, the CFPB issued Buy Now Pay Later (BNPL)
Product FAQs.\16\ The FAQs provide guidance on applying Regulation Z to
Pay-in-Four BNPL products, such as how to apply credit card periodic
statement requirements to Pay-in-Four BNPL products that are accessed
by digital user accounts. These FAQs follow the interpretive rule in
May 2024 that the CFPB released to explain how the Truth in Lending Act
and Regulation Z apply to BNPL loans.\17\ The CFPB recognizes that many
BNPL lenders are working diligently and in good faith to come into
compliance with the interpretive rule. The CFPB issued the FAQs to
support this transition.
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\16\ The FAQs are available at: <a href="https://www.consumerfinance.gov/compliance/compliance-resources/consumer-cards-resources/buy-now-pay-later-bnpl-products/buy-now-pay-later-product-faqs/">https://www.consumerfinance.gov/compliance/compliance-resources/consumer-cards-resources/buy-now-pay-later-bnpl-products/buy-now-pay-later-product-faqs/</a>.
\17\ The interpretive rule is available at: cfpb_bnpl-
interpretive-rule_2024-05.pdf (<a href="http://consumerfinance.gov">consumerfinance.gov</a>).
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In addition, the CFPB has stated it does not intend to seek
penalties for violations of the rules addressed in the interpretive
rule against any BNPL lender while it is transitioning into compliance
in a good faith and expeditious manner. We expect that other Federal
and State regulators will follow the same path.\18\
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\18\ The CFPB blog is available at: <a href="https://www.consumerfinance.gov/about-us/blog/what-buy-now-pay-later-lenders-are-doing-to-be-upfront-with-borrowers">https://www.consumerfinance.gov/about-us/blog/what-buy-now-pay-later-lenders-are-doing-to-be-upfront-with-borrowers</a>.
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3.1.2 CFPB Issues an Advisory Opinion-Consumer Protections for Home
Sales Financed Under Contracts for Deeds
On August 13, 2024, the CFPB issued an advisory opinion which
affirms the current applicability of consumer protections and creditor
obligations under TILA and its implementing Regulation Z to
transactions in which a consumer purchases a home under a ``contract
for deed.'' \19\ When a creditor sells a home to a buyer under a
contract for deed, that transaction will generally meet TILA and
Regulation Z's definition of credit. Where the transaction is secured
by the buyer's dwelling, the buyer will also generally be entitled to
the protections associated with residential mortgage loans under TILA.
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\19\ The advisory opinion is available at: <a href="https://www.consumerfinance.gov/rules-policy/final-rules/truth-in-lending-regulation-z-consumer-protections-for-home-sales-financed-under-contracts-for-deed/">https://www.consumerfinance.gov/rules-policy/final-rules/truth-in-lending-regulation-z-consumer-protections-for-home-sales-financed-under-contracts-for-deed/</a>.
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3.1.3 CFPB Joins Federal Regulators To Propose Rule To Standardize Data
Submitted to Federal Financial Agencies
On August 2, 2024, the CFPB joined several other Federal financial
regulatory agencies in announcing a proposed rule to establish data
standards for certain information collections submitted to financial
regulatory agencies.\20\ The proposal would promote interoperability of
financial regulatory data across the agencies through the establishment
of data standards for identifiers of legal entities and other common
identifiers.
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\20\ The proposed rule is available at: <a href="https://www.consumerfinance.gov/rules-policy/final-rules/truth-in-lending-regulation-z-consumer-protections-for-home-sales-financed-under-contracts-for-deed/">https://www.consumerfinance.gov/rules-policy/final-rules/truth-in-lending-regulation-z-consumer-protections-for-home-sales-financed-under-contracts-for-deed/</a>.
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3.1.4 CFPB Warns Against Intimidation of Whistleblowers
On July 24, 2024, the CFPB issued a circular to law enforcement
agencies and regulators explaining how
[[Page 83849]]
companies may be breaking the law by requiring employees to sign broad
nondisclosure agreements that could deter whistleblowing.\21\ The
circular explains how, in certain circumstances, imposing sweeping
nondisclosure agreements that do not clearly permit communication with
law enforcement may intimidate employees from disclosing misconduct or
cooperating with investigations. This could impede investigations and
potentially violate Federal whistleblower protections.
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\21\ The circular is available at: <a href="https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-04/">https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-04/</a>.
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3.1.5 CFPB Proposes Rule on Earned Wage Access
On July 18, 2024, the CFPB proposed an interpretive rule explaining
that many paycheck advance products, sometimes marketed as ``earned
wage'' products, are consumer loans subject to TILA.\22\ The guidance
would ensure that lenders understand their legal obligations to
disclose the costs and fees of these credit products to workers.
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\22\ The interpretive rule is available at: <a href="https://www.federalregister.gov/documents/2024/07/31/2024-16827/truth-in-lending-regulation-z-consumer-credit-offered-to-borrowers-in-advance-of-expected-receipt-of">https://www.federalregister.gov/documents/2024/07/31/2024-16827/truth-in-lending-regulation-z-consumer-credit-offered-to-borrowers-in-advance-of-expected-receipt-of</a>.
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4. Enforcement Actions
The CFPB's supervisory activities resulted in and supported the
below enforcement actions.
4.1.1 Navient Corporation
On September 12, 2024, the court entered a stipulated final
judgment and order against the student loan servicer Navient for its
years of failures and lawbreaking.\23\ The order permanently bans the
company from servicing Federal Direct Loans and forbids the company
from directly servicing loans issued under the Federal Family Education
Loan Program (FFELP) or acquiring, with limited exceptions, any FFELP
loans. These bans largely remove Navient from a market where it, among
other illegal actions, steered numerous student loan borrowers into
costly repayment options. Navient also illegally deprived student
borrowers of opportunities to enroll in more affordable income-driven
repayment programs and caused them to pay much more than they should
have. Under the terms of the order, Navient paid a $20 million penalty
and provided $100 million for redress for harmed borrowers.
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\23\ The Proposed Order is available at: <a href="https://www.consumerfinance.gov/enforcement/actions/navient-corporation-navient-solutions-inc-and-pioneer-credit-recovery-inc/">https://www.consumerfinance.gov/enforcement/actions/navient-corporation-navient-solutions-inc-and-pioneer-credit-recovery-inc/</a>.
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4.1.2 TD Bank
On September 11, 2024, the CFPB ordered TD Bank to pay $7.76
million to tens of thousands of victims of the bank's illegal
actions.\24\ For years, the bank repeatedly shared inaccurate, negative
information about its customers to consumer reporting companies. The
information included systemic errors about credit card delinquencies
and bankruptcies. In addition to the redress, the CFPB is ordering TD
Bank to pay a $20 million civil money penalty.
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\24\ The Consent Order is available at: <a href="https://www.consumerfinance.gov/enforcement/actions/td-bank-na-furnishing-2024/">https://www.consumerfinance.gov/enforcement/actions/td-bank-na-furnishing-2024/</a>.
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4.1.3 Fay Servicing, LLC
On August 21, 2024, the CFPB ordered Fay Servicing to pay a $2
million penalty for violations of mortgage servicing laws, as well as
for violations of a 2017 agency order that addressed its illegal
foreclosure practices.\25\ The company failed to implement the order's
requirements and continued to break the law. Fay Servicing took
prohibited foreclosure actions against borrowers requesting mortgage
assistance, failed to offer borrowers mortgage assistance options
available to them, and overcharged for private mortgage insurance. In
addition to the civil money penalty, the CFPB's order requires Fay
Servicing to pay consumer redress of $3 million and to invest $2
million to update its servicing technology and compliance management
systems. The order also puts compensation limits on Edward Fay, the
company's Chairman of the Board and Chief Executive Officer, if Mr. Fay
does not take actions necessary to ensure compliance with the order.
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\25\ The Consent Orders are available at: <a href="https://www.consumerfinance.gov/enforcement/actions/fay-servicing-llc-2024/">https://www.consumerfinance.gov/enforcement/actions/fay-servicing-llc-2024/</a>.
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4.1.4 Fifth Third Bank
On July 9, 2024, the CFPB took action against repeat offender Fifth
Third Bank for a range of illegal activities that will result in the
bank paying $20 million in penalties in addition to paying redress to
approximately 35,000 harmed consumers, including about 1,000 who had
their cars repossessed.\26\ Specifically, the CFPB has ordered Fifth
Third Bank to pay a $5 million penalty for forcing vehicle insurance
onto borrowers who had coverage. The CFPB also filed a proposed court
order that would require Fifth Third Bank to pay a $15 million penalty
for opening fake accounts in the names of its customers.\27\ The
proposed court order bans Fifth Third Bank from setting employee sales
goals that incentivize fraudulently opening accounts.
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\26\ The Consent Order is available at: <a href="https://www.consumerfinance.gov/enforcement/actions/fifth-third-bank-na-fpi-2024/">https://www.consumerfinance.gov/enforcement/actions/fifth-third-bank-na-fpi-2024/</a>.
\27\ The Opinion and Order is available at: <a href="https://www.consumerfinance.gov/enforcement/actions/fifth-third-bank-national-association/">https://www.consumerfinance.gov/enforcement/actions/fifth-third-bank-national-association/</a>.
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2024-24093 Filed 10-17-24; 8:45 am]
BILLING CODE 4810-AM-P
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</html>Indexed from Federal Register on October 18, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.