On October 7, 2024, the Consumer Financial Protection Bureau (CFPB) released its Fall edition of Supervisory Highlights, specifically focusing on the auto finance market. This special edition outlines various supervisory observations and enforcement actions related to deceptive practices, wrongful repossessions, and issues in servicing and administration of add-on products within the sector.
Rising Auto Loan Debt
The report indicates that auto loan debt has surged, now totaling over $1.6 trillion, making it the second-largest category of household debt after mortgages, according to Federal Reserve data.
Key Observations from Examinations
The report is based on examinations conducted between November 1, 2023, and August 30, 2024, and highlights the following supervisory findings:
1. Origination Disclosures
The CFPB alleged that subprime loan originators engaged in deceptive practices by advertising “as low as” annual percentage rates (APRs) that many consumers could not realistically qualify for.
Issues were also found with prepayment penalty disclosures, which allegedly violated the Truth in Lending Act (TILA). Disclosures suggested a penalty for early payment, conflicting with statements in retail installment contracts indicating no finance charge would apply if the loan were paid off early.
2. Repossession Practices
The report criticized repossession practices for being unfair, specifically:
- Vehicles were wrongfully repossessed despite consumers having made payments or secured loan modifications that should have prevented repossession.
- Some repossessions occurred without a valid recorded lien on the vehicle.
3. Servicing Practices
Two significant servicing issues were identified:
- Improper Payment Allocation: Servicers were misallocating loan payments, applying them to late fees before principal and interest, resulting in erroneous late fees for borrowers.
- Delays in Vehicle Titles: Excessive delays in providing vehicle titles post-loan payoff harmed consumers who needed these titles for selling vehicles or faced additional insurance costs.
4. Add-On Products
The CFPB identified several abusive and unfair practices regarding add-on products:
- Consumers were charged for optional add-on products they did not agree to purchase.
- Itemization failures in the financing amount violated Regulation Z, specifically concerning payments made on behalf of consumers.
- Burdensome cancellation requirements, such as requiring in-person dealership visits, prevented consumers from exercising their rights.
- Incorrect refunds for add-on products after loan termination were also reported, with some refunds taking excessively long to process.
5. Furnishing Deficiencies
The report pointed to violations of the Fair Credit Reporting Act and Regulation V:
- Lenders reported inaccurate information, including incorrect amounts due and erroneous payment dates.
- There were failures to update or correct inaccurate information for several months, sometimes exceeding a year.
Recent Developments and Enforcement Actions
The report also mentioned several advisory opinions, circulars, and proposed rules from the CFPB. These include:
- FAQs on Buy Now Pay Later products.
- Consumer protection advisory opinions for home sales financed under contracts for deeds.
- A proposed rule to standardize data submitted to federal financial agencies.
- Warnings about non-disclosure agreements potentially deterring whistleblowers.
In terms of enforcement, actions have been taken against financial institutions related to:
- Student loans.
- Credit reporting.
- Mortgage servicing.
- Lender-placed insurance for auto borrowers.
Conclusion
The CFPB’s focus on the auto finance sector highlights significant consumer protection issues that need addressing. As auto loan debt continues to rise, the bureau’s scrutiny serves as a warning to lenders and servicers to ensure compliance with consumer protection laws and regulations, thereby fostering a fairer marketplace for consumers.
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