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CFPB Releases Auto Title Report; Sets Date for Small Dollar Lending Field Hearing
On May 18, the CFPB issued a report titled “Single-Payment Vehicle Title Lending.” The report provides an overview of the CFPB’s analysis of “de-identified data from vehicle title lenders consisting of nearly 3.5 million loans made to over 400,000 borrowers in ten states during 2010-2013.” The CFPB examined loan patterns (re-borrowing and rates of default) for single-payment auto loan titles. A loan contained in the CFPB’s study has three possible outcomes: (i) repaid without subsequent borrowing; (ii) default; or (iii) re-borrowing on the same day or within a certain specified period (14, 30, or 60 days) of time after repayment. According to the report, auto title loans have high rates of consumers re-borrowing: “[o]ver 80% of vehicle title loans are re-borrowed on the same day a previous loan is repaid, and 87% of loans are re-borrowed within 60 days.” The CFPB further contends that only about one in every eight loan sequences is repaid without a consumer having to re-borrow. Additional findings highlighted in the report include: (i) approximately one-third of loan sequences default, with one in every five borrowers having a vehicle repossessed by the lender for failure to repay; and (ii) approximately two-thirds of the loans are in sequences of seven loans or more and about half are in sequences of ten or more loans, with no more than 15% of the sequences maintaining three loans or fewer.
Also on May 18, the CFPB announced that, on June 2, 2016, it will hold a field hearing about small dollar lending in Kansas City, MO. It is widely anticipated that the CFPB will announce its proposal on small dollar lending products during this hearing. Notably, the CFPB’s auto title loan findings are not dissimilar to the findings outlined in the agency’s recent “Online Payday Loan Payments” report. The data analysis from each report will likely influence the lender requirements included in the CFPB’s expected proposal on the small dollar lending industry.
Iowa Governor Signs Bill to Amend Motor Vehicle Purchase Agreement Requirements
On April 13, Governor Terry Branstad signed into law SF 2228, the Motor Vehicle Records and Dealer Licensing Act. The act amends Chapter 321 of Iowa Code 2016 to, among other things, require that the full price of the “documentary fee” included in the purchase of a motor vehicle be “clearly and conspicuously disclosed in any motor vehicle purchase agreement with the customer.” Defined as “a fee that may be charged to a customer by a motor vehicle dealer for the preparation of documents related to an application for motor vehicle registration and an application for issuance of a certificate of title, and the performance of other related services for the customer,” a documentary fee excludes costs or fees charged to a motor vehicle dealer or a dealer’s customer by a third party. For each vehicle sold in a transaction, a documentary fee is limited to $180, unless a form of electronic applications, titling, registering, and transfers is involved, at which point the documentary fee cannot exceed $155. Pursuant to SF 2228, the Department of Transportation must establish and implement a program to allow for electronic applications, titling, registering, and funds transfers for vehicles subject to registration by January 1, 2018.
Alabama Bill Expands Definition of Vehicle Service Contract
On April 4, Alabama Governor Robert Bentley signed into law HB 7, which amends Section 8-32-2 of the Code of Alabama. Specifically, the bill defines road hazard and expands the definition of a vehicle service contract to include (i) certain damages caused by a road hazard; (ii) the replacement of an inoperable, lost, or stolen key or key fob; and (iii) other services approved by the Alabama Commissioner of Insurance.
Massachusetts AG Healey Continues Subprime Auto Loan Review; Lenders to Pay $7.4 Million in Consumer Relief
On March 16, Massachusetts AG Maura Healey announced that two national auto lenders, based in South Carolina and California respectively, agreed to collectively pay $7.4 million in relief to more than two thousand Massachusetts consumers to resolve allegations that they charged excessive interest rates on subprime auto loans. Under the terms of the assurance of discontinuance, the companies will eliminate the alleged excessive interest on certain loans resulting from add-on GAP insurance coverage, forgive outstanding interest on the loans, and reimburse consumers that already paid interest. The South Carolina-based lender will pay approximately $1.7 million in relief to consumers, while the California-based lender will pay the remaining $5.7 million. The settlement agreements further require the lenders to pay $225,000 for implementation of the agreements and to undergo additional auditing to determine if other loans are subject to refunds.
These settlements are part of AG Healey’s subprime loan review initiative. In November 2015, as part of this initiative, AG Healey announced a $5.4 million settlement with a national auto lender to resolve allegations similarly related to the practice of charging inflated interest rates because of add-on GAP insurance coverage.
Maryland Auto Finance Bill Withdrawn from Consideration
On March 11, the Maryland House Committee on Economic Matters reported unfavorably on Maryland House Bill 530. Introduced on February 1, 2016, the bill would have repealed and reenacted, with amendments, Maryland Commercial Law and Annotated Code of Maryland by adding language requiring an assignee of certain documents – retail installment agreements, a note, or other evidence of a loan – relating to the finance purchase of a motor vehicle to provide payment to the seller of the motor vehicle within two business days after approval of the assignment. After the unfavorable report, the bill was withdrawn from consideration.
Massachusetts AG Announces New Consumer Advocacy and Response Division
On March 3, Massachusetts AG Healey announced a new Consumer Advocacy and Response Division (CARD) intended to protect Massachusetts consumers from alleged fraud, unfair business practices, and consumer abuse. The CARD staff will assist consumers with issues such as (i) auto purchasing and financing; (ii) data security and identity theft; (iii) debt collection; and (iv) foreclosure prevention. In 2015, AG Healey’s office handled more than 2,600 consumer complaint cases, resolving issues related to debt collection, auto lending, and securing refunds for disputed charges with cellular phone carriers.
FTC Submits Letter to CFPB Regarding ECOA Enforcement and Education Activities
On February 8, the FTC sent the CFPB a letter summarizing the FTC’s enforcement activities related to compliance with the Equal Credit Opportunity Act (ECOA) and implementing Regulation B during 2015. The annual letter reviews the FTC’s responsibilities with regard to ECOA enforcement and education to most non-bank financial service providers. Highlights of the letter include, but are not limited to, (i) the FTC’s public workshop on the growing use of online lead generation in industries such as lending and education; (ii) the FTC’s Federal Register Notice seeking comments on a proposed survey of consumers regarding their experiences in buying and financing automobiles at dealerships, over which the FTC has broad authority to enforce the FTC Act and ECOA; and (iii) updates to the FTC’s Mortgage Discrimination publication, which includes information about ECOA and warns consumers of illegal practices. Finally, the FTC emphasized that, since 2011, it has brought over 25 cases in the auto purchase and financing industry, “including those in a federal-state effort that yielded more than 200 actions for fraud, deception, and other illegal practices.”
CFPB and DOJ Announce Joint Settlement with Indirect Auto Lender over Alleged ECOA Violations
On February 2, the CFPB and the DOJ announced a joint enforcement action against an indirect auto lender for alleged violations of the Equal Credit Opportunity Act (ECOA) and implementing Regulation B. In April 2013, the CFPB and the DOJ began an investigation into the indirect auto lender’s compliance with the ECOA and found that its policies allowed for dealers to mark up a consumer’s interest rate on the retail installment contract above the established risk-based buy rate, known as “dealer markup.” The dealers received greater compensation from the indirect auto lender on loans with a higher interest rate. The DOJ and the CFPB determined that the respondent’s practice of allowing pricing discretion resulted in qualified African-American/Pacific Islander borrowers paying more than qualified white borrowers. To resolve the DOJ and the CFPB’s allegations, the respondent agreed to (i) reduce the amount by which loans can be marked up to only 1.25% above the established buy rate for auto loans with terms of five years or less, and 1% for loans with longer terms; (ii) pay at least $19.9 million in redress to borrowers affected by its finance practices from January 2011 to February 2, 2016, and up to $2 million more from the date of the action until it implements a new pricing and compensation structure, which must be in place by August 2016; and (iii) hire a settlement administrator to ensure that affected borrowers receive compensation.
These enforcement actions are the fourth in a series of joint CFPB and DOJ actions addressing fair lending risks in the indirect auto lending industry.
New York AG Schneiderman Takes Action Against Auto Dealers for Deceptive Practices
On January 20, New York AG Schneiderman announced a lawsuit against several auto dealerships located in Queens, New York, alleging that the dealerships used deceptive sales tactics to sell add-on products and services, including credit repair and identity theft protection services. According to the lawsuit, the dealerships charged “consumers for services while concealing such charges from the consumers, or [misrepresented] that the services were free,” collecting more than $1 million from consumers between January 2013 and November 2014 for the identity theft and credit repair services alone. The lawsuit further alleges that consumers did not receive the services for which they were charged, including VIN etching and key replacement services. AG Schneiderman alleges these products and services were “bundled into the vehicle sales price and not separately itemized,” ultimately inflating the stated price of the car on the purchase and lease documents. The lawsuit seeks a court order that would (i) prohibit the dealerships from engaging in deceptive practices; and (ii) order the dealerships to refund “all illegally obtained overcharges” back to consumers.
As part of his initiative to end dealerships’ practices of charging consumers for “hidden purchases,” AG Schneiderman simultaneously announced separate settlements with dealerships in Nassau and Suffolk Counties that allegedly sold credit repair and identity theft protection services to consumers. This is in addition to similar 2015 settlements with a “credit repair and identity theft protection” company and a group of dealerships in Queens and Westchester Counties, the latter potentially totaling $14 million.
House Financial Services Committee: CFPB Removed Safeguards to Achieve Political Goals
On January 20, Republicans on the House Committee on Financial Services issued a report alleging that the CFPB removed a number of safeguards from the claims process after it secured its first settlement with an auto finance company and the company’s subsidiary bank in 2013. The Committee’s most recent report follows a November 2015 report in which the Republican staff (i) criticized the CFPB’s approach for determining discrimination in the auto lending industry; and (ii) questioned the CFPB’s authority to bring claims against banks involved in indirect auto lending under ECOA on a disparate impact theory. According to the more recently published report, the CFPB failed to confirm that funds from the 2013 settlement would be distributed to eligible recipients. Specifically, the report states that when CFPB Director Cordray announced that $80 million would be paid to consumers affected by the auto finance company’s practices, he “did not know the race of a single borrower in any vehicle finance contract purchased by [the company].” The report further comments that, “Bureau officials knew that in order to generate a sufficient number of check recipients, they would have to remove a number of safeguards from the claims process, including confirming the race of claimants alleged to have been discriminated against, thus making it more likely that non-minority consumers would receive remuneration.”