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CFPB Takes Action Against Colorado-Based "Buy-Here Pay-Here" Auto Dealer
On January 21, the CFPB filed a consent order to resolve allegations that a Colorado-based subprime auto dealer violated the TILA and the CFPA by engaging in abusive financing and marketing schemes. Specifically, the CFPB alleged that, from January 2012 through May 2014, the auto dealer (i) failed to make purchase prices available to credit consumers until the very end of the transaction; (ii) hid finance charges and improperly disclosed the resulting APRs; (iii) refused to negotiate car prices with credit consumers; and (iv) used abusive marketing tactics by failing to disclose to purchasers the “complete and accurate credit terms” of the automobile financing. The CFPB’s consent order requires the auto dealer to (i) pay $700,000 in redress to consumers affected by its practices; (ii) clearly and prominently post the purchase price on all automobiles; (iii) stop misrepresenting interest rates, finance charges, amounts financed, other credit terms, or any other fact material to the financing of a motor vehicle; and (iv) disclose in writing to the consumer information concerning the terms of the financing offer (including the APR), the purchase price of the car, the total number of payments required before the consumer owns the car, and the duration of the purchase financing contract. The CFPB suspended its civil money penalty of $100,000 as long as redress is paid.
FTC Reveals Auto Distribution Workshop Agenda
On January 6, the FTC released the full agenda for its upcoming one-day workshop, “Auto Distribution: Current Issues and Future Trends,” scheduled to take place in Washington, D.C. on January 19. As previously covered in InfoBytes, the panel discussions will examine current issues and future trends related to the distribution of motor vehicles in the U.S., with presentations on the regulation of dealer location, laws relating to reimbursement for warranty services, restrictions on manufacturers’ ability to engage in direct sales to consumers, and new developments affecting auto distribution.
CFPB Takes Action Against "Buy-Here, Pay-Here" Auto Dealer and Affiliated Financing Company
On December 17, the CFPB announced a consent order against a Minnesota-based auto dealer and its affiliated financing company for alleged violations of the FCRA and the CFPA. The CFPB alleged that the auto dealer, acting through its financing company, (i) repeatedly furnished inaccurate consumer credit information for more than 84,000 customers from January 2009 through September 2013; and (ii) engaged in deceptive acts and practices by failing to report “good credit” to the credit reporting agencies (CRAs) for tens of thousands of consumers after making written representations that the it would report positive credit information to help consumers build and maintain good credit. Alleged FCRA violations include: (i) inaccurately reporting that vehicles were repossessed and borrowers owed balances after the vehicles were returned to the dealer in accordance with the company’s 72-hour return policy; (ii) inaccurately reporting that consumers had outstanding balances after issuing documentation that disputed accounts had been settled; and (iii) failing to establish and maintain reasonable written policies and procedures to ensure the accuracy and integrity of consumer information furnished to CRAs.
Under the terms of the consent order, the companies are required to pay a $6,465,000 civil money penalty. In addition, the companies must (i) establish and implement written consumer-information furnishing policies and procedures that comply with the Furnisher Rule; (ii) identify and correct inaccurate consumer-information that was furnished to the CRAs (iv) cease from making false representations that it will report “good credit” or other positive information to the CRAs; (v) provide affected consumers with free credit reports; and (vi) implement an effective audit program of its credit reporting practices.
FTC to Host Workshop Regarding Regulatory Environment of the U.S. Auto Distribution System
On December 14, the FTC announced that it will host a one-day workshop, Auto Distribution: Current Issues & Future Trends, to examine current issues and future trends related to the distribution of motor vehicles in the United States. Scheduled to take place on January 19, 2016 in Washington, D.C., the event’s primary focus will be to explore competition within the auto distribution system, including the effects of state regulations and emerging trends. The event will consist of presentations addressing the following four topic areas: (i) regulation of dealer location; (ii) laws relating to reimbursement for warranty services; (iii) restrictions on manufacturers’ ability to engage in direct sales to consumers; and (iv) new developments affecting auto distribution. The FTC announced an invitation for public comment on questions related to the workshop; the comment period will remain open through March 4, 2016.
Year in Review: Auto Finance and the CFPB in 2015
The auto finance industry gained a new regulator in 2015 with the publication of the CFPB’s larger participant rule, which, for the first time, allows the Bureau to supervise larger non-bank auto finance companies. In this new compliance environment, larger participants would be prudent to examine past bulletins and consent orders executed by the CFPB to proactively prepare for examinations and enforcements in the coming year.Regulation by Bulletins and Consent Orders
CPFB Bulletin 2013-02, which set forth the CFPB’s initial views regarding the risk under the Equal Credit Opportunity Act associated with “allowing” dealers the discretion to “mark up” the rates of customers’ retail installment sale contracts, provided a basis for two 2015 consent orders. Broadly speaking, the Bulletin noted two possible ways auto finance creditors could mitigate their risk – eliminating dealer discretion or monitoring for disparities in dealer discretion and then providing customer remediation for such disparities.
Since 2013 there have been three public CFPB consent orders regarding dealer pricing discretion. The first order, executed with a large bank holding company and its subsidiary bank in 2013, required the respondents to pay remediation for past transactions within the order’s scope, pay a $18 million civil money penalty, and establish a program to monitor and remediate disparities going forward. This contrasts with the two public consent orders that were issued afterwards. Those subsequent orders, entered into with a captive finance company and a large regional bank in the summer and fall of 2015, respectively, provided the respondents with the option of reducing the range of acceptable “markup” (i.e., the difference between the rate of the installment contract and the institution’s buy rate) to 125 basis points for contracts with a term of 60 months or less and 100 basis points for contracts with a term of more than 60 months. If a respondent selected this option, then monitoring for compliance with these markup limits is required, but monitoring and remediating disparities in dealer markup is not required. Both orders also included other options involving reduced dealer discretion, but did not include an option to monitor and remediate disparities without any change in the permitted dealer discretion.
Larger Participant Rule for Auto Finance
The CFPB’s larger participant rule for auto finance, which became effective on August 31, 2015, extended the CFPB’s supervisory authority to nonbank auto finance companies that have at least “10,000 annual originations.”
- “Originations” in this case includes credit for the purpose of purchasing an automobile, leases of automobiles, refinancings of such transactions, and purchases of such transactions.
- The rule excludes title lending and securitization transactions.
- “Automobile” includes any self-propelled vehicle primarily used for personal, family, or household purposes for onroad transportation except for motor homes, RVs, golf carts, and motor scooters.
Now that the rule is in effect, CFPB examinations of non-bank auto finance companies are expected to follow. In light of this new rule, companies should examine other areas where the CFPB has been active in connection with other consumer financial products, in the event the Bureau extends such initiatives into auto finance. Those areas include:
- Fair lending
- Credit reporting
- Debt collection
- Treatment of servicemembers
- Ancillary products
- Vendor management
House Report Examines the CFPB's Methodology in Auto Finance Investigations
On November 24, Republicans on the House Committee on Financial Services issued a report regarding the CFPB’s approach for determining discrimination in the auto lending industry. The report questions the CFPB’s proxy methodology and its authority to bring claims against banks involved in indirect auto lending under the Equal Credit Opportunity Act’s (ECOA) disparate impact theory. According to the report, disparate impact “is a controversial legal theory of liability in discrimination cases.” The report further states that, even if it assumes that the ECOA permits disparate impact claims, the CFPB is nonetheless required to identify the following to establish a prima facie case: (i) a specific policy or practice adopted by the creditor; (ii) disparate impact on a prohibited basis; and (iii) a causal relationship between the challenged practice and the alleged disparate impact. The report states, “[d]ocuments obtained by the Committee show that the Bureau will likely have difficulty proving any one of these requirements, much less all three.” Notably, the report criticizes the CFPB’s adoption of the Bayesian Improved Surname Geocoding proxy method, which “combines surname- and geography-based information into a single proxy probability for race and ethnicity,” labeling it as “faulty and unreliable.” The report further suggests that the CFPB observed the method to be “less accurate . . . than some proprietary proxy methods that use nonpublic data.” In closing, the report comments on the CFPB’s “ambition to eliminate dealer markup” by summarizing (i) a December 2013 settlement in which the CFPB used its leverage over a bank holding company to negotiate the settlement terms; (ii) the agency’s plans to increase the number of individual enforcement actions on dealer markup and compensation policies; and (iii) potential ECOA rulemaking to “promulgate a regulation prohibiting lenders from compensating dealers based on the terms of a loan.”
FTC Announces Settlement with Ohio Auto Dealers
On November 24, the FTC announced that two Ohio auto dealers agreed to settle FTC charges that they deceived consumers with misleading advertisements. Specifically, the FTC alleged that the auto dealers violated the FTC Act and the Consumer Leasing Act by failing to adequately disclose key terms regarding car lease offers, such as (i) the total payment amount due at signing; (ii) whether a security deposit was required; and (iii) credit score requirements. The proposed settlement order will remain in effect for 20 years and prohibits the defendants from advertising misleading lease or financing terms. The defendants are barred from advertising a payment amount, or that any initial payment is required, without disclosing the following: (i) that the transaction is a lease; (ii) the total amount due at consummation or delivery; (iii) the number of payments, their amounts, and timing; (iv) whether or not a security deposit is required; and (v) that consumers may need to pay an extra fee at the end of the lease based on the difference between the vehicle’s residual value and the value at the end of the lease. Finally, the proposed settlement also requires the defendants to “clearly and conspicuously disclose all qualifications or restrictions on a consumer’s ability to obtain the advertised terms.”
House Passes Bills that Impact CFPB Mortgage and Auto Lending Policies
On November 18, the U.S. House of Representatives passed by voice vote H.R. 1210 and H.R. 1737, both of which will affect CFPB policies governing the mortgage and auto lending industries. The “Portfolio Lending and Mortgage Access Act” – H.R. 1210 – would amend the Truth in Lending Act to create a safe harbor from certain requirements for depository institutions making residential mortgage loans held in portfolios. Specifically, the bill permits loans that appear on a depository institution’s balance sheet to be treated as a Qualified Mortgage subject to certain limitations, thus permitting such loans to fall under the Ability-to-Repay Rule’s safe harbor provisions. The “Reforming CFPB Indirect Auto Finance Guidance Act” – H.R. 1737 – would invalidate CFPB Bulletin 2013-02, which provides guidance to indirect auto lenders regarding compliance with federal fair lending laws.
In anticipation of the two bills passing the House, the White House released two separate statements voicing the Administration’s opposition to both.
Massachusetts AG Settles with Auto Lender Over Alleged "Excessive" Interest Rate Charges
On November 5, Massachusetts AG Maura Healey announced a settlement with a national auto lender to resolve allegations that the lender charged excessive interest rates on subprime auto loans. The company agreed to provide over $5 million – approximately $11,000 per consumer – in relief to those affected by its alleged practice of charging consumers excessive interest rates as a result of including fees from an add-on GAP insurance product. Under the terms of the assurance and discontinuance, the company will (i) eliminate the alleged excessive interest on certain loans as a result of the GAP fee; and (ii) forgive outstanding interest on loans. In addition, the company must pay $150,000 to Massachusetts and perform supervised audits of its existing loan portfolio to ensure that no additional consumers were overcharged because of GAP fees.
CFPB Orders Auto Finance Company to Pay Over Three Million for Alleged Unfair Debt Collection Practices
On October 28, the CFPB filed an administrative order against an Ohio-based auto lender specializing in extending credit to servicemembers. The CFPB alleged that the company violated the CFPA by engaging in unfair, abusive, and deceptive debt collection practices, including: (i) contacting and threatening to contact servicemembers’ commanding officers to inform them of delinquencies and alleged military violations requiring discipline; (ii) exaggerating the potential disciplinary actions, such as demotion, loss of promotion, and discharge, that servicemembers may face if they failed to make payments; (iii) representing that the company could commence an involuntary allotment or wage garnishment without obtaining a court judgment; and (iv) threatening legal action when the company did not intend to take legal action at the time. Among other things, the consent order requires that the company: (i) refund or credit over $2 million to consumers; and (ii) pay a $1 million civil money penalty.
