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Financial Services Law Insights and Observations


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  • NYDFS: Auto loan borrowers are entitled to rebates for cancelled ancillary products

    State Issues

    On July 18, NYDFS sent a letter reminding regulated auto lenders and auto loan servicers that they are responsible for ensuring certain rebates are credited to consumers whose vehicles were repossessed or were a total loss. During its examinations, NYDFS identified instances where certain institutions that finance ancillary products, such as extended warranties, vehicle service contracts, and guaranteed asset protection insurance, failed to properly calculate, obtain, and credit rebates to consumers as required. NYDFS explained that the terms of sale for such ancillary products “provide that if the vehicle is repossessed or is a total loss prior to the product’s expiration, the consumer is entitled to a rebate for the prorated, unused value of the product (a ‘Rebate’), payable first to the [i]nstitution to cover any deficiency balance, and then to the consumer.” NYDFS found that some institutions either neglected to pursue Rebates from the issuers of the ancillary products or miscalculated the owed amounts, adding that in some instances, institutions made initial requests for Rebates but did not follow through to ensure that they were received and credited to consumers.

    NYDFS explained that an institution’s failure to obtain and credit Rebates from unexpired ancillary products is considered to be unfair “because it causes or is likely to cause substantial injury to consumers who are made to pay or defend themselves against deficiency balances in excess of what the consumer legally owes.” The resulting injury caused to consumers is not outweighed by any countervailing benefits to consumers or to competition, NYDFS stressed.

    Additionally, NYDFS said an institution’s statements and claims of consumers’ deficiency balances that do not include correctly calculated and applied Rebates are considered to be deceptive, as they mislead consumers about the amount they owe after considering all setoffs. NYDFS said it expects institutions to fulfill their contractual obligations by ensuring Rebates are properly accounted for, either by deducting them from deficiency balances or issuing refund checks if no deficiency balance is owed.

    NYDFS further noted in its announcement that recent CFPB examinations found that certain auto loan servicers engaged in deceptive practices when they notified consumers of deficiency balances that misrepresented the inclusion of credits or rebates. The Bureau’s supervisory highlights from Winter 2019, Summer 2021, and Spring 2022 also revealed that collecting or attempting to collect miscalculated deficiency balances that failed to account for a lender’s entitled pro-rata refund constituted an unfair practice.

    State Issues Bank Regulatory State Regulators NYDFS Auto Finance Consumer Finance UDAAP Ancillary Products Deceptive Unfair CFPB Act

  • North Carolina Passes Legislation to Clarify Applicability of Motor Vehicle Service Agreement Protections

    Consumer Finance

    On October 22, North Carolina Governor Pat McCrory signed into law North Carolina SB 195 to clarify the types of service agreements that come under the existing framework governing how motor vehicle service agreements are sold. The bill revises the existing statute to specifically describe a set of products considered to be motor vehicle service agreements and delegates to the Commissioner of Insurance power to define additional products consistent with the law. The bill also amends the statute to expressly carve out from the regulatory framework maintenance agreements offered by certain entities. Finally, the new law amends the statute to clarify that ancillary anti-theft protection program and ancillary anti-theft protection program warranty products are not considered contracts of insurance. The amendments are effective as of October 1, 2015.

    Ancillary Products

  • Spotlight on the Military Lending Act, Part 3: Falling in Line with MLA Compliance

    Consumer Finance

    Sasha-LeonhardtWith recent changes in the regulations implementing the Military Lending Act (“MLA”), creditors are now reevaluating their compliance plans to ensure they are prepared for the new regulations.  Although there is no formal guidance on what federal regulators will look for in reviewing MLA compliance, the commentary that accompanied both the proposed and final rule gives some insight as to where regulators will focus examination and enforcement resources.  Below, we discuss some of these likely areas of focus, and offer suggestions for how institutions can prepare for regulatory scrutiny.

    Determining military service and MLA safe harbor provisions

    The MLA only applies to a “covered borrower,” which is either a servicemember (as defined under the MLA) or a servicemember’s dependent.  The MLA provides two safe harbors to determine if a consumer is a covered borrower:  (1) a set of results from the DoD’s MLA database, or (2) a military status indicator in a consumer report.

    Although both of these approaches are optional—and a creditor may use a different method to determine if an individual is eligible for MLA protection—they provide several benefits.  They are both determinative, so even if the borrower is in fact a servicemember a safe harbor check that shows otherwise will govern.  Both checks can also be done without

    inconveniencing the consumer or requiring them to attest to their military status.

    However, these safe harbor approaches are only effective if the results are actually retained by the creditor.  Since military status checks must be performed at origination, we recommend that the results of these checks be retained with the origination documents.  Not only does the outcome of the military status check determine the substantive terms of the actual credit obligation, but by keeping all of these documents together, a creditor can ensure that they have all of the governing origination documents are in a single, secure location.

    Ancillary products and calculation of the Military APR (“MAPR”)

    In crafting the new MLA rules, the Department of Defense expanded the list of items to include in calculating the MAPR.  One of the most significant changes is the addition of fees paid “for a credit-related ancillary product sold in connection with the credit transaction.”  Although the MAPR limit is 36%, ancillary product fees can add up and—especially for accounts that carry a low balance—can quickly exceed the MAPR limit.  This broad definition of the interest rate under the MLA also coincides with the expansive approach that federal regulators have taken regarding enforcement of the interest rate limitations under another military protection statute, the Servicemembers Civil Relief Act.  The CFPB has made no secret of the fact that it reviews add-on products closely, and we expect the Bureau to use the MLA as another method of targeting ancillary products.

    Prohibition against mandatory arbitration

    Although most of the focus has been on the revised MAPR requirements in the new rules, the MLA has prohibited mandatory arbitration for eligible accounts since 2007.  While this provision remains the same under the new MLA rules, what has changed since 2007 is a renewed focus on mandatory arbitration by federal regulators.  Since the CFPB’s creation in 2011, mandatory arbitration—and its impact on consumers—has been a key area of focus for the Bureau.  With the CFPB’s Office of Servicemember Affairs closely watching any practices that may harm military borrowers and the Bureau’s overall focus on arbitration, we expect the arbitration provisions of the MLA to become a keen area for regulatory review.

    MLA disclosure requirements compliance

    Finally, the MLA requires special disclosure requirements for eligible loans.  While most creditors are familiar with the Truth in Lending Act (“TILA”) and Regulation Z disclosure requirements, the MLA also requires that the servicemember receive “a statement of the MAPR applicable to the extension of credit.”  This disclosure must be provided before or at the same time that the servicemember enters into the transaction.

    To ensure compliance with the MLA, we recommend a streamlined, product-specific set of disclosures that an MLA-eligible consumer can receive at origination.  To protect against borrower claims of insufficient disclosures and post hoc regulatory scrutiny, we recommend that creditors retain copies of the MLA disclosures along with the original check of the MLA website and credit agreement.

    SCRA Military Lending Act Ancillary Products Sasha Leonhardt

  • CFPB Reaches $700 Million Settlement to Resolve Credit Card Ancillary Products Investigation

    Consumer Finance

    On July 21, the CFPB announced a nearly $700 million settlement against a leading financial institution and its subsidiaries.  According to the consent order, the Bureau alleges that the entities engaged in deceptive marketing, billing, and collection practices related to various credit card ancillary products, including debt protection and credit monitoring services. Specifically, the Bureau alleges that the institution or its vendors marketing practices, consisting of telemarketing calls, online enrollment, point-of-sale application, and direct enrollment at retailers, mislead consumers into enrolling for certain ancillary products. The Bureau further alleges that, in some instances, telemarketers failed to accurately disclose the cost and fees associated with the ancillary products. With respect to the unfair billing allegations, the Bureau contends that the institution or its vendors improperly charged consumers, without authorization, for services that were not rendered, and failed to provide full product benefits of the services marketed to consumers. In addition, the Bureau alleges that the institution misrepresented payment fee information to consumers by failing to disclose the actual purpose of the fee associated with making payments by phone on delinquent credit card accounts. Under terms of the settlement, the institution and its subsidiaries agreed to (i) provide $479 million in consumer relief related to its marketing practices; (ii) pay roughly $220 million in restitution related to its payments collection practices and for consumers not receiving the full benefits of services promised; and (iii) pay a $35 million civil money penalty.

    In a parallel enforcement action, the OCC imposed a separate $35 million civil money penalty against the institution for engaging in similar practices, and requires the institution to strengthen its oversight of third-party vendors and develop a comprehensive risk management program for ancillary products marketed or sold by the bank.

    CFPB UDAAP OCC Vendors Enforcement Ancillary Products Risk Management

  • OCC Fines National Bank for Alleged Unfair Billing Practices

    Consumer Finance

    On June 19, the OCC released recent enforcement actions taken against national banks, federal savings associations, and individuals currently or formerly affiliated with national banks and federal savings associations. Among the actions was the issuance of a consent order for a civil money penalty against a national bank for allegedly violating the Federal Trade Commission Act. During its investigation, the OCC discovered deficiencies relating to the bank’s billing and marketing practices, specifically with regard to identity protection and debt cancellation products. According to the consent order, since April 2004, the bank, along with an identity protection product vendor, marketed and sold various types of identity theft protection products to its customers. Before customers could access the credit monitoring service of the identity theft product, they “were required to provide sufficient personal verification information and consent before their credit bureau reports could be accessed.” However, the OCC found that the vendor (i) billed the bank’s customers the full fee for the products, even if they were not receiving all of the credit monitoring services; (ii) billed the customers prior to receiving the customers’ information and consent and establishment of credit monitoring; and (iii) failed to ensure that customers received electronic benefit notifications. The bank retained a portion of the fees that the customers paid. Additionally, the bank’s vendors incorrectly informed customers during telemarketing calls that only one of the products offered had the ability to access identity protection benefits electronically. As a result, some customers purchased the more expensive Enhanced Identity Theft Protection, as opposed to the less expensive Identity Theft Protection, under the mistaken belief that this was the only way they could access the product’s benefits online. Finally, the OCC also alleged that, from August 2005 through November 2013, the bank’s debt cancellation product vendor’s billing practices, which posted recurring payments on the same day of the month regardless of the payments’ due dates, resulted in some customers paying recurring late fees. The bank will pay $4,000,000 to resolve the OCC’s allegations.

    OCC Vendors Enforcement Ancillary Products

  • FTC Announces Results of "Operation Ruse Control" on Auto Industry

    Consumer Finance

    On March 26, the FTC announced the results of Operation Ruse Control, “a nationwide and cross-border crackdown” on the auto industry with the intent to protect consumers who are purchasing or leasing a car. Efforts taken jointly by the FTC and its law enforcement partners resulted in over 250 enforcement actions, including the six most recent cases that involved (i) fraudulent add-ons; (ii) deceptive advertising; and (iii) auto loan modification. According to the press release, the FTC recently took its first actions against two auto dealers for its add-on practices, which allegedly violate the FTC Act by failing to disclose the significant fees associated with offered programs or services and misrepresenting to consumers that they would save money. Three auto dealers recently “agreed to settle charges that they ran deceptive ads that violated the FTC Act, and also violated the Truth in Lending Act (TILA) and/or Consumer Leasing Act (CLA).” Finally, at the FTC’s request, the U.S. District Court for the Southern District of Florida temporarily put an end to the practices of a company that charged consumers an upfront fee to “negotiate an auto loan modification on their behalf, but then often provided nothing in return.” The FTC’s recent actions are indicative of its ongoing efforts to prevent alleged fraud within the industry.

    FTC TILA Auto Finance Enforcement Ancillary Products UDAAP

  • CFPB Enforcement Action Targets Bank's Add-On Product Billing Practices

    Consumer Finance

    On September 24, the CFPB announced a consent order with a large national bank to address alleged unfair practices related to add-on identity theft protection products marketed by the bank and sold and administered by a third-party service provider to the bank’s customers from 2003–2012. Specifically, the CFPB alleged that customers were unfairly billed by the service provider for certain products that offered credit monitoring and credit report retrieval services without receiving the full benefit of the services. Customers who enrolled in these add-on identity theft products were required to provide sufficient written authorization and personal verification before the customers’ credit bureau reports could be accessed. However, according to the Bureau, in many instances time passed before a customer’s authorization was obtained or a customer’s authorization was never obtained. In other instances, the credit bureau could not match the customer’s identification information with its records. Although the bank’s vendor, rather than the bank itself, was directly responsible for selling and administering the products, the CFPB found that the bank’s compliance monitoring, service provider management, and quality assurance functions had failed to prevent, identify, and correct the unfair practices, resulting in substantial injury to more than 420,000 consumers. According to the CFPB’s order, this injury was not reasonably avoidable by consumers, and was not outweighed by any countervailing benefit to consumers or competition, and, therefore, the bank engaged in unfair practices.

    The consent order requires the company to pay $47,900,000 in redress to compensate consumers injured by the alleged unfair billing practices, as well as a $5 million penalty to the CFPB. In addition, the consent order requires the bank to: (i) correct all unfair practices related to improper customer billing for add-on identity protection products and take numerous additional corrective actions to ensure that neither the bank nor its service providers or affiliates engage in such practices in the future; (ii) obtain CFPB non-objection prior to marketing, selling, or referring customers to identity protection products in the future; and (iii) review and, if necessary, revise the bank’s third-party risk management and responsible banking programs to ensure that, among other things, the bank conducts periodic onsite reviews of any add-on service provider’s controls, performance, and information systems. A separate OCC consent order also requires the bank to pay an additional $4 million civil money penalty to the OCC.

    CFPB OCC Vendors Enforcement Ancillary Products

  • Ninth Circuit Holds State AG Credit Card Add-On Suits Belong In State Court

    Consumer Finance

    On August 1, the U.S. Court of Appeals for the Ninth Circuit held that neither the federal question statute nor the Class Action Fairness Act provide a federal district court with subject matter jurisdiction over the Hawaii Attorney General’s (AG) suit against credit card issuers over allegedly deceptive marketing of add-on products. Hawaii v. HSBC Bank Nev., N.A., No. 12-263, 2014 WL 3765697 (9th Cir. Aug. 1, 2014). The Hawaii AG filed suits in state court against several credit card issuers asserting three state law causes of action based on allegations that the issuers deceptively marketed and enrolled Hawaii cardholders in various debt protection products. After the issuers removed the cases to federal court, the district court refused to remand, holding that at least one claim in each case was preempted by the National Bank Act. The court reasoned that the AG implicitly challenged the “rate of interest” on outstanding credit card balances by alleging the issuers charged “significant fees” for “minimal benefits” and had “increased profits by substantial sums,” and explained that the National Bank Act completely preempts state laws regulating the interest rates charged by nationally chartered banks. The appeals court disagreed, concluding—as the Fifth Circuit did last year in a similar case—that regardless of how state law labels the claims, the AG’s complaints did not challenge the “rate of interest” that issuers charged and are not preempted. Further, the court held that CAFA does not provide an alternative basis for federal jurisdiction because the AG’s suits are common law parens patriae suits that specifically disclaimed class status, and, as such, they are not class actions.

    Credit Cards State Attorney General Ancillary Products

  • Florida Restricts Certain Auto Finance Ancillary Product Practices

    Consumer Finance

    On June 13, Florida Governor Rick Scott signed HB 783, which prohibits an “affiliated finance company”—i.e. an auto manufacturer’s or wholesale distributor’s captive finance company, as defined by the law—from (i) refusing to purchase or accept an assignment of a vehicle contract from a dealer or (ii) charging a dealer an additional fee or surcharge for the contract, solely because the contract contains an automotive-related product from a third-party. The restrictions apply only if the third-party product is of “similar nature, scope, and quality” to the product provided by affiliated finance company, or its related manufacturer or wholesale distributor.  The bill provides factors for determining whether a product is similar. The new restrictions take effect July 1, 2014.

    Auto Finance Ancillary Products

  • DOJ, CFPB Fair Lending Enforcement Actions Target Credit Card Repayment Programs, Marketing Of Add-On Products

    Consumer Finance

    On June 19, the CFPB and the DOJ announced parallel enforcement actions against a federal savings bank that allegedly violated ECOA in the offering of credit card debt-repayment programs and allegedly engaged in deceptive marketing practices in the offering of certain card add-on products. The bank will pay a total of $228.5 million in customer relief and penalties to resolve the allegations.

    ECOA Violations

    The CFPB and DOJ charge that the bank excluded borrowers who indicated that they preferred communications to be in Spanish or who had a mailing address in Puerto Rico, even if the consumers met the promotion’s qualifications. The CFPB and DOJ assert that as a result, Hispanic populations were unfairly denied the opportunity to benefit from the promotions, which constitutes a violation of the ECOA’s prohibition on creditors discriminating in any aspect of a credit transaction on the basis of characteristics such as national origin.

    To resolve the joint fair lending actions, the bank entered into separate consent orders with the CFPB and the DOJ. As detailed in the DOJ order, the bank will make $37 million in payments, credits and waivers to affected borrowers. The bank already has provided the benefits of the offers or their equivalent value to approximately 84,000 borrowers, totaling $131.8 million in relief. In total the bank will provide $169 million in relief, making the settlement the largest ever fair lending credit card action. The CFPB did not assess a civil money penalty for the ECOA violations because the bank self-reported the potential violations, self-initiated remediation to affected borrowers, and cooperated in the investigation. The CFPB did require the bank to review its credit offering strategies and enhance fair lending training and compliance.

    Add-On Product Marketing Violations

    The CFPB further alleges that its examiners identified several deceptive marketing practices used by the bank to promote five credit card add-on products. The CFPB alleges that the bank’s and its service providers misrepresented the products by (i) marketing them as free of charge when the fee was avoidable only in certain specific circumstances; (ii) failing to disclose consumers’ ineligibility, causing certain consumers to purchase products from which they could receive no benefit; (iii) failing to disclose that consumers were making a purchase, leading consumers to believe they were receiving a benefit or updating their account; and (iv) marketing as a limited time offer products that were not so limited.

    Under the CFPB consent order, the bank will refund $56 million to approximately 638,000 consumers who were subjected to the allegedly deceptive marketing practices, and will pay a $3.5 million civil money penalty. The bank also must develop an enhanced add-on product compliance plan that includes, among other things, a revised vendor management policy.

    CFPB UDAAP Fair Lending ECOA DOJ Ancillary Products


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