On May 21, 2021, the Consumer Financial Protection Bureau (CFPB) and 3rd Generation, Inc. d / b / a California Auto Finance entered into an agreement Consent order in which the CFPB has alleged acts or unfair practices in connection with a complementary auto finance product.
What was the complementary product?
According to the consent order, the 3rd generation purchases and manages “subprime auto loans by accepting the assignment of retail installment contracts that auto dealers make with borrowers”. As part of its loan agreement, 3rd Generation requires consumers to use its Loss Damage Waiver (LDW) product. The 3rd generation places the LDW product on the consumer’s account when the latter does not have sufficient insurance; it “covers the cancellation of the borrower’s debt in the event of total loss of the vehicle, or the cost of repair if the vehicle is not a total loss”. Adding the LDW product to the consumer’s account incurs a monthly LDW fee.
The addition of the LDW product may result in an increase in the loan principal and repayment of the amortized loan, and in some cases this increase in principal amounted to thousands of dollars, according to the CFPB order. Although consumer claims and notices disclose LDW charges, 3rd Generation does not “disclose to consumers that interest accrues on late payments of these charges.” The CFPB found that many of the 3rd Generation customers had poor or no credit scores, made late payments and incurred interest charges. During the relevant review period, the CFPB identified 5,782 clients who paid a total of $ 565,813 in interest on late payments of LDW fees.
What was the alleged violation and the remedy ordered by the CFPB?
The CFPB argues that by charging consumers interest on late payments of LDW fees without disclosing the accumulation of interest on those late payments in the loan agreement or consumer notices, 3e Generation violated the Consumer Financial Protection Act 2010 by engaging in unfair acts or practices.
The consent order prohibits 3rd Generation from charging interest on LDW fees without first disclosing “clearly and conspicuously” that term. For the purposes of the consent order, “clearly and visibly” means “hard to miss” and “easily understood by the ordinary consumer.[s]. In addition, 3rd Generation must set aside $ 168,162 to pay off customers who have paid off their loans and provide additional credit of $ 117,582 to current customers. 3rd Generation must also pay a civil fine of $ 50,000. more, 3e Generation must ask credit bureaus to correct inaccurate information it has reported about certain customers whose loans have been written off.
What does this action tell us about the CFPB’s scrutiny of auto loans and complementary products?
The survey of 3rd The generation that gave rise to this consent order was likely born before former manager Kathleen Kraninger left. Therefore, this action itself is not necessarily conclusive of the priorities and approach of CFPB under the leadership of Acting Director David Uejio. However, the leadership and direction of the CFPB has changed dramatically, and we expect a more in-depth review of auto loans in general in the coming years, especially as it relates to subprime auto loans.
Additionally, Acting Director Uejio has made it clear that tackling the economic impact of the coronavirus pandemic is a top priority. A gradual reduction in government stimulus payments should lead to an increase in subprime delinquencies. We expect the CFPB to use its UDAAP enforcement authority more aggressively in all sectors, including subprime auto loans. This could lead to increased scrutiny of not only loan origination, but also add-on products and service issues – especially where there is a perceived link between pandemic-related challenges and practices of concern to the CFPB.
The most direct conclusion from this recent consent order might be that lenders and service providers closely scrutinize loan agreements and subsequent consumer reviews to ensure adequate disclosure of fees and costs. However, for some businesses or practices, a more comprehensive UDAAP risk assessment may be useful in light of the expected increase in CFPB review.
© 2021 Bradley Arant Boult Cummings LLPRevue nationale de droit, volume XI, number 152