The Consumer Financial Protection Bureau (CFPB) recently issued its Supervisory Highlights for Summer 2023 in connection with examinations they completed from July 1, 2022, to March 31, 2023. As you may know, the Highlights are a way for the CFPB to convey its examination findings to the public of federal consumer financial laws and regulations violations from otherwise confidential, private examinations of supervised institutions without necessarily naming names of specific companies. By reviewing the Highlights, you can learn what practices the CFPB has alleged are violative of the federal consumer financial laws and regulations. This Highlights edition also includes, for the first time, findings from the CFPB’s Supervision information technology (IT) program.
The latest Highlights is a regular cornucopia; there’s something for everyone to digest. Here are a few of the most significant compliance issues identified by examiners during their examinations as applicable to auto sales and finance.
Deceptive Marketing of Vehicles/Contracts
CFPB examiners found that supervised institutions engaged in the deceptive marketing of auto “loans” when they used advertisements that pictured vehicles that were significantly larger, more expensive, and newer than the advertised “loan” offers were good for. (note – the CFPB refers to “loans” in the Highlights, but as the CFPB tends to conflate a loan with a retail installment sales contract, I’ve included the term “loan” in quotes). Examiners found that the representations made in these advertisements were likely to mislead consumers, as the “net impression” to consumers was that the advertisements applied to a subset of vehicles to which they did not actually apply. Examiners concluded that it was reasonable for consumers to believe that the advertised terms applied to a class of vehicles similar to the cars that were pictured in the ads. These representations were material to consumers as information about the central characteristics of a product or service—such as costs, benefits, and/or restrictions on the use or availability—are presumed to be material. Here, the examiners claimed the promotional offers advertised were significantly more restricted than a consumer may have realized. The takeaway here is that if you’re going to advertise vehicles to be financed, make sure the vehicles you advertise are representative of the types of vehicles you actually finance.
Auto Servicing
CFPB examiners identified three unfair or abusive acts or practices at auto servicers related to charging interest on inflated contract balances/powerbooking; cancelling automatic payments without sufficient notice; and collection practices after repossession.
A. Charging Interest/Powerbooking Issues
Among the tasty morsels in the Highlights cornucopia is a new and novel change in CFPB policy. The change in policy revolves around the issue of “powerbooking” – where a dealer fraudulently represents to a financing source that a vehicle has options or enhancements that it doesn’t actually have. This practice may artificially inflate the value of the vehicle, which may make it easier for a dealer to find funding for the contract from the financing source.
The CFPB found that certain auto servicers engaged in unfair and abusive acts or practices by charging and collecting interest on amounts owed on vehicle retail installment sale contracts (RISCs) that were based on those fraudulent representations by dealers. The CFPB claimed that when the auto servicers identified these discrepancies (in other words, determined that the dealer was powerbooking), the servicers reduced the amounts they paid dealers by the amount of the missing options. However, servicers also didn’t reduce the amount that consumers owed on the RISCs and continued to charge interest tied to the financing of those nonexistent options. Also, after a vehicle was repossessed, servicers compared the options actually on the repossessed vehicle to the information provided by the dealer. Where the options were not actually included, the servicers obtained refunds from dealers that were applied to the consumer’s deficiency balances. However, the servicers also did not refund consumers the interest that was charged on the non-existent options. The CFPB found these practices to be unfair or abusive acts or practices. This new expectation by the CFPB could have a major impact on auto finance companies and banks that purchase RISCs. When you learn a dealer engaged in powerbooking, how many of you are refunding your consumers the interest that was charged on the non-existent options? And, if you are refunding interest tied to the financing of those illusory options, are your calculations correct?
Further, if you’re a dealer and your sell your originated RISCs to a financing source, you can likely expect increased scrutiny from your financing sources as a result of this recent development and change in CFPB policy. Now more than ever, a dealer should be prepared to prove that the vehicle financed by the RISC actually has all the options and enhancements that you represent it has to your financing source.
B. Canceling Automatic Payments Without Sufficient Notice
CFPB examiners also claimed they found that auto servicers engaged in unfair acts or practices by suspending recurring automated clearing house (ACH) payments before a consumers’ final payment without sufficiently notifying consumers that the final payment must be made manually. The written electronic funds transfer authorizations signed by consumers contained a small print disclosure that servicers would not automatically withdraw their final payment. The CFPB claims that servicers cancelled the final withdrawal and did not debit the final payment and that by doing so it resulted in consumers missing payments and being charged a late fee. The Bureau claimed that consumers suffered substantial injury when servicers failed to provide adequate notice that they would not debit the final payment, including the late fees charged when the consumers missed these payments. The takeaway here is that if you have an ACH payment agreement with your customers, be sure that you don’t cancel or suspend their final payment without giving them adequate notice as to how the final payment must be made (e.g., manually).
C. Cross-Collateralization and Redemption
The CFPB claimed that some vehicle financing contracts contained cross-collateralization clauses which allowed servicers to use the vehicle to secure other unrelated unsecured debts consumers may owe to the company, such as credit card debt. Examiners found that after servicers repossessed vehicles, they accelerated the amount due on the vehicle finance contract and also accelerated any other amounts the consumer owed to the company. When consumers called to recover their vehicles, the servicers required consumers to pay the full amount owed on all accelerated debts, which included both vehicle debt and other debts. Examiners found that servicers engaged in unfair and abusive acts or practices by engaging in the blanket practice of cross-collateralizing contracts and requiring consumers to pay other debts to redeem their repossessed vehicles. The Bureau found that accelerating and demanding repayment on other debts before returning the repossessed vehicles was unfair. While servicers occasionally allowed consumers to pay lesser amounts, they did so only if consumers objected or argued about the debt and consumers were not meaningfully made aware that arguing about the cross-collateralization could result in a lesser payment amount. Even if the consumer objected, servicer representatives still allegedly used the cross-collateral provisions as a coercive collection tactic.
The Bureau also claimed that this practice was abusive because it took unreasonable advantage of a lack of understanding of consumers of the material risks, costs, or conditions of their financing agreements. When consumers sought to reinstate their contracts after repossession, the Bureau claims servicers utilized contractual remedies to accelerate all debts owed to them which resulted in a significant monetary advantage to servicers while imposing a corresponding degree of economic harm on the consumer. The Bureau claimed that these practices also inflicted significant emotional and psychological distress. In the case of vehicle repossession, the examiners claimed that servicers gained an unreasonable advantage. Finally, consumers lacked an understanding of the material risks, costs, or conditions of the specific contractual remedies allowing for cross-collateralization at issue in the relevant contracts. The takeaway here is that if your contracts have cross-collateral provisions, you should check your policies and procedures to ensure that you’re not requiring consumers to pay other debts to redeem their repossessed vehicles.
Fair Lending Issues Around Criminal History
The Bureau claims that national data and the history of discrimination in the justice system suggest that restrictions on lending based on criminal history are, in many circumstances, likely to have a disparate impact based on race and national origin. Thus, the use of criminal history in credit decisioning may create a heightened risk of violating the Equal Credit Opportunity Act (ECOA) and Regulation B. A common thread in the CFPB’s review was that the discovery of criminal records prompted enhanced or second-level underwriting review. The Bureau claimed that the examined institutions’ policies and procedures did not provide detail regarding how that review should be conducted, creating fair lending risk around how the reviewer exercises discretion. There were variations amongst the policies and procedures as to how the creditor identified criminal records and which violations or charges triggered further review or denial. For example, some creditors generally denied credit when it identified applicants with felony convictions for financial crimes but did not deny credit for arrests or non-felony convictions. Other creditors treated criminal indictments, fraud cases, sexual offenses, and industry bans as significant risks. Without clear guidelines and well-defined standards designed to meet legitimate business needs, the Bureau claimed that creditors risked violating the ECOA and Regulation B by applying these underwriting restrictions in a manner that could discriminate on a prohibited basis. The CFPB directed creditors to review, identify, and provide relief to any applicant negatively affected by these policies.
Information Technology
The CFPB’s Supervision program evaluates information technology controls at supervised institutions that may impact compliance with Federal consumer financial law or implicate risk to consumers. The CFPB assesses the effectiveness of information technology controls in detecting and preventing data breaches and cyberattacks. For example, inadequate security for sensitive consumer information, weak password management controls, untimely software updates or failing to implement multi-factor authentication or a reasonable equivalent could cause or contribute to violations of law including the prohibition against engaging in unfair, deceptive or abusive acts or practices. Examiners found that institutions engaged in unfair acts or practices by failing to implement adequate information technology security controls that could have prevented or mitigated cyberattacks. More specifically, the institutions’ password management policies for certain online accounts were weak, the entities failed to establish adequate controls in connection with log-in attempts, and the same entities also did not adequately implement multi-factor authentication or a reasonable equivalent for consumer accounts. The takeaway here is that you should review whether you use multi-factor authentication, or a reasonable equivalent, have good password management practices and adequate controls for failed log-in attempts to prevent/mitigate unauthorized access to your consumer accounts.
These are just a sampling of some of the findings from the latest Supervisory Highlights. Other areas covered in the Highlights included consumer reporting, debt collection, deposits, mortgage lending/servicing, payday and small dollar lending and remittances. Take some time to read through the Highlights and talk to your friendly lawyer about your policies and procedures!
©Copyright 2023 Eric L. Johnson. All rights reserved. Single print publication rights Non Prime Times.
