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Credit unions to pay $4 million in GAP fee refunds
On January 4, the Colorado attorney general announced settlements with two credit unions that will pay a combined $4 million in refunds to borrowers in the state who were entitled to “guaranteed automobile protection” (GAP) fee refunds. An investigation conducted by the Consumer Protection Section of the Colorado Department of Law found that the credit unions historically failed to refund unearned GAP fees owed to consumers. According to the state, the credit unions act as creditors by purchasing retail installment sales contracts from auto dealers that include GAP purchased by Colorado consumers. The state explained in its announcement that borrowers pay the full GAP fee when they purchase a car (the fee is typically only earned gradually over the loan’s lifetime). However, should a borrower prepay the loan prior to maturity or the car is repossessed and sold at auction before the loan is paid off, Colorado law requires lenders to refund the unearned portion of the GAP fee to the borrower, the state said.
The assurances of discontinuance (see here and here) apply to all consumer credit transactions entered into with consumers in the state related to any alleged unfair conduct committed by the credit unions related to GAP fee refund practices. In additional to paying consumer remediation and $100,000 each to the state, the credit unions also agreed to alter their business practices to ensure that applicable refunds will be provided to consumers going forward.
CFPB and New York say auto lender misled consumers
On January 4, the CFPB and New York attorney general filed a complaint against a Michigan-based auto finance company accused of allegedly misrepresenting the cost of credit and deceiving low-income consumers into taking out high-interest loans on used vehicles. (See also AG’s press release here.) The joint complaint alleges, among other things, that the defendant based the price of a loan (and then artificially inflated the principal amount) and the payment to the dealer on the projected amount that may be collected from the consumer during the life of the loan (without factoring in whether consumers could actually afford the loan).
The Bureau and AG further argued that the true cost of credit is hidden in inflated principal balances in order to evade state interest rate caps. An investigation conducted by the AG found that while the defendant’s loan agreements in New York claimed an APR of 22.99 percent or 23.99 percent (just below the 25 percent usury cap), the defendant actually charged on average more than 38 percent (and on many occasions charged an APR in excess of 100 percent). These high-interest loans, the AG claimed, often caused consumers to accrue additional fees and become delinquent on their loans.
The complaint also alleged the defendant failed to consider consumers’ ability to repay their loans in full, engaged in aggressive debt collection tactics, and created financial incentives for dealers to add on extra products, such as vehicle service contracts. Add-on products generated roughly $250 million in revenue for the defendant in 2020, the complaint said, adding that these alleged deceptive lending practices lowered consumers’ credit scores and cost borrowers millions of dollars. The complaint further maintained that the defendant packaged the consumer loans into securities that were sold to investors on the premise that the underlying loans complied with applicable law. These alleged false representations, the complaint said, constituted securities fraud under New York’s Martin Act.
The complaint — which also alleges violations of the Consumer Financial Protection Act’s prohibition against deceptive and abusive acts or practices, New York usury limits, and other state consumer and investor protection laws — seeks, among other things, injunctive relief, monetary relief, disgorgement, and civil money penalties of $1,000,000 for each day of violations.
The defendant was previously targeted for violating consumer protection laws in 2021 by the Massachusetts attorney general, who announced a $27.2 million settlement to resolve allegations of predatory lending and deceptive debt collection practices. (Covered by InfoBytes here.)
CFPB fines bank over auto loan, mortgage, and deposit account allegations
On December 20, the CFPB announced a consent order against a national bank for allegedly mismanaging auto loans, mortgages, and deposit accounts. According to the Bureau, the bank allegedly engaged in deceptive or unfair acts or practices in violation of the CFPA by, among other things: (i) incorrectly processing auto-loan payments; (ii) assessing borrowers erroneous fees and interest due to technology, audit, and compliance failures; (iii) incorrectly denying mortgage loan modification applications; (iv) failing to ensure that unearned Guaranteed Asset Protection fees were refunded to borrowers who paid off their loans; (v) incorrectly denying mortgage loan modification applications and miscalculated fees; and (vi) charging “surprise” overdraft fees on debit card transactions and ATM withdrawals because, according to the Bureau, consumers “believed that if they had enough money to cover the relevant transaction when it was authorized they would not incur an [o]verdraft fee.”
Under the terms of the consent order, the bank is required to pay redress totaling more than $2 billion to allegedly harmed customers. Specifically, the bank is ordered to pay approximately: (i) $1.3 billion in consumer redress for affected auto lending accounts; (ii) $500 million in consumer redress for affected deposit accounts, including $205 million for illegal surprise overdraft fees; and (iii) nearly $200 million in consumer redress for affected mortgage servicing accounts. Among other things, the bank is prohibited from charging overdraft fees for deposit accounts when the consumer had available funds at the time of a purchase or other debit transaction, but then subsequently had a negative balance once the transaction settled. The bank is also ordered to pay a $1.7 billion civil penalty to the Bureau. CFPB Director Rohit Chopra released a statement following the announcement saying the order does not provide immunity for any individuals nor does it release claims for any ongoing illegal acts or practices.
The bank issued a press release stating that “[c]urrent leadership has made significant progress to transform the bank,” and noting that “the CFPB recognized that since 2020, the company has accelerated corrective actions and remediation, including to address the matters covered by today’s settlement.”
New Jersey settles with car dealerships over consumer protection violations
On December 15, the New Jersey attorney general announced that the Division of Consumer Affairs has now reached settlements with six car dealerships totaling over $260,000 to resolve alleged consumer protection violations. Among other things, the dealerships allegedly failed to honor the advertised price of used vehicles, charged excessive vehicle preparation fees that were not properly itemized or disclosed, failed to disclose the vehicle’s full sale price, and engaged in deceptive advertising. Under the terms of the most recent settlement (joining five other settlements announced earlier in the year), the dealership is required to pay $180,000, and must stop engaging in any unfair or deceptive acts practices. The dealership must also (i) comply with all applicable state and federal laws, including the Consumer Fraud Act, the Motor Vehicle Advertising Regulations, and the Automotive Sales Practices Regulations; (ii) honor all advertised sale or lease prices; (iii) accurately disclose a vehicle’s sale price; (iv) disclose previous damage and substantial repairs done to used cars when advertising; (v) clearly and conspicuously disclose all disclaimers, qualifiers, or offer limitations in advertisements; and (vi) enter binding arbitration to resolve any pending consumer complaints, as well as any additional complaints received by the Division for a one-year period.
CFPB seeks to enhance public data on auto lending
On November 17, the CFPB announced it is seeking public comment on its proposal to develop a new data set to monitor the auto loan market. According to the Bureau, more than 100 million Americans have an auto loan, and currently there is approximately $1.5 trillion in outstanding auto loan debt, making it the third-largest consumer credit category. The Bureau explained that financial markets and policymakers have access to mortgage data that has given insight into patterns in lending and risk. But, despite its size, there is less known about the auto lending market. Over the past two years, car prices have risen significantly, which has resulted in higher loan amounts and monthly payments. The Bureau noted that these loan size increases are “beginning to have an impact on consumers and households. Recent data show an increase in auto loan delinquencies, particularly for low-income consumers and those with subprime credit scores.” According to the Bureau, the available data permits market participants to identify and measure certain trends but is insufficiently granular to fully explore the cause of those trends. The Bureau also noted that many auto loans are made to consumers with subprime or deep subprime credit scores from lenders that do not furnish data on those loans to credit reporting agencies. Specifically, for its request, the Bureau is “seeking to build a new data set that will allow for a more robust understanding of market trends,” which may include, among other things, “collecting retrospective data from a sample of lenders that represent a cross-section of the auto lending market.” Comments are due by December 19.
FTC takes action against auto dealer over deceptive advertising and pricing practices
On October 18, the FTC announced an action against an auto dealer group and two of its officers (the owner/president and the vice president) for engaging in deceptive advertising and pricing practices and discriminatory and unfair financing. According to the complaint, the FTC alleged that the defendants violated the FTC Act by deceptively advertising cars as “certified,” “inspected,” or “reconditioned” at specific prices, but then charged customers fees above the advertised price for costs related to “inspection,” “reconditioning,” or “certification.” The FTC also alleged that the defendants “unlawfully discriminate[d] on the basis of race, color, and national origin by imposing higher borrowing costs on Black and Latino consumers than non-Latino White consumers,” in violation of ECOA. Specifically, the FTC claimed that the defendants charged a higher markup to the interest rate for Black and Latino consumers than to non-Latino White consumers. Black and Latino consumers paid on average about $291 and $235, respectively, more in interest than non-Latino White consumers did. The FTC also alleged that Black and Latino consumers paid on average at least one extra fee 24 percent and 42 percent more often, respectively, than non-Latino White consumers. In addition to alleging that this conduct violated ECOA, the FTC also alleged that this discriminatory practice was an unfair act or practice in violation of Section 5 of the FTC Act. According to the order, the defendants are required to establish a fair lending program to ensure they do not discriminate in the future, including a provision that will require each associated dealership to either charge no financing markup or charge the same markup rate to all consumers, and must pay the FTC $3.38 million to refund harmed consumers. Among other things, the defendants are also prohibited from misrepresenting the cost or terms to buy, lease, or finance a car, or whether a fee or charge is optional. Two of the commissioners issued dissenting statements (see here and here), challenging the fair lending claims being brought under Section 5 of the FTC Act and the imposition of liability against the individual officers.
Pennsylvania announces two settlements involving auto title loans
On October 14, the Pennsylvania AG announced a settlement with the owners of an auto title loan business. According to the settlement, the company made unlawful loans to Pennsylvania borrowers carrying annual interest rates over 200 percent. Under the terms of the settlement, the owners must refund over $1.5 million in unlawful interest charges to consumers. The refunds are in addition to the $3.2 million in debt cancellation victims received under an October 2021 order. The owners are also prohibited from, among other things, knowingly participating in, owning, or working for any company that extends credit to Pennsylvania residents, for seven years after they make their last payment under the settlement.
The Pennsylvania AG also announced a settlement with a Florida-based auto title lender for alleged violations of Pennsylvania usury laws and unfair and deceptive business practices. Under the terms of the settlement, the company, among other things, must cancel all outstanding loans made to Pennsylvania consumers, and refund Pennsylvania consumers all fees and interest they paid, which will result in nearly 200 consumers receiving refunds in the amount of $99,541.
NYDFS announces fair lending settlement with indirect auto lender
On October 6, NYDFS announced a settlement with a New York State-licensed bank to resolve allegations that the bank violated New York Executive Law § 296-a while engaged in indirect automobile lending. NYDFS alleged that the bank’s practices resulted in minority borrowers paying higher interest rates than non-Hispanic white borrowers regardless of their creditworthiness. According to the announcement, the bank allegedly “failed to effectively monitor automobile dealers from which [the bank] agreed to purchase loans, thereby allowing the dealers to charge members of protected classes more in discretionary dealer markups than borrowers identified as non-Hispanic White.” Under the terms of the consent order, the bank agreed to pay a $950,000 civil money penalty to the state, as well as restitution to eligible borrowers impacted during the period of January 1, 2017 through March 31, 2022. The bank also agreed to undertake fair lending compliance remediation efforts to increase its monitoring of dealers participating in its indirect auto lending program to precent discriminatory markups in the future.
CFPB examines potential impact of high vehicle costs on consumers with deep subprime credit scores
On September 28, the CFPB published a blog post examining the potential impact of high vehicle costs on borrowers with deep subprime credit scores (credit scores below 540). The findings follow a separate recent CFPB blog post, which explored the potential relationship between high vehicle costs and changes in auto loan characteristics and performance (covered by InfoBytes here). Pointing out that many lenders do not provide information on deep subprime auto loans to consumer reporting agencies (CRAs), the Bureau’s newest findings rely on a statistical database containing information on vehicles and vehicle loans pulled from various sources, including vehicle titles and registrations, auto lenders, and auto manufacturers. The Bureau found that the median value of vehicles purchased by consumers with deep subprime credit scores has increased by roughly 60 percent since 2019, as compared to only a 30 percent increase for consumers with prime credit scores. The Bureau expressed concern that many consumers with deep subprime credit scores have been priced out of the auto loan market, noting that “the rapid increase in vehicle prices has had the largest impacts on the most vulnerable consumers.” The Bureau will continue to monitor these trends, but said the lack of data on monthly payments or delinquency rates for auto loans that are not furnished to CRAs limits its ability to study affordability concerns.
DOJ amends SCRA settlement with auto loan provider
On September 28, the DOJ announced an amended settlement with an auto loan provider resolving allegations that it failed to fully provide qualified servicemembers with interest rate benefits afforded to them under the Servicemembers Civil Relief Act (SCRA). According to the DOJ, while monitoring the auto lender’s compliance with the original DOJ settlement, the DOJ found that the auto loan provider was failing to apply interest rate benefits back to the date orders were issued calling the servicemember to active duty, and that it had improperly delayed the approval of interest rate benefits to some servicemembers. Under this amended settlement agreement, the auto loan provider agreed to pay an additional $185,460 to 250 servicemembers who did not receive proper interest rate benefits. The DOJ also noted that each servicemember who did not receive interest rate benefits back to the date their orders were issued will receive a refund of any excess interest they paid, as well as an additional payment of three times the overpayment or $100, whichever is higher. The auto loan provider is required to pay an additional $40,000 civil penalty to the U.S. and must revise its SCRA policies and training regarding interest rate benefits for servicemembers.