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  • California amends GAP disclosure legislation

    State Issues

    On September 13, the California governor signed AB 2311, which amends provisions regarding vehicle finance disclosures. The bill establishes provisions to govern the offer, sale, provision, or administration, in connection with a conditional sale contract, of a guaranteed asset protection waiver (GAP waiver). Specifically, the bill requires creditors to automatically refund the unearned portion of a GAP waiver if a consumer pays off or otherwise terminates their auto loan early. The bill prohibits: (i) conditioning the extension of credit, the term of credit, or the terms of a conditional sale contract upon the purchase of a GAP waiver; and (ii) the sale of a GAP waiver pursuant to certain provisions where the loan-to-value ratio exceeds the maximum loan-to-value ratio of the GAP waiver. The bill, among other things, authorizes the buyer to recover three times the amount of any GAP charges paid. The bill is effective January 1, 2023.

    State Issues State Legislation California Auto Finance Disclosures GAP Waivers GAP Fees Consumer Finance

  • CFPB examines relationship between high vehicle costs and loan performance

    Federal Issues

    On September 19, the CFPB published a blog post exploring the potential relationship between high vehicle costs and changes in auto loan characteristics and performance, particularly with respect to consumers with near-prime or subprime credit scores. The Bureau reported that the average vehicle price increased over the past two years, particularly throughout 2021, and that data from the Bureau’s Consumer Credit Panel showed that an increase in the size of newly originated auto loans coincided with a spike in vehicle price. The blog post also highlighted a recent Federal Reserve Bank of New York report, which found that higher vehicle prices are a significant factor driving larger loan amounts. “The dollar value of outstanding auto loans increased by $33 billion between the first and second quarters of 2022 to $1.5 trillion outstanding,” the report said, noting that the increase “is due in large part to larger loan originations rather than by an increase in the number of loans.” The Bureau also reported that recent data has shown that delinquency rates, especially for low-income borrowers, has increased over the past year. While the Bureau said it cannot fully infer that the end of pandemic-related stimulus policies or inflationary pressures are possible explanations for the rise in delinquency rates, the agency said it “cannot ignore the relationship between larger loan amounts and increasing interest rates to consumer’s monthly budgets and some consumers’ struggle to stay current on their loans.” The Bureau stressed, however, that while current data provides insight into broad indicators, it “lacks the granularity to isolate specific economic trends or to fully explore the impact on subsets of consumers.” The agency said it will continue to seek data that allows for better visibility in this market and will remain focused on ensuring that the auto lending market is fair, transparent, and competitive.

    Federal Issues CFPB Consumer Finance Auto Finance Credit Scores Federal Reserve Bank of New York

  • FTC will not extend comment period on NPRM seeking to ban auto lending junk fees and bait-and-switch tactics

    Agency Rule-Making & Guidance

    On August 23, the FTC issued a decision declining to extend the public comment period for its notice of proposed rulemaking (NPRM) to ban “junk fees” and “bait-and-switch” advertising tactics related to the sale, financing, and leasing of motor vehicles by dealers. As previously covered by InfoBytes, the NPRM seeks to prohibit dealers from making deceptive advertising claims to entice prospective car buyers and would also: (i) prohibit dealers from charging fees for “fraudulent add-on products” and services that—according to the FTC—do not benefit the consumer; (ii) require clear, written, and informed consent (including the price of the car without any optional add-ons); and (iii) require dealers to provide full, upfront disclosure of costs and conditions, including the true “offering price” (the full price for a vehicle minus only taxes and government fees), as well as any optional add-on fees and key financing terms. Dealers would also be required to maintain records of advertisements and customer transactions. In declining to extend the comment period, the FTC said the public has been afforded “a meaningful opportunity to provide the Commission with comments regarding its rulemaking proposal.” The comment period will end September 12.

    Agency Rule-Making & Guidance Federal Issues RTC Auto Finance Junk Fees Fees Disclosures Consumer Finance

  • CFPB, DOJ issue letter to auto companies on SCRA provisions

    Federal Issues

    On July 29, the CFPB and DOJ issued a joint letter reminding auto finance companies of legal protections for military families under the Servicemembers Civil Relief Act (SCRA). Among other things, the letter outlines several SCRA provisions that apply to vehicle financing, including: (i) prohibiting vehicle repossession without a court order during the borrower’s military service if a borrower financed or leased the vehicle prior to entering military service; (ii) permitting servicemembers and joint lessee dependents to terminate motor vehicle leases early, and without penalty, after entering military service or receiving qualifying military orders during active duty; and (iii) capping the amount of interest on loans incurred prior to military service to 6 percent per year.

    Federal Issues CFPB Servicemembers DOJ SCRA Auto Finance

  • FTC seeks to ban auto lending “junk fees” and “bait-and-switch tactics”

    Agency Rule-Making & Guidance

    On June 23, the FTC issued a notice of proposed rulemaking (NPRM) to ban “junk fees” and “bait-and-switch” advertising tactics related to the sale, financing, and leasing of motor vehicles by dealers. Specifically, the NPRM would prohibit dealers from making deceptive advertising claims to entice prospective car buyers. According to the FTC’s announcement, deceptive claims could “include the cost of a vehicle or the terms of financing, the cost of any add-on products or services, whether financing terms are for a lease, the availability of any discounts or rebates, the actual availability of the vehicles being advertised, and whether a financing deal has been finalized, among other areas.” The NPRM would also (i) prohibit dealers from charging junk fees for “fraudulent add-on products” and services that—according to the FTC—do not benefit the consumer; (ii) require clear, written, and informed consent (including the price of the car without any optional add-ons); and (iii) require dealers to provide full, upfront disclosure of costs and conditions, including the true “offering price” (the full price for a vehicle minus only taxes and government fees), as well as any optional add-on fees and key financing terms. Dealers would also be required to maintain records of advertisements and customer transactions. Comments on the NPRM are due 60 days after publication in the Federal Register.

    The FTC noted that in the past 10 years, the Commission has brought more than 50 auto-related enforcement actions and helped lead two nationwide law enforcement sweeps including 181 state-level enforcement actions in this space. Despite these efforts, the FTC reported that automobile-related consumer complaints are among the top ten complaint types submitted to the Commission.

    Agency Rule-Making & Guidance Federal Issues FTC Auto Finance Junk Fees Fees Disclosures Consumer Finance Federal Register

  • CFPB examines servicers’ handling of auto lending add-on products

    Federal Issues

    On May 2, the CFPB published a blog post examining how servicers handle overcharging for add-on products on auto loans. The post describes, among other things, that auto dealers and financial companies “often charge consumers all payments for any add-on products as a lump sum at origination of the auto loan, and they generally include the lump sum cost as part of the total vehicle financing agreement.” Bureau examiners have focused on how servicers manage these add-on product charges when the loan ends prior to when the add-on product’s potential benefits end. As previously covered by InfoBytes, the Bureau published a Supervisory Report, finding that servicers engaged in unfair practices by failing to request refunds from the third-party administrators for “unearned” fees associated with the add-on product guaranteed asset protection, among other things. As a response to these findings, the servicers remediated impacted consumers and implemented more controls, which are intended to ensure that add-on product refunds are processed after repossession, according to the post. The Bureau also cited servicers for engaging in unfair acts or practices for miscalculating ancillary auto product refunds after repossession and attempting to collect miscalculated deficiency balances (covered by InfoBytes here). The miscalculated refunds have decreased the refunds available to certain borrowers and led to deficiency balances that were higher by hundreds of dollars. The servicers attempted to collect the deficiency balances. In response to these findings, the servicers conducted reviews to identify and remediate affected borrowers. According to the post, the Bureau “will continue to scrutinize servicer practices to make sure that borrowers aren’t overcharged when their loans end early.”

    Federal Issues CFPB Consumer Finance Auto Finance

  • FTC imposes “record-setting” fine on auto dealer alleging discriminatory junk fees

    Federal Issues

    On April 1, the FTC and the Illinois Attorney General announced a proposed settlement with an Illinois-based multistate auto dealer group for allegedly adding junk fees for unwanted “add-on” products to consumers’ bills and discriminating against Black consumers. Under the terms of the proposed settlement, the defendants are ordered to pay a $10 million penalty, of which $9.95 million will be used to provide monetary relief to consumers. According to the FTC, this is the highest penalty ever obtained against an auto dealer. The remaining balance of the penalty will be paid to the Illinois Attorney General Court Ordered and Voluntary Compliance Payment Projects Fund.

    According to the complaint, which brings claims under the FTC Act, TILA, ECOA, and comparable Illinois laws, eight of the defendant’s dealerships, along with the general manager of two of the Illinois dealerships, allegedly tacked on junk fees for unwanted “add-on” products such as service contracts, GAP insurance, and paint protection to consumers’ purchase contracts at the end of the negotiation process, often without consumers’ consent. In other instances, consumers were told that the add-ons were free or were required to purchase or finance their vehicle. The complaint further alleges that defendants discriminated against Black consumers by charging them higher interest rates or more for add-on products than similarly situated non-Latino white consumers. As result, Black consumers allegedly paid, on average, $190 more in interest and $99 more for add-on products.

    FTC Chair Lina M. Khan and Commissioner Rebecca Kelly Slaughter issued a joint statement noting that they “would have also supported a count alleging a violation of the FTC Act’s prohibition on unfair acts or practices.” Khan and Slaughter elaborated on reasons why the FTC “should evaluate under its unfairness authority any discrimination that is found to be based on disparate treatment or have a disparate impact,” pointing out that (i) discrimination based on protected status can cause substantial injury to consumers; (ii) “injuries stemming from disparate treatment or impact are unavoidable because affected consumers cannot change their status or otherwise influence the unfair practices”; and (iii) “injuries stemming from disparate treatment or impact are not outweighed by countervailing benefits to consumers or competition.”

    Federal Issues FTC Enforcement Fees State Issues Illinois State Attorney General Discrimination Auto Finance Fair Lending ECOA FTC Act TILA Disparate Impact

  • DOJ resolves SCRA violations with credit union

    Federal Issues

    On March 11, the DOJ announced a settlement with a credit union resolving allegations that the credit union violated the Servicemembers Civil Relief Act (SCRA) by charging excessive interest on servicemembers’ loans and repossessing servicemembers’ cars without first obtaining a court order. According to the DOJ’s complaint, which was filed concurrently with the proposed settlement, the credit union allegedly charged interest exceeding 6 percent to 21 servicemembers who qualified for SCRA interest rate benefits. Under the SCRA, creditors are required to reduce the interest rate on retail installment sales contracts to 6 percent in certain circumstances. However, the DOJ asserted that in at least one instance, a servicemember was told that “reducing the interest rate would increase her monthly payment.” The DOJ also alleged that the credit union repossessed three servicemembers’ vehicles without court orders, including one instance where the vehicle was repossessed from a military base.

    The consent order, which is pending court approval, requires the credit union to pay nearly $70,000 to the affected servicemembers, along with a $40,000 civil penalty. The credit union is also, among other things, prohibited from (i) charging interest rate exceeding 6 percent during a period of military service; (ii) reamortizing any retail installment sales contracts connected to a request for SCRA interest rate benefits; (iii) “failing or refusing to credit early alert periods of military service when applying such benefits”; and (iv) repossessing SCRA-protected servicemembers’ vehicles without first obtaining a court order or valid SCRA waiver. The settlement also requires the credit union to review and update its SCRA policies and procedures to prevent future violations and to provide SCRA compliance training to its employees.

    Federal Issues DOJ SCRA Servicemembers Enforcement Auto Finance Settlement Consumer Finance

  • CFPB guidance on automobile repossession warns on UDAAPs

    Federal Issues

    On February 28, the CFPB released Bulletin 2022-4 regarding the repossession of vehicles and the potential for violations of Dodd-Frank’s prohibition on engaging in unfair, deceptive, or abusive acts or practices (collectively, “UDAAPs”) when repossessing vehicles. According to the Bulletin, “[t]he Bureau intends to hold loan holders and servicers accountable for UDAAPs related to the repossession of consumers’ vehicles.” To prevent UDAAPs, the Bureau noted that entities should, among other things: (i) review their policies and procedures regarding repossession and cancellation of repossession; (ii) ensure prompt communications between servicers and repossession service providers when a repossession is canceled and monitor compliance with cancellations; (iii) utilize monitoring of wrongful repossessions through routine oversight and audits of customer communications; and (iv) ensure corrective action programs are in place to address any violations and reimburse consumers for costs incurred as a result of unlawful repossessions. Additionally, the Bulletin suggests that entities should monitor service providers and any force-placed collateral protection insurance programs to verify that consumers are not charged for unnecessary force-placed insurance. According to the CFPB’s blog post released the same day, “the Bureau is closely watching the auto lending market. Auto loans are already the third largest consumer credit market in the United States at over $1.46 trillion outstanding, double the amount from ten years ago.”

    Federal Issues CFPB Dodd-Frank UDAAP Auto Finance Consumer Finance Repossession

  • CFPB blogs about growth in auto lending

    Federal Issues

    On February 24, the CFPB published a blog post regarding the auto lending market. In the post, the Bureau noted that the consumer price index for new and used cars increased by nearly 40 percent over the last year, and that it anticipated “that both the total amount of debt and the average loan size will continue to increase and that larger car loans will put increased pressure on some consumers’ budgets for much of the next decade.” Among other things, the Bureau highlighted it is monitoring the loan-to-value ratios in the auto lending market, auto loan servicing and collections practices, and the subprime auto lending market, stating that with respect to the subprime auto lending market, it is “looking to better understand potential barriers to competition in the subprime auto lending market that may drive” variation among subprime interest rates for auto loans. The post pointed to research that found “that typical ‘shallow subprime’ small BHPH ('buy-here-pay-here') borrowers would save around $894 over the life of a loan if they could reduce the interest rate from 13 percent, which is typical for such BHPH borrowers, to 9 percent, which is typical for bank borrowers with similar default rates.” The Bureau also noted that it “will continue to research auto lending policies and practices that may hinder a fair, transparent, and competitive market" and will work with its counterparts at the FTC and the Federal Reserve to use the agencies' collective authorities to address issues in the market.

    Federal Issues Auto Finance Consumer Finance CFPB

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