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Massachusetts settles with auto lender
On February 18, the Massachusetts attorney general announced that a national auto lender entered into a settlement with the Commonwealth resolving allegations that the lender did not provide sufficient disclosures to consumers related to its debt collection practices, with over 1,000 borrowers expected to be eligible for relief. According to the Assurance of Discontinuance (AOD), the lender allegedly failed to provide certain consumers with sufficient information about the calculation methods for any deficiencies remaining on their auto loans after their cars were repossessed. The AOD requires the auto lender to pay $5.6 million in restitution to eligible borrowers, and cover administration and investigation costs associated with the matter. According to Massachusetts Attorney General Laura Healey, the “settlement, which combines cash payments with debt relief and credit repair, will help many subprime borrowers in need.”
Chopra highlights consumer protection topics
On February 10, CFPB Director Rohit Chopra answered questions during a Washington Post Live session on several consumer protection topics. Citing auto lending as a top concern for the Bureau, Chopra noted that it is important for consumers to be able to shop around, refinance loans, and navigate a competitive market. He also discussed recent Bureau initiatives related to junk fees and overdraft/insufficient funds fees, and said the Bureau intends to sharpen its supervisory scrutiny in these spaces. Chopra stated that, as part of a fair and competitive market consumers want to know when they are being charged these fees, noting that financial institutions have started to transition away from dependency on these types of fees and instead implement programs that will allow a bank to determine what shortfall they will allow on an individual consumer basis. He added that the Bureau may eventually see if rulemaking will increase competition and upfront pricing.
Chopra also discussed the role agencies play in the future regulation of cryptocurrency. He noted that while most of the cryptocurrency market is currently related to speculative trading, this could change if one of the big tech payment platforms decides to expand its services to cryptocurrency. Chopra highlighted several concerns, including how payment data from these systems will be used, how money will be transacted, and how consumers will report fraud. He stated that the Bureau is closely monitoring this space and any regulation will be an interagency effort. While Chopra also discussed the need for transparency with respect to how big tech companies are tracking, monetizing, and harvesting consumer data, he stated it is too early to tell whether there is a need for rulemaking in this area. Chopra also discussed topics related to the buy-now-pay-later industry and student lending, and stated that the Bureau is monitoring both areas carefully.
3rd Circuit: Applying Pennsylvania usury laws to out-of-state lender does not violate “Commerce Clause”
On January 24, the U.S. Court of Appeals for the Third Circuit held that applying Pennsylvania usury laws to an out-of-state lender is not a violation of the “dormant Commerce Clause” of the Constitution. According to the opinion, the lender provides motor vehicle loans with interest rates allegedly “as high as 180%” to consumers, including residents of Pennsylvania. The opinion noted that the “entire loan process—from the application to the disbursement of funds—takes place . . . at one of [the lender’s] brick-and-mortar locations” outside of Pennsylvania, and that under the lender’s motor vehicle loan terms, the borrower receives the applicable loan proceeds “in the form of ‘a check drawn on a bank outside of Pennsylvania.’” Pursuant to its enforcement authority under Pennsylvania’s Consumer Discount Company Act (CDCA) and the Loan Interest and Protection Law (LIPL), the Pennsylvania Department of Banking and Securities (Department) issued a subpoena asking the lender to provide documents related to its interactions with Pennsylvania residents. The lender stopped making loans to Pennsylvania residents after receiving the subpoena, and later filed a lawsuit in the U.S. District Court for the District of Delaware against the Department claiming it “lost revenue as a result” of the Department’s actions. The suit sought “injunctive and declaratory relief for, among other things, violations of the Commerce Clause.” The Department separately filed a petition in state court to enforce the subpoena.
While the lender did not dispute that before 2017, it engaged in loan servicing activities and vehicle repossessions in Pennsylvania, the lender maintained that it “does not have any offices, employees, agents, or brick-and-mortar stores in Pennsylvania and is not licensed as a lender in the Commonwealth.” Additionally, the lender claimed that while “it has never used employees or agents to solicit Pennsylvania business, and [] does not run television ads within Pennsylvania,” advertisements may still reach Pennsylvania residents. The district court eventually determined that because the lender’s “loans are ‘completely made and executed outside Pennsylvania and inside. . .[brick-and-mortar] locations in Delaware, Ohio, or Virginia,’ the Department’s subpoena’s effect is to apply Pennsylvania’s usury laws extraterritorially in violation of the Commerce Clause.”
On appeal, the 3rd Circuit examined the “territorial scope” of the transactions the Department “has attempted to regulate” and considered whether these transactions occur “wholly outside” of Pennsylvania. The appellate court concluded that the lender’s “conduct does not occur wholly outside of Pennsylvania,” and that the transactions are “more than a simple conveyance of money,” but rather "create a creditor-debtor relationship that imposes obligations on both the borrower and lender until the debt is fully paid.” Moreover, even if the appellate court considered the local benefits with respect to interstate commerce, it “would conclude that they weigh in favor of applying Pennsylvania laws to [the lender].” The CDCA and LIPL “protect Pennsylvania consumers from usurious lending rates,” the 3rd Circuit wrote, adding that applying Pennsylvania’s usury laws to the lender’s loans furthers the state’s local interest in prohibiting usurious lending. “Pennsylvania may therefore investigate and apply its usury laws to [the lender] without violating the Commerce Clause,” the appellate court explained. “[A]ny burden on interstate commerce from doing so is, at most, incidental.”
DOJ proposes SCRA settlement with Texas auto lender
On September 30, the DOJ announced a proposed settlement with a Texas-based auto lender, resolving allegations that the lender denied early motor vehicle lease terminations to qualifying servicemembers as required by the Servicemembers Civil Relief Act (SCRA). The SCRA allows servicemembers to terminate their motor vehicle leases early without penalty if they enter military service or receive qualifying military orders for a permanent change of station or to deploy to another location. According to the DOJ’s complaint, filed concurrently with the proposed settlement, an investigation revealed 10 instances in which the lender allegedly failed to provide early lease terminations to qualifying servicemembers. As a result, the DOJ claimed that the servicemembers, among other things, continued to make payments for vehicles they no longer wanted and were charged early termination penalties. Under the terms of the proposed settlement, the lender is required to pay more than $94,000 in compensation to the affected servicemembers and a $40,000 civil penalty. The proposed settlement also requires the lender to update its SCRA policies and procedures to avoid future violations and to provide SCRA compliance training to any employees whose customer interaction includes discussion of early lease termination benefits.
CFPB examines subprime auto loans
On September 30, the CFPB released a Data Point report, titled Subprime Auto Loan Outcomes by Lender Type, which examines interest rate and default risk trends across different types of subprime lenders, including how much of the variation of interest rates charged among subprime lenders can be explained by differences in default rates and how much is left to be explained. The report found notable average differences across lender types in the borrowers they serve and the types of vehicles they finance. Banks and credit unions offering subprime auto loans typically lend to borrowers with higher credit scores compared to finance companies and buy-here-pay-here dealerships, the report noted, adding that different lenders also charge very different interest rates on average. According to the report’s sample, a bank’s average subprime loan interest rate is approximately 10 percent, compared to 15 to 20 percent at finance companies and buy-here-pay-here dealerships. The report found that higher default rates were found at lenders that charged higher interest rates, and that “the likelihood of a subprime auto loan becoming at least 60 days delinquent within three years is approximately 15 percent for bank borrowers and between 25 percent and 40 percent for finance company and buy-here-pay-here borrowers.”
However, the report presented statistical analysis that called into question whether differences in default rates fully explained the average differences in interest rates across subprime lender types. As an example, an average borrower with a 560 credit score or higher would have the same default risk whether the borrower obtained a loan from a bank or a small buy-here-pay-here lender, but the estimated interest rate would be nine percent with a bank loan versus 13 percent from a small buy-here-pay-here lender. The report noted that there are other variables, not observed in the data collected, that may explain differences in interest rates charged by different types of auto lenders, such as down payments, vehicle values, variations in borrowers’ access to information, borrowers’ financial sophistication, and variations within lenders’ business practices and incentives.
Colorado reaches agreement with financial institution to refund $1.68 million in unused GAP fees
On September 27, the Colorado attorney general announced that a financial institution has agreed to refund approximately $1.68 million to Colorado borrowers after allegedly failing to return guaranteed automobile protection (GAP) fees that were improperly retained by the financial institution. Under Colorado law, lenders are required to automatically refund borrowers any unearned GAP payments if a borrower prepays a loan prior to maturity or a vehicle is repossessed before the loan is paid off. Under the terms of the assurance of discontinuance, the financial institution (without admitting or denying liability) has agreed to comply with all legal obligations and issue refunds to affected borrowers. The financial institution will also pay $75,000 to the AG as reimbursement for costs. The AG noted that the financial institution voluntarily provided information concerning GAP payments to Colorado borrowers, fully cooperated in good faith, and has “committed to a robust oversight system to ensure” future compliance. The AG also noted that a separate credit union is currently determining the amount of GAP refunds it owes to consumers.
Auto-financer settles with DOJ on SCRA allegations
On September 29, the DOJ announced a settlement with a California-based auto-financing company resolving allegations that the company failed to refund up-front lease payments to servicemembers who lawfully terminated their motor vehicle leases early, in violation of the Servicemembers Civil Relief Act (SCRA). According to the press release, the SCRA “permits servicemembers to terminate motor vehicle leases early without penalty after entering military service or receiving qualifying military orders for a permanent change of station or to deploy.” When servicemembers end their motor vehicle leases early under the SCRA, the lessor must refund all lease payments made in advance under the SCRA. The settlement, filed by the DOJ in the U.S. District Court for the Central District of California, alleged that the company provided cash refunds for capitalized cost reduction (CCR) by servicemembers, but failed “to refund, on a pro rata basis, lease amounts—in the form of [CCR] from vehicle trade-in value—paid in advance by servicemembers who lawfully terminated their motor vehicle leases upon receipt of qualifying military orders.”
Among other things, the settlement requires the company to compensate 714 servicemembers, pay $64,715 to the U.S. Treasury, adopt new policies, and implement new training requirements consistent with the SCRA. The settlement also notes that the company fully cooperated with the investigation.
SEC claims principals misled investors about subprime auto loans
On September 23, the SEC filed a complaint against two former principals of a subprime automobile finance company for allegedly misleading investors about certain subprime auto loans. According to the SEC, the defendants made false and misleading statements and engaged in deceptive conduct concerning the company’s servicing practices in connection with a $100 million offering backed by a pool of subprime auto loans. The SEC alleged that the defendants took measures to artificially inflate the value of the collateral underlying the offering, such as by (i) including poorly-performing and delinquent loans that were disguised to appear to be performing better than they really were; (ii) applying “fake borrower payments” to delinquent loans; and (iii) extending terms on delinquent loans without contacting the borrower to disguise how far behind the borrowers were on payments. Because of these improper practices, the SEC claimed that servicing and performance information provided by the company to investors at the time of the offering and later on was false. The complaint charges the defendants with violations of the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, and seeks permanent injunctions, officer and director bars, disgorgement with prejudgment interest, and civil penalties.
FTC approves five FCRA rule changes for auto dealers
On September 8, the FTC announced it approved final revisions to rules that would implement parts of the FCRA in line with the Dodd-Frank Act. As previously covered by InfoBytes, the agency sought comment on the proposed rule changes in 2020. In separate notices, the FTC approved largely technical, non-substantive changes, clarifying five FCRA rules enforced by the FTC, which apply only to motor vehicle dealers. The changes affect the following rules:
- Address Discrepancy Rule, which requires users of consumer reports to implement policies and procedures for, among other things, handling notices of address discrepancy received from a nationwide consumer reporting agency (CRA) and furnishing an address for a consumer that a “user has reasonably confirmed as accurate to the CRA from whom it received the notice.”
- Affiliate Marketing Rule, which provides consumers the right to restrict a person from using certain information received from an affiliate to make solicitations.
- Furnisher Rule, which requires entities to implement policies and procedures regarding the accuracy and integrity of the consumer information they provide to a CRA.
- Pre-screen Opt-Out Notice Rule, which outlines requirements for those who use consumer reports to make unsolicited credit or insurance offers to consumers.
- Risk-Based Pricing Rule, which requires that persons who use information from a consumer report to offer less favorable terms are required to provide a risk-based pricing notice to consumers about the use of such data.
Massachusetts announces $27 million settlement with auto lender
On September 1, the Massachusetts attorney general announced “the largest settlement of its kind” with a Michigan-based auto finance company (defendant) resolving allegations of predatory lending and deceptive debt collection practices. The defendant allegedly made high-interest subprime auto loans that it knew or should have known that many borrowers would be unable to repay. The assurance of discontinuance states that some of the company’s borrowers were subject to hidden finance charges, which resulted in violations of Massachusetts’s 21 percent usury cap. The defendant also allegedly “failed to inform investors that it topped off securitization loan pools with higher-risk loans.” Under the terms of the settlement, the defendant must pay a total of $27.2 million and provide debt relief and credit repair to over 3,000 borrowers across the state who are expected to be eligible for settlement funds. The settlement also requires that the defendant make changes to its loan handling practices. According to the AG, this action “is part of her Office’s ongoing industry-wide review of securitization practices in the subprime auto loan market.”