COVID-19 has been a disruptor of our supply chain, our health, and our finances. In 2021, we are all hoping for a return to the pre-COVID world and, in the automotive industry, to our pre-COVID normal sales inventory and sales volume. COVID has unfortunately had an adverse impact on many consumer’s finances, and correspondingly subprime borrowing has been getting increased attention.
In May 2021, the CFPB entered into a Consent Order with 3rd Generation, doing business as California Auto Finance (CAF) which was a subprime auto lending servicer. CAF indirectly originated and serviced subprime auto loans Retail Installment Sales Contracts (RISCs) that were assigned to it by automotive dealers. The consumer loan agreements required them to use CAF’s Loss Damage Waiver (LDW). The LDW was an ancillary product for which consumers were charged a monthly fee that covered the cancellation of the borrower’s debt in the event of a total loss or covered the cost of repair if the vehicle was not a total loss. While there was a disclosure of the monthly LDW fee, there was no disclosure that interest accrues on late payments of the LDW fee.
The failure to disclose the interest charge on the LDW ancillary product was found to be a Unfair, Deceptive or Abusive Acts or Practices (UDAAP) violation, and CAF was ordered to pay $168,162 back as redress to consumers with paid off loans, $117,582 to consumers who still had active loans, $50,000 in civil penalty. Also, CAF was required to request that consumer reporting agencies correct or update inaccurate information that CAF reported regarding charged-off loans that included improper interest charges. CAF was ordered to provide compliance reports to the CFPB and the Consent Order resolving this matter was to continue for five years.
The takeaway from the case was that the law requires clear and conspicuous disclosure of both the charge imposed, as well as any consequences from a late payment of any charge. The disclosure itself must be done in a fashion easily noticed, read, and understandable to ordinary consumers. Cases like the CAF case above demonstrate that compliance settlements can be expected to include monetary sanctions to correct past wrongs and can be expected to continue for years after the settlement. On a broader scale, disclosures of all ancillary products charges, limitations, and exemptions must be clear and conspicuous, and made before the consumer agrees to the purchase.
Many industry watchers are wondering if this case signals the start of a post-COVID increased regulatory focus on ancillary product sales or on the automotive sales market itself. Can this mark the start of the Biden-era CFPB’s more ambitious style of consumer-focused enforcement in the automotive industry? While the precise outlines of the CFPB’s agenda are unknown, best practices will continue to be transparency, disclosure, and a full Compliance Management System to mitigate your risk and provide consistent and demonstrable compliance over time.
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© 2021 Robert J. Wilson, All Rights Reserved
Robert J. Wilson, Esquire (Bob) is a Philadelphia lawyer and is general counsel for ARMD Resource Management Group. Bob’s practice is largely in the consumer finance space, and he regularly consults with Lenders and contributes articles on various compliance related issues.