On May 21, 2021, the Consumer Financial Protection Bureau (CFPB) and 3rd Generation, Inc. d/b/a California Auto Finance entered into a Consent Order in which the CFPB alleged unfair acts or practices in connection with an auto finance add-on product.
What was the add-on product?
According to the Consent Order, 3rd Generation purchases and services “subprime auto loans by taking assignment of retail-installment-sales contracts that automobile dealers make with borrowers.” As part of its loan agreement, 3rd Generation requires consumers to use its Loss Damage Waiver (LDW) product. 3rd Generation places the LDW product on the consumer’s account when the consumer has insufficient insurance; it “covers cancellation of the borrower’s debt in the event of a total vehicle loss, or the cost of a repair if the vehicle is not a total loss.” The addition of the LDW product on the consumer’s account results in a monthly LDW fee.
The addition of the LDW product can result in an increase to the loan principal and a re-amortized loan payment, and in some cases this principal increase amounted to thousands of dollars, according to the CFPB order. Although statements and notices to consumers disclose the LDW fee, 3rd Generation does not “disclose to consumers that interest accrues on late payments of that fee.” The CFPB found that many of 3rd Generation’s customers had low or no credit score, made late payments, and incurred interest charges. During the relevant review period, the CFPB identified 5,782 customers who paid a total of $565,813 in interest on late LDW fee payments.
What was the alleged violation and relief ordered by the CFPB?
The CFPB contends that by charging consumers interest on late LDW fee payments without disclosing the accrual of interest on those late payments in the loan agreement or consumer notices, 3rd Generation violated the Consumer Financial Protection Act of 2010 by engaging in unfair acts or practices.
The Consent Order prohibits 3rd Generation from charging interest on LDW fees without first “clearly and conspicuously” disclosing that term. For the purposes of the Consent Order, “clearly and conspicuously” means “difficult to miss” and “easily understandable by ordinary consumer[s].” In addition, 3rd Generation must set aside $168,162 to refund customers who paid off their loans and provide an additional $117,582 in credit for current customers. 3rd Generation must also pay a $50,000 civil money penalty. Moreover, 3rd Generation must request that credit reporting agencies correct inaccurate information that it reported about certain customers whose loans were written off.
What does this action tell us about the CFPB’s scrutiny of auto lending and add-on products?
The investigation of 3rd Generation that resulted in this Consent Order likely originated prior to the departure of former Director Kathleen Kraninger. Therefore, this action itself isn’t necessarily probative of the priorities and approach of the CFPB under Acting Director David Uejio. However, the leadership and direction of the CFPB have changed dramatically, and we expect increased scrutiny of auto lending generally in the coming years, especially with regard to subprime auto lending.
Moreover, Acting Director Uejio has made clear that addressing the economic impact of the coronavirus pandemic is a top priority. A wind-down of government stimulus payments is expected to lead to a rise in subprime delinquencies. We expect the CFPB to use its UDAAP enforcement authority more aggressively across all industries, including subprime auto lending. This could lead to increased scrutiny of not only lending origination but also add-on products and servicing issues – especially where there is a perceived nexus between pandemic-related hardship and practices of concern to the CFPB.
The most direct takeaway from this recent Consent Order may be for lenders and servicers to closely examine loan agreements and subsequent consumer notices to ensure adequate disclosure of fees and costs. However, for some companies or practices, a more comprehensive UDAAP risk assessment may be worth considering in light of the expected increase in CFPB scrutiny.