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 a complementary automobile financing product.
What was the complementary product?
According to the consent order, 3rd Generation purchases and offers “subprime auto loans by accepting the assignment of retail installment contracts that auto dealers enter into 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 does not have sufficient insurance; it “covers the cancellation of the debt of the borrower in the event of total loss of the vehicle, or the cost of a repair if the vehicle is not a total loss”. Adding the LDW product to the consumer’s account incurs a monthly LDW charge.
The addition of the LDW product may result in an increase in loan principal and repayment of the re-amortized loan, and in some cases that increase in principal amounted to thousands of dollars, according to the CFPB order. Although consumer statements and notices disclose LDW fees, 3rd Generation does not “disclose to consumers that interest accrues on late payment of these fees.” The CFPB found that many of the 3rd Generation’s customers had poor or no credit, 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 the remedy ordered by the CFPB?
The CFPB argues that by charging consumers interest on late payment of LDW fees without disclosing the accrual of interest on such late payment in the loan agreement or consumer notices, 3rd Generation has breached the Consumer Financial Protection Act 2010 by engaging in unfair acts or practices.
The consent order prohibits 3rd Generation from charging interest on LDW’s fees without first “clearly and conspicuously” disclosing that term. For the purposes of the consent order, “clearly and conspicuously” means “hard to miss” and “easily understood by the ordinary consumer[s].” Additionally, 3rd Generation must set aside $168,162 to repay customers who have repaid their loans and provide additional credit of $117,582 to current customers. The 3rd generation must also pay a civil fine of $50,000. Additionally, 3rd Generation needs to ask credit reporting agencies to correct inaccurate information it provided about certain customers whose loans were written off.
What does this action tell us about the CFPB’s scrutiny of auto loans and add-on products?
The investigation of 3rd The generation that culminated in this consent order was likely born before former principal Kathleen Kraninger left. Therefore, this action itself is not necessarily indicative of CFPB’s priorities and approach under Acting Director David Uejio. However, the leadership and direction of the CFPB has changed dramatically, and we expect increased scrutiny of auto loans in general in the coming years, particularly with respect to subprime auto loans.
Moreover, Acting Director Uejio has made it clear that tackling the economic impact of the coronavirus pandemic is a top priority. A gradual reduction in government stimulus payments is expected to lead to an increase in subprime defaults. We expect the CFPB to use its UDAAP enforcement power more aggressively across all sectors, including subprime auto loans. This could lead to increased scrutiny not only of loan origination, but also of complementary products and service issues – particularly where there is a perceived link between pandemic-related difficulties and practices of concern to the CFPB. .
Perhaps the most direct takeaway from this recent consent order is that lenders and servicers closely scrutinize loan agreements and subsequent consumer notices to ensure proper 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 review.
© 2022 Bradley Arant Boult Cummings LLPNational Law Review, Volume XI, Number 152