The Consumer Financial Protection Bureau (CFPB) published a report on its findings related to illegal practices in auto finance.
Among the practices detailed in the CFPB’s Supervisory Highlights report, the CFPB cited examples of lenders repossessing consumers’ cars after the borrower made timely payments or received loan extensions. It also discussed lenders providing inaccurate disclosures, misapplying loan payments, and putting incorrect information on consumers’ credit reports. Further, the report highlights problems with add-on products that are packaged at the front-end of the auto loan, increasing the loan costs, and then not properly refunded at the back end upon early loan termination.
“Borrowing to buy a vehicle is one of the largest sources of household debt for American families, and many deal with unnecessary costs and challenges paying for their car,” CFPB Director Rohit Chopra said. “The CFPB will take action against auto-finance companies that charge fees for nonexistent services or repossess cars after borrowers make payments.”
With regard to add-on products, car purchasers are frequently offered add-on products, such as extended warranties or “guaranteed asset protection” insurance. With these products, sellers charge the borrower an upfront lump sum cost at the loan origination that is bundled into the total loan cost. If a borrower pays off the loan balance early, or otherwise terminates the loan, they are generally eligible for a prorated refund of the prepaid premiums for the unused portion of the loan term.
The CFPB found subprime auto finance companies charging consumers for optional add-on products that the consumers did not agree to purchase. They also found that servicers failed to provide refunds or credits to consumers for the unused portion of the product following early termination of a loan. In addition, some servicers required borrowers to make two separate, in-person visits to a dealership to cancel an unwanted add-on product, which prevented consumers from exercising their cancellation rights.
CFPB examiners directed the auto-finance companies to stop this illegal conduct and make it clear to consumers that add-on products are optional.
The CFPB report also discussed how servicers wrongfully repossessed vehicles due to service providers failing to cancel orders to repossess vehicles when consumers had made payments or had obtained a loan deferment, modification, or extension.
Some servicers were also misallocating borrowers’ auto loan payments, such as applying payments to late fees first instead of applying to the loan principal and interest. This resulted in borrowers having to pay erroneous late fees. Thus, CFPB examiners directed servicers to fully refund all accounts that incurred late fees due to payments being applied in a different order than that disclosed on the servicers’ website.
The CFPB also barred servicers from repossessing vehicles and failing to promptly return vehicles when consumers made timely payments or payment arrangements or have obtained a loan modification sufficient to prevent repossessions.
The CFPB has previously acted against companies for illegal practices in auto finance. For example, Toyota Motor Credit paid $60 million for withholding refunds and tarnishing borrower credit reports.