The Consumer Financial Protection Bureau (“CFPB”) recently issued its Supervisory Highlights – Issue 12, Summer 2016 report, addressing, among other industries, automobile origination. The report reflects supervisory activity generally completed between January 2016 and April 2016 and makes it clear that there is increased scrutiny and consumer complaint activity in the auto lending industry. The CFPB found that several auto lenders have been deceptive in their advertisements for guaranteed asset protection (“GAP”) coverage and disclosures of payment deferral terms.
GAP coverage helps borrowers cover the difference between the amount owed on an auto loan or lease and a totaled car’s actual cash value. Even if a car can no longer be used, the borrower is generally still responsible for any remaining loan or lease payments. Thus, if the reimbursement check from the insurance company is not enough to cover the amount outstanding on the loan or lease, GAP coverage may help pay the remaining amount. With respect to GAP coverage, the CFPB reported that “one or more auto lenders deceptively advertised the benefits of their gap coverage products, leaving the impression that these products would fully cover the remaining balance of a consumer’s loan in the event of vehicle loss,” when in fact “the product only covered amounts below a certain loan to value ratio.”
As for disclosures related to payment deferral terms, the Supervisory Highlights indicate that some lenders used a telephone script to communicate with borrowers and create a false impression that the only effects of taking advantage of an auto loan payment deferral would be to extend the loan and accrue interest during the deferral. They omitted to inform consumers that the subsequent payments would initially be “applied to the interest earned on the unpaid amount financed from the date of the last payment received from the consumer,” which “could result in the consumer paying more finance charges than originally disclosed.” The CFPB is currently reviewing these alleged violations to determine “what, if any, remedial and corrective actions should be undertaken by the relevant financial institutions,” the Supervisory Highlights said.
In its separate June 2016 Monthly Complaint Report, the CFPB revealed that auto lending comprised 60 percent of consumer loan complaints since July 11, 2011. Those include vehicle loan, vehicle lease, and title loan complaints submitted to the CFPB. Nearly half of the complaints centered on managing the loan, lease, or line of credit, and roughly a quarter of them related to problems that occur when customers are unable to pay. Though the June Report did not include statistics on what might be causing these issues, many consumers expressed a lack of understanding for the terms of their loans. However, it is not clear whether that lack of understanding is the fault of the auto lenders. It is clear that, comparing the period from March to May in 2015 with that same period in 2016, the number of complaints had grown in all but sixteen states, including the District of Columbia.
The Supervisory Highlights and June Report should alert auto lenders that the CFPB likely will pursue remedial and corrective actions. To the extent auto lenders can commence mitigation efforts in response to the CFPB’s findings related to GAP coverage and payment deferral disclosures, it could help them avoid CFPB scrutiny. Director Richard Cordray made it clear that he believes it is “compliance malpractice for other institutions not to look carefully at our orders . . . and not to think, ‘Am I doing the same thing? Am I violating the law? And therefore should I clean that up?”