On May 21, 2021, the Consumer Financial Protection Bureau (CFPB) and 3rd Generation, Inc. d / b / a California Auto Finance entered into an a Consent order in which the CFPB alleged improper act or practice in connection with an ancillary product to car finance.
What was the add-on product?
According to the Consent Order, buy and service 3rd generation “subprime car loans by transferring hire purchase agreements that car dealers conclude with borrowers”. As part of the loan agreement, 3rd Generation requires consumers to use their Loss Damage Waiver (LDW) product. 3rd generation places the LDW product on the consumer’s account if the consumer is not adequately insured; it “covers the debt relief of the borrower in the event of a total loss of the vehicle or the costs of a repair if it is not a total loss of the vehicle”. Adding the LDW product to the consumer’s account results in a monthly LDW fee.
The addition of the LDW product may result in an increase in loan capital and a newly amortized loan payment, and in some cases that capital increase amounted to thousands of dollars under the CFPB regulation. Although statements and communications to consumers disclose the LDW fee, 3rd Generation “does not disclose to consumers that interest will be incurred on late payments of this fee”. The CFPB found that many of 3approx Generation’s customers had low or no creditworthiness, made late payments, and incurred interest expenses. 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 remedial action ordered by the CFPB?
The CFPB contends that by charging interest on late LDW fee payments from consumers without disclosing the accrued interest on those late payments in the credit agreement or consumer notices 3approx Generation has violated the Consumer Financial Protection Act 2010 by engaging in unfair acts or practices.
The Consent Order prohibits the 3rd generation from charging interest on LDW fees without first disclosing this term “clearly and conspicuously”. For the purposes of the consent arrangement, “clear and conspicuous” means “difficult to miss” and “easy to understand for the normal consumer”.[s]. In addition, the 3rd generation will have to set aside $ 168,162 to repay customers who have paid off their loans and to provide an additional $ 117,582 loan to existing customers. The third generation also faces a civil fine of $ 50,000. Also 3approx Generation must require credit bureaus to correct inaccurate information it has reported about certain customers whose loans have been written off.
What does this measure tell us about the CFPB’s review of car loans and ancillary products?
The investigation of 3approx The generation that led to this consent order probably came into being before the departure of former director Kathleen Kraninger. As such, this move itself is not necessarily a testament to the priorities and approach of the CFPB under Acting Director David Uejio. However, the leadership and direction of the CFPB has changed dramatically, and we expect increased scrutiny of auto lending, particularly with regard to subprime auto lending, in the years to come.
In addition, acting director Uejio has made it clear that addressing the economic impact of the coronavirus pandemic is a top priority. A reduction in government stimulus payments is likely to lead to an increase in subprime defaults. We expect the CFPB to use its UDAAP enforcement agency more aggressively across all industries, including subprime auto lending. This could lead to increased scrutiny of not only lending but also ancillary products and service issues – especially when there is a link between pandemic hardship and practices that are of concern to the CFPB.
The most direct conclusion from this recent consent order may be for lenders and service providers to carefully review credit agreements and subsequent consumer communications to ensure adequate disclosure of fees and charges. However, for some companies or practices, a more comprehensive UDAAP risk assessment may be considered given the expected increase in the CFPB exam.
© 2021 Bradley Arant Boult Cummings LLPNational Law Review, Volume XI, Number 152