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Consumer financial services: The road ahead
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Auto finance

In 2018, the CFPB continued to pay attention to the auto finance industry, with a particular focus on indirect (dealer-arranged) auto lenders and unfair or abusive loan servicing practices.

Let’s be clear. Discrimination in auto lending is alive and well.”
Senator Elizabeth Warren (D-MA)1

As the federal government stands down on protecting consumers from financial frauds and abuses, [the New York Department of Financial Services] stands up to safeguard New Yorkers from unfair lending practices [and] continues to . . . review indirect automobile lending programs where appropriate.” 
Former NYDFS Superintendent Maria T. Vullo2

Supervision

The CFPB has continued to target the auto finance industry, with a focus on indirect (i.e., dealer-arranged) auto lenders and unfair, deceptive or abusive loan servicing practices. In 2018, the Bureau paid particular attention to auto loan servicing activities, primarily to assess whether servicers have engaged in unfair, deceptive, or abusive acts or practices. Notably, the CFPB has specifically identified deceptive and unfair acts or practices related to billing statements and wrongful repossessions through its supervisory function.3

 

Origination

The results of the CFPB’s most recent examinations evidence a focus on auto loan servicing as opposed to loan origination. Still, the Bureau brought certain enforcement actions in 2018 for unfair or deceptive acts and practices, and violations of TILA in auto loan origination. The Bureau has also focused on educating service members on auto finance matters, including with respect to loan origination by publishing articles with information regarding how to shop for financing and how to evaluate add-on financing products.4

 

Servicing

The Bureau’s supervisory efforts in 2018 addressed automobile loan servicing deficiencies by focusing on illegal repossessions and inaccurate billing statements. Specifically, the CFPB focused on unfair practices used by servicers to wrongfully repossess consumers’ vehicles in instances where the servicer and consumer had reached an agreement to cancel the repossession.5 In addition, the Bureau found that servicers acted deceptively by sending billing statements after a total vehicle loss showing that the insurance proceeds had been applied to the loan payments such that the loan was paid ahead, but then treated consumers who failed to pay by the next month as late, and in some cases, also reported the resulting inaccurate negative information to credit bureaus.6

In May 2018, President Trump signed into law a joint resolution under the Congressional Review Act that disapproves the CFPB’s Bulletin 2013-2,7 which targeted dealer markups using disparate impact discrimination theories under the ECOA.8 The resolution was passed in the wake of a December 2017 determination by the GAO that the bulletin should have been submitted for Congressional review as a rule.9 Former Acting Director Mulvaney issued a statement10 in May 2018 acknowledging that the bulletin is no longer in force and noting that the Bureau is reexamining ECOA enforcement in light of a recent US Supreme Court decision concerning the disparate impact doctrine, “distinguishing between antidiscrimination statutes that refer to the consequences of actions and those that refer only to the intent of the actor.”11 A coalition of 14 state AGs subsequently urged the Bureau against reading disparate impact liability out of the ECOA.12

 

Enforcement

The CFPB previously brought enforcement actions against auto lenders for alleged UDAAP, ECOA and Fair Credit Reporting Act (FCRA) violations, frequently through joint actions with the DOJ. The CFPB brought far fewer enforcement actions in 2018 than in past years, including in the auto lending space, but did bring certain notable enforcement actions for alleged UDAAP and TILA violations. Alleged violations included not properly describing the benefits and limitations of add-on products and the impact of obtaining a loan extension,13  as well as failing to disclose finance charges associated with auto title loans, APR and other information required by TILA in advertisements.14  In a joint enforcement action with the OCC, the Bureau notably reached an unprecedented US$1 billion settlement with a major financial institution for activities, including auto loan servicing abuses that include forcing consumers to buy mandatory auto loan insurance coverage.15  As discussed below, the various states and the District of Columbia reached a settlement with the same institution for related conduct. 

The FTC also sued a group of four auto dealers for activities that included falsifying consumers’ income and down-payment information on vehicle financing applications, in some cases after the consumers had signed the applications, and deceiving consumers about the nature and terms of financing or leasing offers.16  The DOJ has also filed a lawsuit against an auto finance company for allegedly repossessing protected service members’ motor vehicles without obtaining the necessary court orders for such repossessions.17

Given the CFPB leadership’s decreased focus on UDAAP as an enforcement tool, as well as the reassignment of the CFPB’s fair lending office to educational activities,18 we anticipate that the CFPB will continue to bring enforcement actions against the auto lending industry at a slower pace than under former Director Cordray.

US$54.6
billion in auto loans originated (since CFPB’s creation)30

 

State enforcement and litigation

The states have not signaled such a shift in focus,19 and will likely continue to rely on state prohibitions on unfair and deceptive acts or practices to protect consumers in this market segment. In 2018, states mainly targeted indirect auto lenders and auto dealers and successfully reached settlements with, or obtained successful verdicts against, industry participants, notably:

  • Massachusetts: The AG has continued to be active in this market segment. The AG entered a consent judgment against an auto lending company that the state found to have facilitated the dealerships' sale of defective and inoperable vehicles by supplying the dealerships with financing, despite knowing of consumer complaints against the dealerships and of the associated high default and repossession rates.20
  • New Jersey: The AG and the state Division of Consumer Affairs sued a luxury used auto dealership for alleged deceptive practices including conducting credit checks without the consumers' knowledge or authorization, submitting false financial information to a lending institution, failing to refund monies paid by consumers after they cancelled the sales transaction, and advertising used motor vehicles at a price lower than the price posted on the vehicle at the dealership location.21
  • Arkansas: The AG brought a successful lawsuit against an auto dealer and its related companies for failures to deliver titles to cars, satisfy prior liens on the vehicles and return money rightfully belonging to consumers, including loan proceeds from third-party lenders.22
  • Arizona: The AG settled with an auto dealer for engaging in false advertising practices, including internet advertising that listed vehicles at prices that included all possible rebates and excluded mandatory dealer "add-ons" that had already been applied to the vehicles, and misrepresenting consumers' financial information on loan applications.23

Going forward, the rise in state involvement may also lead to increased class action litigation against the auto lending industry.

17,134
consumer complaints related to auto loans or leases (between Nov. 2016 and Nov. 2018)31

 

Fintech outlook

Fintechs in the auto finance space generally focus on pairing consumers with financing offers—both for vehicle purchases and leases—by either establishing partnerships with auto finance companies or banks,24 or by allowing consumers to compare different financing options online. While such tech-focused methods—as seen in the residential mortgage space—do not appear to show any sign of subsiding, we note that there continues to be fair lending compliance and enforcement risk in this area, especially for new market entrants who may not be as familiar or experienced with applicable laws and regulations. Even if the CFPB continues to put less of an emphasis on federal fair lending enforcement, state fair lending laws will apply and state-level scrutiny of fair lending issues is likely to continue, if not increase.

 

State spotlight

In addition to state enforcement and litigation efforts, we also note the following developments:

  • Increased cooperation. State AGs are considering the creation of a multi-state task force to target the auto finance industry and, more specifically, the subprime segment.25 Cooperation efforts have resulted in joint investigations and settlements: notably in December 2018, the 50 states and the District of Columbia reached a settlement with a major financial institution for, among other things, charging auto loan customers for insurance they did not need and failing to ensure that customers received refunds of unearned premiums on certain optional auto finance products.26
  • Rulemaking.  The invalidation of the CFPB’s 2013 Indirect Auto Lending Bulletin may incentivize state AGs to issue similar rules or guidance to replace the bulletin. For example, in August 2018, NYDFS issued guidance27 to remind its supervised institutions and sales finance companies that engage in indirect automobile lending through third parties that they must comply with New York’s Fair Lending Law,28 in light of what the head of the Department characterized as “federal supervisory lapses and rollbacks in enforcement.”29

 

2019 outlook

  • We anticipate that the CFPB will continue to bring enforcement actions against the auto lending industry at a slower pace, although the Bureau will continue to be attentive to auto lending matters, especially auto loan servicing.
  • State regulators will likely continue to address what some perceive as a lack of action by the CFPB in the auto lending space while at the same time enhancing cooperation with other states, resulting in possible increases in state-level enforcement actions in 2019.
  • Fair lending enforcement will continue to take a backseat at the CFPB, as the industry waits for the Bureau’s next steps with respect to ECOA enforcement and use of the disparate impact doctrine.

 

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Consumer financial services: The road ahead

 

1 Renae Merle, Senate Poised to Roll Back Watchdog Effort to Prevent Discrimination in Auto Lending Market, The Washington Post (Apr. 17, 2018), https://www.washingtonpost.com/news/business/wp/2018/04/17/senate-poised-to-roll-back-watchdog-effort-to-prevent-discrimination-in-auto-lending-market/?utm_term=.3acc72789912.
2 NYDFS, DFS Takes Action to Protect New Yorkers From Unfair Auto Lending Practices as Federal Government Rolls Back Consumer Protections (Aug. 23, 2018), https://www.dfs.ny.gov/about/press/pr1808231.htm.
3 CFPB, Supervisory Highlights, Issue 17 (Summer 2018), at 3, https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_supervisory-highlights_issue-17_2018-09.pdf.
4 CFPB, Servicemembers, Arm Yourself With Basic Car Buying Skills—Stand Your Guard When it Comes to Add-On Products (Dec. 10, 2018), https://www.consumerfinance.gov/about-us/blog/servicemembers-arm-yourself-basic-car-buying-skills-stand-your-guard-when-it-comes-add-products/; CFPB, Servicemembers, Arm Yourself With Basic Car Buying Skills—How to Shop for Auto Financing (Nov. 27, 2018), https://www.consumerfinance.gov/about-us/blog/servicemembers-arm-yourself-basic-car-buying-skills-how-to-shop-auto-financing/.
5 CFPB, Supervisory Highlights, Issue 17 (Summer 2018), at 4, https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_supervisory-highlights_issue-17_2018-09.pdf.
6 CFPB, Supervisory Highlights, Issue 17 (Summer 2018), at 3-4, https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_supervisory-highlights_issue-17_2018-09.pdf.
7 S. J. Res. 57 (May 21, 2018), https://www.congress.gov/115/plaws/publ172/PLAW-115publ172.pdf.
8 Under Compliance Bulletin 2013-02, the CFPB sought to tackle target dealer markups, a practice whereby an automobile dealer charges a consumer a higher interest rate than the rate by which an indirect lender is willing to purchase the consumer's retail installment sales contract. Dealers were thereby allowed by indirect lenders to exercise significant pricing discretion, opening the door to discrimination. Many indirect lenders contended that they should not be penalized for unintentional discrimination by dealers. See https://files.consumerfinance.gov/f/201303_cfpb_march_-Auto-Finance-Bulletin.pdf.
9 Letter from Thomas H. Armstong, General Counsel, US Government Accountability Office, to The Honorable Patrick J. Toomey (Dec. 5, 2017), https://www.gao.gov/assets/690/688763.pdf.
10 CFPB, Statement of the Bureau of Consumer Financial Protection on Enactment of S.J. Res. 57 (May 21, 2018), https://www.consumerfinance.gov/about-us/newsroom/statement-bureau-consumer-financial-protection-enactment-sj-res-57/. The Bureau has indicated that it might undertake a rulemaking addressing the disparate income doctrine. See https://www.reginfo.gov/public/jsp/eAgenda/StaticContent/201810/Preamble_3170.html.
11 Tex. Dep't of Hous. & Cmty. Affairs v. Inclusive Cmtys. Project, Inc., 135 S. Ct. 2507 (U.S. 2015).
12 Jon Hill, 14 AGs Urge CFPB Not to Back Off Disparate Impact Liability, Law360 (Sept. 5, 2018), https://www.law360.com/articles/1079821/14-ags-urge-cfpb-not-to-back-off-disparate-impact-liability.
13 CFPB, Consent Order in the Matter of Santander Consumer USA Inc., 2018-BCFP-0008 (Nov. 20, 2018), https://files.consumerfinance.gov/f/documents/bcfp_santander-consumer-usa_consent-order_2018-11.pdf.
14 CFPB, Consent Order in the Matter of Triton Management Group, Inc., TMS Group, Inc. d/b/a Always Money, EFS, Inc. d/b/a Quik Pawn Shop, and Three Rivers Investment, Inc. d/b/a Always Money, 2018-BCFP-0005 (July 19, 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_triton-management-group_consent-order_2018-07.pdf.
15 CFPB, Consent Order in the Matter of Wells Fargo Bank, N.A., 2018-BCFP-0001 (Apr. 20, 2018), https://files.consumerfinance.gov/f/documents/cfpb_wells-fargo-bank-na_consent-order_2018-04.pdf.
16 FTC, FTC Charges Auto Dealerships in Arizona and New Mexico with Falsifying Consumers' Information on Financing Documents (Aug. 1, 2018), https://www.ftc.gov/news-events/press-releases/2018/08/ftc-charges-auto-dealerships-arizona-new-mexico-falsifying.
17 DOJ, Justice Department Sues Subprime Auto Lender in Orange County, California, for Illegally Repossessing Servicemembers' Cars (Mar. 28, 2018), https://www.justice.gov/opa/pr/justice-department-sues-subprime-auto-lender-orange-county-california-illegally-repossessing.
18 Kate Berry, CFPB's Mulvaney Strips His Fair-Lending Office Of of Enforcement Powers, American Banker (Feb. 1, 2018), https://www.americanbanker.com/news/cfpbs-mulvaney-strips-his-fair-lending-office-of-enforcement-powers.
19 Kevin Wack, Auto Lending Scrutiny: Will States Pick Up Where CFPB Left Off?, American Banker (May 7, 2018), https://www.americanbanker.com/news/auto-lending-scrutiny-will-states-pick-up-where-cfpb-left-off.
20 Press Release, Auto Lender to Provide More Than $700,000 in Debt Relief and Refunds to Consumers Victimized by Fraudulent Auto Dealerships (Dec. 27, 2018), https://www.mass.gov/news/auto-lender-to-provide-more-than-700000-in-debt-relief-and-refunds-to-consumers-victimized-by.
21 Press Release, NJ Consumer Affairs Files Second Lawsuit Against 21st Century Auto Group Alleging the Dealership and Owner Dmitry Zeldin Continue to Engage in Deceptive Business Practices (May 1, 2018), https://nj.gov/oag/newsreleases18/pr20180501b.html.
22 Press Release, Rutledge Announces Trial Victory Over Northwest Arkansas Used Auto Dealer (Aug. 17, 2018), https://arkansasag.gov/media-center/news-releases/rutledge-announces-trial-victory-over-northwest-arkansas-used-auto-dealer/.
23 Press Release, AG Brnovich Obtains $130,000 for Arizonans from Auto Dealer (Apr. 24, 2018), https://www.azag.gov/press-release/ag-brnovich-obtains-130000-arizonans-auto-dealer.
24 For instance, AutoFi has partnered with Ford Motor Credit to connect dealers to lenders so customers can finance and purchase vehicles online in minutes and has also entered into a partnership with Chase Bank. See, e.g., AutoGravity, Blinker, and Honker.
25 Alan Wingfield, Brooke Conkle, Amir Shachmurove, Ashley L. Taylor Jr., Federal Deregulation Opens the Door for State-Level Threats to Auto Finance, Business Law Today (Jan. 16, 2018), https://businesslawtoday.org/2018/01/federal-deregulation-opens-the-door-for-state-level-threats-to-auto-finance.
26 Settlement Agreement, by and among Wells Fargo Bank, N.A. and the Various Attorneys General (Dec. 28, 2018), https://portal.ct.gov/-/media/AG/Press_Releases/2018/20181228_WellsFargo_MultistateSettlement.pdf?la=en.
27 NYDFS, Indirect Automobile Lending and Compliance with New York's Fair Lending Statute (Aug. 23, 2018), https://www.dfs.ny.gov/legal/industry/il180823.pdf.
28 N.Y. Exec. L. § 296-a.
29 NYDFS, DFS Takes Action to Protect New Yorkers from Unfair Auto Lending Practices as Federal Government Rolls Bank Consumer Protections (Aug. 23, 2018), https://www.dfs.ny.gov/about/press/pr1808231.htm.
30 CFPB Consumer Credit Panel, Auto Loans Origination, https://www.consumerfinance.gov/data-research/consumer-credit-trends/auto-loans/origination-activity/#anchor_lending-levels.
31 CFPB, Complaint Snapshot: Mortgage (January 2019), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_complaint-snapshot-mortage_2019-01_liwsYNV.pdf.

 

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