Blog: CFPB Lawsuit Against Subprime Auto Lender Seeks To Regulate … – Mondaq

Manatt, Phelps & Phillips LLP

United States:

CFPB Lawsuit Against Subprime Auto Lender Seeks To Regulate Through Enforcement

25 January 2023

Manatt, Phelps & Phillips LLP

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On January 4, 2023, the Consumer Financial Protection Bureau
(“CFPB”) and New York Attorney General (“NYAG”)
filed a complaint in the Southern District of New York
against a Michigan-based subprime indirect auto lender accusing it
of, among other things, misrepresenting the true cost of credit and
improperly incentivizing dealers to mislead consumers into
purchasing add-on products. The company’s side of the story
isn’t public at this point, but the legal theories asserted in
the complaint raise serious concerns about the CFPB using its UDAAP
authority to attempt to impose new requirements that contradict or
add to existing law.

The 59-page complaint makes a slew of allegations concerning
alleged misconduct by the company, such as encouraging dealers to
finance consumers who are not expected to be able to repay and
failing to police alleged dealer misconduct. We focus here on three
legal theories that exemplify “pushing the envelope” of
the CFPB’s authority.

First, the lawsuit alleges that the company used its
underwriting not to vary the interest rate charged to consumers or
to decide whether to finance them at all, but instead to project
the total amounts it would collect from the consumer on those
installment contracts (incorrectly referred to as “loans”
by the CFPB), which in turn determined the amount the company would
pay dealers for the contracts. This allegedly incentivized dealers
to inflate the amount financed by selling vehicles at an
artificially increased price or selling company-approved add-on
products, resulting in an alleged “hidden” finance
charge. But pricing is in the control of the dealer, and the CFPB
admits that the company restricts dealers from increasing prices
beyond 115% of the highest Black Book or Blue Book value. Moreover,
the Official Interpretation of Regulation Z expressly provides that
“[c]harges absorbed by the creditor as a cost of doing
business are not finance charges, even though the creditor
may take such costs into consideration in determining . . . the
cash price of the property or service sold
.” 12 C.F.R.
§ 1026, Supp. I, cmt. for 1026.4, ¶ 4(a)(2) (emphasis
added). It further states that “[a] discount imposed on a
credit obligation when it is assigned by a seller-creditor to
another party is not a finance charge as long as the discount is
not separately imposed on the consumer.” Id.
4(a)(2)(i). The complaint notably does not allege that the discount
is separately imposed on consumers, and it is silent on what cash
prices have been charged by the same dealers. Given that financing
contracts are sold at a discount in many types of transactions, the
CFPB’s assertion of this theory has broad implications that
should concern other consumer finance companies that sell into
secondary markets.

Second, the complaint asserts “abusive”
practice claims based on the alleged failure to disclose “the
magnitude of the harm that would result upon default” and the
“risk of defaulting and suffering negative consequences as a
result.” The complaint acknowledges that the company made
required TILA disclosures including the payment schedule, and the
contracts at issue undoubtedly specified the remedies available on
default. Thus, the CFPB is taking the position that companies are
required to make credit counseling disclosures that Congress has
never required. These same claims could be asserted against any
finance company, including ones extending financing to prime
borrowers.

Finally, the CFPB again has ignored the express
exemption of auto dealers from CFPB oversight, baldly asserting
that dealers working with the company are both “covered
persons” and “service providers” under the Consumer
Financial Protection Act. While the lawsuit does not assert claims
against the auto dealers directly, the suggestion that dealers can
be covered persons or service providers is troubling.

While the lawsuit raises concerns about regulatory overreach, it
also underscores the critical importance of monitoring dealer
conduct and dealing fairly with consumers. When add-on products are
made available, it is critical that consumers be given clear and
conspicuous disclosures that the products are optional and
cancelable. Here, the company allegedly financed add-on products in
nearly 90% of its contracts, a sell-through rate that regulators
consider to be evidence of improper sales practices, and it
allegedly made it difficult for borrowers to cancel them.
Furthermore, the company allegedly received a high volume of
complaints concerning dealers requiring the purchase of add-on
products to obtain financing, failing to provide consumers with
copies of their contracts and improperly controlling the e-sign
process; yet it allegedly took little action against the dealers
responsible for those complaints. Given well-established regulatory
concerns in these areas, auto finance companies should be making
these issues a high priority in managing compliance.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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