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MoFo Reenforcement The Enforcement Blog

One-Two Punch: CFPB Indirect Auto and Add-On Product Orders

Posted in Auto Lending, CFPB, Credit Cards, Enforcement Actions

The CFPB announced two new enforcement action settlements on September 28: one for alleged discriminatory auto loan pricing and the other for alleged deceptive credit card add-on product marketing practices.

Indirect Auto Settlement: The joint CFPB and DOJ auto-lending enforcement action continues the Bureau’s campaign to regulate auto dealer markups via lender enforcement actions. In this consent order, a regional bank agreed to change its pricing and comp system by limiting dealer discretion to mark up interest rates to a maximum of 1.25% above the buy rate for car loans with terms of five years or less, and 1% for loans with longer terms. The lender “has the option,” but is not required, “to move to non-discretionary dealer compensation.” This follows the template set in the Honda consent order, which involved lowering dealer mark-ups to as low as 1% depending on the term of the loan. The lender will pay $12 million into a settlement fund, and receive a “credit of between $5 million and $6 million for remediation it has already provided to harmed consumers.” It will then pay any additional funds necessary into the settlement fund to bring its total payment to $18 million.

As in prior actions, the CFPB and DOJ emphasized that they believe dealer markups create discretion that breeds fair lending violations. The Bureau noted, though, that it “did not assess penalties” here “because of the proactive steps the company is taking that directly address the fair lending risk of discretionary pricing and compensation systems by substantially reducing or eliminating that discretion altogether.”

Add-On Action: The card action relates to credit card add-on products offered by the same bank. The CFPB asserts that the bank—through its service providers—committed deceptive acts or practices in the marketing and sales of its “Debt Protection” credit card add-on product. The product provided various debt cancellation benefits. As the CFPB noted, this is the Bureau’s 11th public credit card add-on enforcement action.

This consent order focused on alleged deceptive marketing and enrollment practices. The alleged deceptive acts and practices include the following:

1.   Consent to Enroll

a.     Telling customers that they were merely agreeing to receive information about the product rather than enrolling

b.    Implying that cardholders agreed to enroll by signing an acknowledgment form sent after enrollment

c.     Telling customers that the bank was offering a risk-free trial, rather than an optional product with a monthly fee

d.    Obtaining consent to enroll by asking customers to verify their “participation” by verifying their date of birth

2.   Product Terms and Conditions

a.     Failing to inform customers who had disclosed information suggesting they would be ineligible for a product benefit that they would be ineligible for the benefit

b.    Telling customers that the product covered events that were actually excluded (e.g., falsely telling a consumer who indicated that she was retired that the product covers retirements)

c.     Telling customers that the product protections began “immediately,” when one of the benefits didn’t kick until 90 days after enrollment

3.   Product Cost

a.     Incorrectly representing, “expressly or impliedly,” that if the customer did not “carry a balance,” then there would be no fee associated with the product or that customers could avoid a fee by paying their balance in full before the monthly due date

b.    Mistakenly stating in fulfillment packets that the cost of a product was 0.81% of the balance, when it was actually 0.89%

4.   Compliance Management 

The bank’s “compliance monitoring, Service Provider management, and quality assurance” allegedly “resulted in ineffective oversight, which failed to prevent, identify, or correct certain improper sales practices.”

The lender agreed to pay about $3 million to about 24,500 customers and pay a $500,000 CMP. It has already discontinued marketing of the product.