The CFPB just issued it’s Supervisory Highlights, paying particular attention to automobile finance and issues regarding ancillary products.
The Bureau continues to examine auto loan servicing activities, primarily to assess whether servicers have engaged in unfair, deceptive, or abusive acts or practices (UDAAPs) prohibited by the Consumer Financial Protection Act of 2010 (CFPA). Recent auto loan servicing examinations identified unfair acts or practices related to collecting incorrectly calculated deficiency balances. Recent examinations have also identified deceptive acts or practices related to representations on deficiency balance notices.
2.1.1 Unfair and deceptive practices regarding rebates for certain ancillary products
Examiners reviewed the servicing operations of one or more captive auto finance companies. A captive auto finance company is a finance company that is owned by an auto manufacturer that finances retail purchases of autos from that manufacturer. Borrowers financing a car sometimes purchased ancillary products such as an extended warranty and financed the products through the same loan. If the borrower later experiences a total loss or repossession, the servicer or borrower may cancel such ancillary products in order to obtain pro-rated rebates of the premium amounts for the unused portion of the products. In these situations, the rebate is payable first to the servicer to cover any deficiency balance and then to the borrower. Generally, the servicer contractually reserves the right to request the rebate without the borrower’s participation, although it does not obligate itself to do so. The borrower also retains a right to request the rebate. In the extended warranty products reviewed during the examination(s), the amount of potential rebates for the products depended on the number of miles driven. Examiners observed instances where one or more servicers used the wrong mileage amounts to calculate the rebate for extended-warranty cancellations. For some borrowers who financed used vehicles, the servicers applied the total number of miles the car had been driven to calculate rebates. However, the servicer(s) should have applied the net number of miles driven since the borrower purchased the automobile. The miscalculation reduced the rebate available to certain borrowers and led to deficiency balances that were higher by hundreds of dollars. The servicer(s) then attempted to collect the deficiency balances. One or more examinations found that servicer attempts to collect miscalculated deficiency balances were unfair. Collecting inaccurately inflated deficiency balances caused or was likely to cause substantial injury to consumers. And these borrowers could not reasonably have avoided collection attempts on inaccurate balances because they were uninvolved in the servicer’s calculation process. The injury of this activity is not outweighed by the countervailing benefits to consumers or competition. For example, the additional expense the servicers would incur to train staff or service providers to ensure that refund calculations are correct would not outweigh the substantial injury to consumers. In response to these findings, the servicer(s) conducted reviews to identify and remediate affected borrowers based on the mileage they drove before the repossession or total loss of their vehicles. The servicer(s) also began to verify mileage calculations directly with the issuers of the products subject to rebate.
Additionally, examiners observed instances where one or more servicers did not request rebates for eligible ancillary products after a repossession or a total loss. The servicer(s) then sent these borrowers deficiency notices listing a final deficiency balance purporting to net out available “total credits/rebates” including insurance and other rebates. The notices also stated that future additional rebates may affect the amount of the surplus or deficiency, but that “[a]t this time, we are not aware of any such charges.” However, the servicers’ records contained information that it had not sought the eligible rebates. The examination(s) showed that the average unclaimed rebate was roughly $1,700. One or more examinations identified these communications as a deceptive act or practice. The deficiency notice misled borrowers because it created the net impression that the deficiency balance reflected a setoff of all eligible ancillary-product rebates, when in fact, the servicer(s)’ systems showed that it had not sought one or more eligible rebates. It was reasonable for consumers to interpret this deficiency balance as reflecting any eligible rebates because the servicer(s) were both contractually entitled and financially incentivized to seek and apply eligible rebates to the deficiency balance. And the misrepresentation was material to consumers. because they may have pursued rebates on their own had the servicer(s) not represented that there were not additional rebates available. In response to these findings, the servicer(s) conducted reviews to identify and remediate affected borrowers. The servicer(s) also changed deficiency notices to clarify the status of eligible ancillary product rebates.
A copy of the CFPB’s Supervisory Highlights can be found here:
https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-18_032019.pdf