Increased Focus on Auto Lending
Auto lending practices continue to be a hot topic for state and federal regulators as well as plaintiffs’ attorneys. Within the past few months, there have been multistate actions by state attorneys general (AGs), significant consent orders brought about by the Consumer Financial Protection Bureau (CFPB) and private lawsuits concerning the sale of ancillary products in connection with auto finance transactions. Credit unions that engage in indirect auto lending should take note and pay particular attention to their dealer partners and indirect programs.
Regulatory focus includes a recent multistate action by the AGs for 34 states — including Maryland — that resulted in a settlement with a large subprime auto finance company. The settlement concludes a multiyear investigation into the finance company’s indirect auto lending practices. The AGs alleged that the finance company knowingly exposed deeply subprime borrowers to risky auto loans, which featured high loan-to-value ratios, expensive backend ancillary products (such as vehicle service contracts and GAP waivers), and high payment-to-income ratios. The AGs also alleged that the finance company ignored dealer misconduct, such as doctoring income and expense information, and inflating collateral values. The AGs also emphasized that many consumers lacked any “residual income [remaining income after factoring in debt service and housing and insurance expenses].” Along with significant monetary penalties, the settlement requires the finance company to implement measures to better monitor dealers that engage in misconduct and require additional documentation from those dealers.
In October, the CFPB entered into a consent order with a large auto finance company concerning certain of its indirect lending practices. The CFPB alleged that the finance company wrongfully repossessed vehicles, impermissibly kept borrower personal property left in vehicles, and charged borrowers high pay-by-phone fees (without adequately disclosing lower cost payment options). The CFPB contended that the finance company caused repossessions in a number of situations where borrowers had paid amounts due or had complied with payment arrangements that should have stopped repossession. Other actions faulted included the requirement that borrowers pay an upfront storage fee before repossession agents would release personal property that was left in repossessed autos and failure to disclose the amount of a pay-by-phone fee as high as $12.95 where other, less costly, payment options were available. The finance company agreed to pay a substantial fine, issue refunds, and make significant changes to its indirect lending program.
In addition, a recent wave of litigation activity in Colorado has involved indirect auto lending and guaranteed asset protection (GAP) refunds. Some states have specific GAP refund requirements (e.g., pro rata refund after 60 days, full refund in first 60 days). There have been class actions filed involving claims that auto dealers have been using GAP contracts on the front end that either do not line up with the state refund requirements or the lenders have been providing refunds that do not line up with the dealer GAP contracts. Borrowers have filed suit, claiming that lenders have issued refunds that are too small. As in many other states, Maryland credit unions that make loans under Maryland Subtitle 10 (Closed End Credit Grantor Provisions) must make sure that the GAP contracts used by dealers that sell them indirect auto loans follow applicable Maryland requirements. This type of litigation highlights the importance of making sure that refunds for ancillary products are calculated in accordance with the applicable contract terms and the state law where the dealer originates the loan.
Practice Point: Credit unions should review their underwriting policies and ancillary products sold, and ensure they have appropriate controls over their dealer partners. This is also a good time to review dealer agreements to make sure they contain adequate requirements for dealer compliance and strong indemnification and repurchase rights. Credit unions should expect to receive additional scrutiny concerning indirect loans in their portfolios.
Please contact Christopher R. Rahl or Bryan M. Mullwith any questions concerning this topic.