On June 10, 2015, the Consumer Financial Protection Bureau (CFPB) issued a press release entitled “CFPB to Oversee Nonbank Auto Finance Companies.” The subheading stated “Bureau Publishes Exam Procedures for Supervised Companies in $900 Billion Market.” While the main focus of the press release was the finalization of the rule which allows the CFPB to supervise larger nonbank auto finance companies, it is the secondary focus of the Press Release, the CFPB Automotive Finance Exam Procedures (http://files.consumerfinance.gov/f/201506_cfpb_automobile-finance-examination-procedures.pdf), which warrants a closer look for those involved in the sale of VSC’s, GAP Waivers, and Ancillary Products, whether the role is as a dealer, an agent, a provider, or administrator. Upon closer review of the exam procedures, they seemingly identify a written path for the CFPB to extend its interest in the aforementioned F&I products when unrelated to any financing aspect, as well as providing the CFPB with the opportunity to extend its assessment of risks to consumers even when the risks are not governed by specific statutory or regulatory provisions.
The path begins in the section of the Exam Procedures labeled as “Examination Objectives” and travels through a section identified as “Background”, and another identified as “Module 5 –Payment Processing, Account Maintenance, and Optional Products”.The objectives as stated by the CFPB in its procedures.
The path begins at page one of the Automobile Finance Examination Procedures under the Examination Objectives. The CFPB lists the following as its objectives in conducting an automobile finance examination:
- To assess the quality of a supervised entity’s compliance management system for preventing violations of Federal consumer financial law in its automobile loan or lease origination business or automobile servicing business. (emphasis added).
- To identify acts or practices that materially increase the risk of violations of Federal consumer financial law, and associated harm to consumers, in connection with an entity’s automobile loan or lease origination business or automobile servicing business. (emphasis added)
- To gather facts that help determine whether a supervised entity engages in acts or practices that are likely to violate Federal consumer financial law in connection with its automobile loan or lease origination business or automobile servicing business. (emphasis added).
- To determine, in accordance with CFPB internal consultation requirements, whether a violation of Federal consumer financial law has occurred and whether further supervisory or enforcement actions are appropriate.
It is interesting to note that objective numbers 1, 2, and 3 are specifically related to “the automotive loan or lease origination business or automobile servicing business,” and each objective specifically uses that qualifier in defining the objective. However, the qualifier is noticeably absent in objective number 4, and “CFPB internal consultation requirements” is also left undefined. Arguably, one could be concerned that this objective provides the examiner with the opportunity, while conducting the examination, to seek out, and report on any perceived violation of federal consumer financial laws, regardless of a connection with automobile financing. Given this objective, those involved in the sale of VSCs, GAP Waivers, and Ancillary Products should take heed of this written and published objective and continue to be diligent in compliance with federal consumer financial laws.The “Background” Information that the CFPB Provides to Explain the Automobile Finance Business and Federal Consumer Financial Law Requirements that are Applicable to the Examination
Page 2 of the Examination Procedures states that “[t]his section of the Procedures provides background on the automobile finance business and the Federal consumer financial law requirements that apply.” It then goes on to explain how the Dodd-Frank Act gave the CFPB supervisory authority over larger participants. In this background section, it also includes subheadings which discuss the concepts of auto financing through indirect lending channels; direct lending channels; auto leasing; and Buy Here - Pay Here; as well as a subheading which is seemingly unrelated to the aforementioned topics regarding auto financing and is entitled “Ancillary Products and Services.” It states:
In addition to the actual vehicle, auto dealers and auto financers offer ancillary services and products at the time of vehicle purchase. These products can be distinguished by their association to either the vehicle purchase or the financing relationship.
- GAP Insurance: Also known as Guaranteed Auto Protection or Guaranteed Asset Protection, it is an insurance policy that covers the amount on a financing obligation that is the difference between the asset value and the amount covered by another insurance policy. In the event of total vehicle loss, the insurance policy covers the deficiency between the insurance settlement and the balance still owed. This insurance coverage is usually marketed for financing with small down payments, high interest rates, and/or extended terms (usually over 60 months).
- Extended Warranty: An extended warranty or vehicle service contract covers the costs of some types of repairs in addition to the manufacturer’s warranty or after the manufacturer’s warranty ends. These contracts typically exclude routine maintenance such as oil changes and tire replacement.
- Vehicle Add-Ons: Also known as back-end products, these add-ons are other pieces of equipment or finishing items that can be purchased with the vehicle such as Lo-Jack systems, vehicle identification number etching (anti-theft precaution), and paint protection.
While this section may seem unrelated to the other background topics, its relevance may be better understood when read in conjunction with the section that immediately precedes it, which is a subheading labeled as “Applicable Laws/Regulations”. It lists the various laws and regulations which “may apply to an ‘entity’s auto financing activities’ such as TILA, EFTA, FDCPA, FCRA, GLBA, and ECOA. While those are self-evident, it is important to note that the Exam Procedures provide an opportunity for the exam process to assess other risks that are not governed by specific statutory or regulatory provisions. It is crucial for those involved in the sale of VSC’s, GAP Waivers, and Ancillary Products to understand the breadth of this statement in the Examination Procedures. The CFPB has provided, in writing, its written procedure which indicates that its process will include assessing risks to consumers for which there are no specific statutes or regulations. This section states:
- To carry out the objectives set forth in the Examination Objectives section, the examination process also will include assessing other risks to consumers that are not governed by specific statutory or regulatory provisions. These risks may include potentially unfair, deceptive, or abusive acts or practices (UDAAPs) with respect to lenders’ or servicers’ interactions with consumers. Collecting information about risks to consumers, whether or not there are specific legal guidelines addressing such risks, can help inform the CFPB’s policymaking. Generally the standards the CFPB will use in assessing UDAAPs are as follows.
the misleading representation, omission, act, or practice is material.An act or practice is unfair when: • it causes or is likely to cause substantial injury to consumers; • the injury is not reasonably avoidable by consumers; and • the injury is not outweighed by countervailing benefits to consumers or to competition. An abusive act or practice: • materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or • takes unreasonable advantage of:
- a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
- the inability of the consumer to protect the consumer’s interests in selecting or using a consumer financial product or service; or
- the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
Refer to the examination procedures regarding UDAAPs for more information about the legal standards and the CFPB’s approach to examining for UDAAPs.
The particular facts in a case are crucial to a determination of UDAAPs. As set forth in the Examination Objectives section, examiners should follow the CFPB internal consultation requirements to determine whether the applicable legal standards have been met before a violation of any Federal consumer financial law is cited, including a UDAAP violation.Module 5 – Payment Processing, Account Maintenance, and Optional Products
This section begins on page 54 of the Examination Procedures. While it provides procedures which are seemingly directly related to auto financing functions with its procedures to assess payment posting and fee practice, compliance with Electronic Fund Transfer Act (Regulation E), Truth in Lending (Regulation Z), servicing of transfers of loans/leases, and payoff statements, it also includes a section which seems unrelated to the forgoing, and is titled: “Optional Products, Other Risks to Consumers.” Within this section, the examiner is advised to:
- Determine whether the servicer offers or finances optional products or services (such as biweekly payment plans, payment protection, credit protection, or extended warranties) and, if so, which products and/or services the servicer offers or finances.
- Determine whether the servicer offers debt cancellation, debt suspension, or other similar additional products or services and, if so, which products and/or services, the servicer offers.
- Determine how the service monitors optional products attached to loans or leases, including cancelling the products in a timely manner, where applicable.
- Determine whether the servicer uses a service provider in connection with optional products and, if so, how the servicer monitors optional products offered and administered by a service provider. This includes how the lender or servicer ensures that the items are appropriately presented as optional products to consumers.
- Review marketing materials, whether they are telemarketing scripts, direct mail, web-based, or other media, and determine whether each optional product’s costs and terms are clearly and prominently disclosed.
- Determine whether the servicer added on optional products or services without obtaining explicit authorization from the consumer. If the service obtains written authorization, review records of consumers who received additional products or services to ensure that written authorization has been provided and retained.
The CFPB Automotive Finance Examination Procedures is a lengthy document, but this article has identified key sections of it that should be reviewed and considered by those involved in the sale of VSCs, GAP Waivers, and Ancillary Products. In outlining these procedures, the CFPB has provided the industry with a roadmap of how it will conduct an automobile finance examination. These procedures make clear that under the CFPB’s current practices, the CFPB has created methods which have potential for a CFPB exam to encompass areas that are outside of what a person may traditionally perceive to be the focus of an automobile “finance examination”. Therefore, anyone involved in the sale of F&I products, whether in the role of a dealer, an agent, a provider, or administrator; needs to be aware of these recently published examination procedures and continue to be diligent in compliance with federal consumer financial laws.