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CFPB Takes Aim at F&I Products

May 8, 2013

By Brittany-Marie Swanson

 

Less than two months after the Consumer Financial Protection Bureau (CFPB) confirmed it was watching policies related to dealer participation by issuing guidance to indirect auto lenders, the bureau appears to be targeting the sale of extended warranties and other F&I products.

Reports suggest that the CFPB has issued subpoenas to U.S. auto lenders related to the sale of products such as extended-service contracts and other add-ons. Service Contract Industry Council (SCIC) Executive Director and General Counsel Timothy J. Meenan said the move is “possible and probable” based on media reports, but he has yet to receive confirmation.

“It appears that they are looking at lending practices for sales of automobiles, and also looking at issues involving add-on products,” Meenan said.

In March, the CFPB said it would hold lenders that offer auto loans through dealerships responsible for unlawful, discriminatory pricing. It alleged that bank policies which allow auto dealers to mark up the interest rates on retail installment sale transactions in exchange for services rendered have caused a disparate impact, meaning that members of minority groups pay higher rates. Several banking institutions, including Ally Financial, received letters stating that they could face lawsuits under the Equal Credit Opportunity Act (ECOA).

Groups such as the National Automobile Dealers Association (NADA) and the National Association of Minority Automobile Dealers (NAMAD) have denounced the bureau’s actions, as the CFPB has not revealed how it is conducting its analysis. Using the disparate impact theory, the CFPB has taken the position that violations of the ECOA can be pursued based solely on statistics — meaning a lender can potentially be held responsible for unintentional impacts on minorities.

NADA’s Director of Public Relations, Charles Cyrill, said the organization was not aware of any CFPB action related to F&I add-ons. “We have not received any information about CFPB investigations regarding optional products other than dealer reserve,” he explained.

The CFPB has not publicly confirmed the targeting of F&I products, but a spokesman contacted by F&I and Showroom did not deny recent reports.

“When I look at what the CFPB's been doing with mortgages and with, say, credit card companies, they've gone after things that are potentially misleading,” Meenan said. He explained that while credit card companies have been known to sign up customers for add-on products without their knowledge or understanding, car buyers must sign a contract for F&I add-ons that says, “Yes, I want this.”

Last year, the CFPB reached settlements with credit card issuers such as Capital One Bank, which agreed to refund approximately $140 million to 2 million customers, as well as pay a $25 million penalty for the way it marketed add-on products like payment protection.

“I think those kinds of misleading practices don't really apply to automobile service contracts,” Meenan said. “You can, in the first 45 days, cancel a service contract and get all your money back. And thereafter, you can get the pro rata share back… There are lots of good consumer protections in these products that I think the CFPB will find attractive.”

The CFPB is not the only agency looking at the auto industry. At a panel discussion at George Mason University on May 2, Jon M. Seward, deputy at the U.S. Department of Justice’s Housing and Civil Enforcement Section, said that the DOJ has experienced a shift in referrals of violations from federal bank regulators including the CFPB.

“We’re seeing a lot more referrals involving pricing discrimination allegations in the unsecured consumer lending space; a number of auto-related referrals either involving indirect auto lending or some involving buy-here, pay-here car dealerships,” Seward said in a video obtained by F&I and Showroom.

In December 2012, the department signed a memorandum of understanding with the CFPB aimed at strengthening their coordination in connection with fair lending investigations. That’s why, Meenan says, “We’re not taking anything lightly… We are in a fact-finding mode using local council and others to find out what it is the CFPB is after.”

Comments

  1. 1. William V. Fowler [ May 09, 2013 @ 08:42AM ]

    In an effort to add more information on this subject, reference the information below:

    Reference this article by Loeb & Loeb LLP,

    United States: CFPB Announces Plans To Hold Auto Lenders Liable For Discriminatory Loans

    18 April 2013

    Article by Michael W. Jahnke, Livia Kiser, Michael Mallow and Michael Thurman

    The Consumer Financial Protection Bureau issued a guidance bulletin announcing that it will treat indirect auto lenders as creditors subject to the Equal Credit Opportunity Act (ECOA). The March 21 bulletin follows the CFPB's previous signals that it intended to pursue discrimination in the dealer-assisted auto financing market (read our alert on the CFPB's investigation of auto lenders here). While automobile dealers are not considered creditors and are specifically exempt from CFPB regulation and oversight, the bulletin targets "dealer markup and compensation" arrangements between dealers and lenders, making clear that lenders may be held responsible for dealer policies that result in discriminatory pricing.

    The ECOA prohibits creditors from discriminating in any aspect of a credit transaction because of race, color, religion, national origin, sex, marital status, age, receipt of income from any public assistance program, or the exercise in good faith of a right under the Consumer Credit Protection Act. The ECOA's definition of a "creditor" extends to "any assignee of an original creditor who participates in the decision to extend, renew, or continue credit." The Federal Reserve's implementing regulation-Regulation B-further clarifies that creditor broadly includes "a person, who, in the ordinary course of business, regularly participates in the decision of whether or not to extend credit[.]" The CFPB's bulletin acknowledges that there is a "continuum" of indirect lender participation in credit decisions in the auto loan market and that a lender's practices may fall at "various points along t

  2. 2. Frank [ May 09, 2013 @ 08:43AM ]

    Why is it that the SCIC on their own web sight makes a clear distinction of the difference "Warranties" and "Service Contracts" in favor of consumer protection, YET, at the same time allows several member vendors to use business names that include the phrase "Warranty" in their business name ?

    Using the phrase "Warranty" in a business name (such as X Warranty Corporation) or the phrase "Insurance" in the business name (such as X Insurance Company) when the business only provides Service Contracts is misleading to the public, and is provides a sound basis for the need for more oversight from the CFPB.

    SCIC encourages this misleading marketing by allowing membership from these vendors and publishing these companies on an approved vendor list.

    And yet Our Industry still complains the CFPB is "Taking Aim at F&I Products" as if such aim is unwarranted.

 

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