[Federal Register Volume 89, Number 202 (Friday, October 18, 2024)]
[Notices]
[Pages 83842-83849]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-24093]


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CONSUMER FINANCIAL PROTECTION BUREAU


Supervisory Highlights: Special Edition Auto Finance

AGENCY: Consumer Financial Protection Bureau.

ACTION: Supervisory highlights.

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SUMMARY: The Consumer Financial Protection Bureau (CFPB or Bureau) is 
issuing its thirty fifth edition of Supervisory Highlights.

DATES: The findings in this edition of Supervisory Highlights cover 
select examinations related to auto-finance that were generally 
completed from November 1, 2023, to August 30, 2024.

FOR FURTHER INFORMATION CONTACT: Jaclyn Sellers, Senior Counsel, at 
(202) 435-7449. If you require this document in an alternative 
electronic format, please contact <a href="/cdn-cgi/l/email-protection#4f0c091f0d100e2c2c2a3c3c262d2623263b360f2c293f2d61282039"><span class="__cf_email__" data-cfemail="4a090c1a08150b29292f393923282326233e330a292c3a28642d253c">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

1. Introduction

    This edition of Supervisory Highlights focuses on the Consumer 
Financial Protection Bureau's (CFPB's) work to put the brakes on 
wrongdoing in the auto-finance market. The impact of this market on 
American families is significant. Auto loan debt exceeds all other 
household-debt categories except for home mortgages. As of the second 
quarter of 2024, Americans owe $1.616 trillion in auto loan debt.\1\
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    \1\ Federal Reserve Bank of New York, Household Debt and Credit 
Report (Q2 2024), https://www.newyorkfed.org/microeconomics/hhdc.html.
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    The auto-finance market enables people to buy vehicles necessary 
for important life functions, such as driving to work, school, and 
medical appointments. But when auto-finance companies violate the law 
it can have serious consequences for families, from having to pay money 
they do not owe to losing their vehicle.
    This Supervisory Highlights issue covers significant findings 
across all aspects of consumers' experiences with the auto-finance 
market. It reports on consumers being lured in through deceptive 
advertising about available loan terms and failing to receive accurate 
and complete disclosures at origination, having their payments 
misapplied or incorrect information

[[Page 83843]]

about their payment history reported to credit reporting companies 
(CRCs), and finding their car had been repossessed, though they had 
made their payments as promised.
    This issue also highlights a trend of significant violations 
related to the handling of add-on products, also known as optional or 
ancillary products. Consumers generally finance these add-on products 
at loan origination, with the product premium paid upfront and then 
included in the amount financed. Auto-finance companies profit from 
these products through the original cost, the finance costs over the 
life of the loan, and, in some cases, from the failure to ensure 
refunds when consumers can no longer use the products. Although add-on 
products may benefit some consumers, examiners have identified unfair, 
deceptive, and abusive acts or practices throughout the lifecycle of 
add-on products. From auto loan originators including add-on products 
without consumers' consent, to servicers failing to allow consumers to 
cancel the products during the initial cancellation period, failing to 
provide the benefit of the product, or failing to ensure consumers 
receive refunds when the loan terminates early, add-on product 
administration represents a significant risk to consumers that the CFPB 
will continue to monitor.
    The auto-finance market is subject to various laws and regulations 
the CFPB enforces. Under the Consumer Financial Protection Act (CFPA), 
all covered persons or service providers are prohibited from committing 
unfair, deceptive, or abusive acts or practices. Examiners' findings of 
unfair, deceptive, and abusive acts or practices in auto-finance 
reviews are included in this issue of Supervisory Highlights.
    The findings in this edition of Supervisory Highlights cover select 
examinations related to auto-finance that were generally completed 
between November 1, 2023, and August 30, 2024.
    To maintain the anonymity of the supervised institutions discussed 
in Supervisory Highlights, references to institutions generally are in 
the plural and the related findings may pertain to one or more 
institutions.\2\ We invite readers with questions or comments about 
Supervisory Highlights to contact us at <a href="/cdn-cgi/l/email-protection#bbf8fdebf9e4e8cecbdec9cdd2c8d2d4d5fbd8ddcbd995dcd4cd"><span class="__cf_email__" data-cfemail="1d5e5b4d5f424e686d786f6b746e7472735d7e7b6d7f337a726b">[email protected]</span></a>.
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    \2\ If a supervisory matter is referred to the Office of 
Enforcement, Enforcement may cite additional violations based on 
these facts or uncover additional information that could impact the 
conclusion as to what violations may exist.
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2. Supervisory Observations

2.1 Origination Disclosures

    Examiners identified two issues with auto-finance companies' 
disclosures at origination. Specifically, examiners identified issues 
with how auto-finance companies marketed annual percentage rates (APRs) 
and how they disclosed prepayment penalties.

2.1.1 Misleading ``as low as'' ARP Marketing

    Examiners found that subprime auto loan originators engaged in 
deceptive acts or practices. A representation, omission, act, or 
practice is deceptive when (1) the representation, omission, act, or 
practice misleads or is likely to mislead the consumer; (2) the 
consumer's interpretation of the representation, omission, act, or 
practice is reasonable under the circumstances; and (3) the misleading 
representation, omission, act, or practice is material.\3\
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    \3\ Whether an act or practice is deceptive is informed by 
decades of precedent including that involving section 5 of the 
Federal Trade Commission Act. See CFPB Exam Manual at UDAAP 5.
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    Examiners found that subprime loan originators engaged in deceptive 
acts or practices through service providers when the service providers 
mailed prescreened advertisements marketing rates ``as low as'' 
specified APR rates to consumers who in fact had no reasonable chance 
of qualifying for or being offered rates at or near that level. The 
lowest interest rate offered to consumers by the servicers was more 
than twice the advertised rate. These marketing materials were likely 
to mislead borrowers. Borrowers would be reasonable to interpret the 
``as low as'' rate as a rate for which they had a reasonable chance of 
qualifying or being offered since the advertisements indicated the 
recipients had been prescreened based on information in their credit 
reports. And the prominent ``as low as'' rate was material to the 
prospective borrowers' decision whether to pursue the offer.
    In response to these findings, the auto loan companies were 
directed to: (i) cease the deceptive practice, whether by the 
originators directly or through their service providers, of advertising 
specified ``as low as'' rates to consumers who in fact have no 
reasonable chance of qualifying for or being offered rates at or near 
that level; (ii) revise policies and procedures to ensure service 
providers offer prescreened marketing advertisements that include 
financing terms that are not misleading and are consistent with the 
type of financing terms the companies' borrowers have a reasonable 
chance of obtaining; and (iii) ensure against originating consumer 
contracts through service providers that advertise and market rates not 
offered by the companies.

2.1.2 Inaccurate Disclosures About Prepayment Penalties

    The origination of automobile loans is governed by the Truth in 
Lending Act (TILA) as implemented by Regulation Z.\4\ Examiners found 
that auto-loan originators violated section 1026.17(c)(1) of Regulation 
Z because their disclosures did not accurately reflect the terms of the 
prepayment penalty. Section 1026.17(c)(1) states that the disclosures 
shall reflect the terms of the legal obligation between the parties. 
The TILA disclosure stated ``Prepayment--if you pay early, you may have 
to pay a penalty.'' In contrast, the associated retail installment 
sales contract stated that there was no finance charge if the loan is 
paid early.
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    \4\ 12 CFR part 1026.
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    In response to these findings, the entities modified their 
disclosures to come into compliance with Regulation Z.

2.2 Repossession Activities

    To secure an auto loan, lenders require borrowers to give creditors 
a security interest in the vehicle. If a borrower defaults, a creditor 
may exercise its contractual rights to repossess the secured vehicle. 
The magnitude of repossessions is significant, with the number of 
repossessions in 2024 estimated to reach 1.6 million.\5\ Servicers 
collect and process auto loan or lease payments from borrowers and are 
either creditors or act on behalf of creditors. Generally, servicers do 
not immediately repossess a vehicle upon default and instead attempt to 
contact consumers before repossession, usually by phone or mail. 
Servicers may give consumers in default the opportunity to avoid 
repossession by catching up on past-due payments or making promises to 
pay. Servicers generally use service providers to conduct 
repossessions. While some repossessions are unavoidable, Supervision 
pays particular attention to servicers' repossession of automobiles. 
Loan holders and servicers are responsible for ensuring that their 
repossession-related practices, and the

[[Page 83844]]

practices of their service providers, do not violate the law.\6\
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    \5\ Cox Automotive, Q2 Manheim used vehicle value index call 
(July 9, 2024), https://www.coxautoinc.com/wp-content/uploads/2024/07/July-9-Q2-2024-Manheim-Used-Vehicle-Value-Index-Call-Presentation.pdf.
    \6\ CFPB, Bulletin 2022-04: Mitigating Harm from Repossession of 
Automobiles (Feb 28, 2022), https://www.consumerfinance.gov/compliance/supervisory-guidance/cfpb-bulletin-2022-04-mitigating-harm-from-repossession-of-automobiles/.
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2.2.1 Wrongful Repossession
    Examiners found that servicers engaged in unfair acts or practices. 
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.\7\
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    \7\ 12 U.S.C. 5531.
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    Examiners found that servicers engaged in unfair acts or practices 
when they erroneously repossessed consumers' vehicles (a) when their 
representatives or service providers failed to cancel orders to 
repossess vehicles, or act on those cancellations, when consumers had 
made payments or obtained extensions that should have prevented 
repossessions; and (b) when consumers had requested, or the servicer 
had approved, a COVID-19 related loan deferment or loan modification, 
consumers had otherwise made timely payments, or consumers made 
arrangements to pay an amount sufficient to cancel the repossession.
    These practices cause or are likely to cause substantial injury 
because they create a substantial risk that consumers will be 
erroneously deprived of their vehicles. Borrowers who are deprived of 
their vehicles are likely to suffer injury in the form of inability to 
travel to work and resulting lost wages and by inability to use their 
vehicles for other critical daily needs. Consumers could not reasonably 
avoid the injury because borrowers had no control over the servicers' 
repossession practices, including errors relating to payment 
processing, repossession orders, repossession holds, and their COVID-19 
related deferment practices. The injury was not outweighed by any 
countervailing benefits to consumers or competition.
    In response to these findings, the servicers were directed to cease 
repossessing vehicles and failing to promptly return vehicles when 
consumers have made timely payments or payment arrangements or have 
obtained a loan modification sufficient to prevent repossessions. Some 
servicers also have implemented policies and procedures to ensure that 
they do not repossess vehicles when consumers have made payments or 
obtained extensions sufficient to prevent repossessions.
2.2.2 Repossessing Third Parties' Vehicles Without a Recorded Lien
    Examiners found that servicers engaged in unfair acts or practices 
when they failed to record liens and then repossessed vehicles without 
a valid lien. When assigning vehicles for repossession, servicers did 
not verify that they had a valid lien. As a result, they repossessed 
vehicles from consumers who did not have any prior affiliation with the 
servicers. Servicers had no right to repossess these vehicles because 
they did not have a valid lien and, by repossessing them, they caused 
substantial injury in the form of lost wages, the costs of arranging 
alternative transportation, or being deprived of the ability to meet 
other important needs. Consumers could not reasonably foresee that 
their vehicle would be repossessed by servicers with which they did not 
have any prior relationship or affiliation. The injury to consumers was 
not outweighed by countervailing benefits to consumers or competition, 
including the cost of implementing controls to prevent wrongful 
repossessions.
    In response to these findings, servicers implemented policies and 
procedures to ensure that they recorded liens for all vehicles and 
repossessed vehicles only when they had recorded a lien.

2.3 Servicing Practices

    Examiners identified two issues related to general servicing 
practices. First, servicers failed to adhere to their disclosed 
payment-allocation methodology for post-maturity loans. Second, 
servicers failed to timely provide consumers with title after loan 
payoff.
2.3.1 Improper Payment Allocation
    Examiners found that servicers engaged in both a deceptive and 
unfair act or practice by applying borrowers' auto-loan payments to 
post-maturity loans in a different order than that disclosed to 
consumers on their websites, which resulted in borrowers having to pay 
late fees. The websites disclosed a particular payment allocation order 
with no indications that the disclosed order did not apply to post-
maturity loans. For post-maturity loans, the servicers applied payments 
in a different order than that disclosed on the websites. The websites 
stated that payments would be applied to the current payment due, 
including both interest and principal, before outstanding late charges. 
The servicers, however, applied payments on post-maturity loans first 
to the most recent payment due, then to other charges (such as late 
fees), and then to other payments due. Examiners found that the payment 
allocation order the servicers used for such payments resulted in the 
principal balance not being paid off on schedule, and that the 
servicers then assessed late fees.
    The representation on the websites was likely to mislead consumers 
with post-maturity loans because it was a false statement, and there 
was no indication that the disclosed order did not apply to post-
maturity loans. Consumers may reasonably take the websites at face 
value regarding the payment-application order. The disclosures are 
material because consumers may use information about the payment-
application order to make decisions about the amount and timing of 
their payments. Borrowers may use this information to attempt to avoid 
late fees and ensure that their loans are fully paid off as planned.
    This practice was also unfair. It was likely to cause substantial 
injury because it prevented consumers from submitting payments in a way 
that could allow them to pay off their principal balances on schedule 
and avoid late fees. The injury was not reasonably avoidable because 
consumers had no reason to anticipate that the servicers would apply 
their payments in a manner that contradicts the information on its 
website. The injury is not outweighed by any countervailing benefits to 
consumers or competition.
    In response to the findings, servicers revised their policies and 
procedures to ensure that payments are applied to all loans in the 
order that is disclosed to consumers and ensured full remediation for 
all accounts that incurred late fees due to payments being applied in a 
different order than that disclosed on the website.
2.3.2 Excessive Delay in Providing Title
    Examiners found that auto-loan servicers engaged in unfair acts or 
practices because consumers suffered substantial injury when the 
servicers failed, through service providers, to timely deliver the 
titles to vehicles after a loan or lease payoff or when consumers 
requested the title in connection with transferring vehicle 
registrations to a different State. Examiners found that the servicers' 
policies are generally to provide title documentation within two 
business days but that delivery times significantly exceeded this 
timeline.

[[Page 83845]]

Consumers who do not have possession of their vehicle title document 
suffer harm, most significantly the inability to legally sell their 
vehicles, the incurrence of additional insurance expenses, and the 
threat of having their vehicles towed. Consumers had no ability to make 
the servicers, or the service providers, more quickly process or 
deliver the titles. And the injury was not outweighed by countervailing 
benefits to consumers or to competition.
    In response to these findings, the servicers were directed to cease 
delaying the delivery of vehicle titles after a loan payoff, lease 
buyout, or request to transfer registration to a different state.

2.4 Add-On Products

    When consumers purchase an automobile, auto dealers and finance 
companies typically offer consumers add-on products. These products 
generally fall into one of two categories, credit products and vehicle 
products. Credit products will assist with the remaining loan balance 
owed by the consumer under certain circumstances; these products cease 
to provide any benefits when the loan is terminated. For example, 
``guaranteed asset protection'' (GAP) products are credit products that 
are offered to help pay off the loan if the car is totaled or stolen. 
Vehicle products relate to the vehicle itself; these products may 
continue to provide benefits after the loan is terminated. For example, 
consumers may purchase a vehicle service contract to pay for the cost 
of certain repairs. The add-on products apply only for specific 
periods, and only under certain circumstances.\8\
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    \8\ See generally CFPB, Supervisory Highlights, Issue 28 (Fall 
2022), Supervisory Highlights, Issue 28, Fall 2022 [verbar] Consumer 
Financial Protection Bureau (consumerfinance.gov).
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    Dealers and finance companies often charge consumers all payments 
for add-on products as a lump sum at origination. Dealers and finance 
companies generally include the lump sum cost of add-on products as 
part of the vehicle financing agreement, and consumers typically make 
payments for these products throughout the loan term. The add-on 
products often allow consumers to cancel early for a partial refund of 
the product cost.
    Upon early termination, the account generally is eligible for a pro 
rata refund of the prepaid premiums for the unused portion of the 
products--often called ``unearned'' premiums. In the default scenario, 
the refund amount should be applied to any deficiency balance, and the 
borrower receives any remaining refund amount. For early payoffs, the 
full amount of the refund should go to the borrower.
    When the loan terminates early, credit products no longer offer any 
possible benefit to consumers because coverage is tied to the financed 
loan, which is paid off. Absent a refund, consumers may wind up paying 
for services they can no longer use, as the relevant products terminate 
when the loan terminates. In addition, vehicle products such as service 
contract coverage terminate upon default, when the borrower no longer 
possesses the vehicle.
2.4.1 Collecting and Retaining Amounts for Add-On Products Consumers 
Did Not Agree To Purchase
    Examiners found that subprime auto-finance companies engaged in 
abusive acts or practices. The CFPA prohibits two types of abusive 
practices. First, materially interfering with the ability of a consumer 
to understand a term or condition of a product or service is abusive. 
Second, taking unreasonable advantage of one of the three statutorily 
specified market imbalances is abusive. Those market imbalances include 
(1) a consumer's lack of understanding of the material risks, costs or 
conditions of a product or service, (2) a consumer's inability to 
protect their interests in selecting or using a product or service, or 
(3) a consumer's reasonable reliance on a covered person to act in 
their interests.\9\
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    \9\ 12 U.S.C. 5531(d).
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    Examiners found that subprime auto-finance companies engaged in 
abusive acts or practices when they collected and retained amounts for 
optional add-on products that consumers did not agree to purchase. The 
companies contracted with service providers to market refinance loan 
options to existing borrowers and prepare origination documents. The 
companies' contracts with the service providers included provisions 
requiring that refinanced loans include a minimum number of so-called 
``tangible benefits.'' The tangible benefits included add-on products, 
such as an extended service contract or other vehicle protection 
product, and an optional GAP waiver product. Recorded calls between the 
service providers and borrowers during which the service providers 
walked the borrowers through the process of signing the refinanced loan 
agreement electronically revealed that the service providers had failed 
to disclose or explain the add-on products that had been included and 
financed as part of the refinanced loans. The companies had failed to 
conduct comprehensive compliance monitoring of the service providers.
    By collecting and retaining amounts for add-on products that 
consumers did not agree to purchase, without policies or procedures to 
ensure or verify that consumers authorized these purchases, servicers 
took unreasonable advantage of consumers' inability to protect their 
interests in selecting or using a product or service. Consumers who did 
not know about or consent to being charged for add-on products were not 
able to protect their interests.
    In response to these findings, the entities were directed to cease 
collecting and retaining amounts for optional products that consumers 
did not agree to purchase or that they agreed to purchase based on 
misrepresentations as to products' voluntary nature or cost. The 
entities were also directed to engage qualified external consultants to 
advise, report, and evaluate the entities' remediation plans to ensure 
that they captured all consumer harm related to these findings, and to 
provide remediation to all consumers identified by the external 
consultants. In addition, the entities were directed to update and 
revise language in contracts with their service providers to set forth 
clear expectations about the service providers' compliance with and 
consequences for failure to comply with applicable Federal consumer 
financial laws.
    The companies were further directed to enhance their risk-
management program to mitigate unwarranted risks to consumers from 
service providers and to ensure that service providers understand their 
consumer compliance responsibilities and comply with Federal consumer 
financial laws. The entities were directed to enhance compliance 
monitoring and audit practices for all consumer-facing service 
providers and any staff that facilitate the purchase of optional 
products to ensure compliance with all applicable Federal consumer 
financial protection laws.
    Finally, the entities were directed to ensure that consumers 
understand the voluntary nature and cost of optional products and that 
there are no efforts in place to coerce consumers into buying such 
products. They were directed to include, as part of compliance 
monitoring and audit practices, the recording of all calls. They were 
further directed to conduct second-level reviews of all retail 
installment contracts prior to funding and to regularly review calls 
between service providers and consumers where the terms and features of 
potential auto loans are discussed.

[[Page 83846]]

2.4.2 Financing of Void Add-On Products on Salvage Vehicles
    Certain add-on products, like GAP products, are void, and therefore 
lack any value to the consumer, if the vehicle has a salvage title, 
meaning it had loss events recorded on the vehicle's title history 
(e.g., a record of an accident or damage associated with the vehicle). 
Before financing a vehicle, servicers may perform a title check to 
determine whether a vehicle has a salvage title.
    Examiners found that auto servicers engaged in abusive acts or 
practices by taking unreasonable advantage of consumers' lack of 
understanding of material risks, costs, or conditions by suspending 
title check procedures for certain originating dealers and then 
financing GAP products that were void due to loss events recorded on 
the vehicles' title histories. As a result of not checking title 
histories, the servicers financed auto loans with GAP products that 
delivered no benefit to consumers but increased the amounts financed 
and the monthly payments. Additionally, servicers paid for title checks 
in some situations but not when financing GAP contracts originated by 
certain preferred lenders. Failing to conduct title checks in these 
instances also provided servicers with cost savings. In obtaining these 
benefits, servicers took unreasonable advantage of consumers' lack of 
understanding of material risks, costs, or conditions associated with 
the GAP product. The consumers paid for GAP coverage but did not 
benefit from the coverage because of the exclusion for salvage 
vehicles.
    In response to these findings, the entities were directed to 
develop and implement policies and procedures to conduct title history 
searches to determine the condition of vehicles' eligibility for add-on 
products.
2.4.3 Failure To Identify Payee of Add-On Products
    Examiners found that auto loan originators violated section 
1026.18(c)(1)(iii) of Regulation Z because the itemization of the 
amount financed disclosures failed to identify the payee for optional 
products purchased by the consumer. Section 1026.18(c)(1)(iii) requires 
a separate written itemization of amounts financed that includes any 
amounts paid to other persons by the creditor on the consumer's behalf. 
The provision also requires the creditor to identify those persons. The 
entities did not identify (or bought retail installment sales contracts 
that did not identify) the payee for optional products purchased by the 
consumer in the itemization of amount financed.
    In response to these findings, the entities changed their practices 
to come into compliance with this provision of Regulation Z.
2.4.4 Onerous Requirements To Cancel Add-On Products
    Examiners found that servicers engaged in abusive acts or practices 
by requiring consumers to make two in-person visits to a dealership to 
cancel contracts for add-on products. An act or practice may be abusive 
when it takes unreasonable advantage of the inability of the consumer 
to protect the interests of the consumer in selecting or using a 
consumer financial product or service.\10\
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    \10\ 12 U.S.C. 5531.
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    Servicers sold and administered add-on products that were included 
in the financed amount and were cancelable for a pro rata refund. The 
contract required consumers to visit the dealerships in person to 
cancel the product. The servicers' practice was to require consumers to 
make two in-person visits when cancelling the product, one visit to 
cancel where the servicers required the consumers to speak to the 
general manager of the dealerships and a second to pick up the refund 
check.
    Servicers took unreasonable advantage of consumers by requiring 
consumers to make two in-person visits and speak with the general 
managers of the dealerships to cancel the add-on products. The 
servicers gained an advantage because they avoided paying a refund when 
the consumer could not make the two in-person visits and the advantage 
was unreasonable because the servicers controlled the process and 
created onerous refund processes involving multiple in-person visits to 
prevent consumers from exercising their cancellation rights. Consumers 
were unable to protect their interests because the contracts for the 
add-on product required cancellation in-person but did not disclose a 
requirement that consumers make two trips to the dealership. Requiring 
two separate visits can interfere with consumers' ability to protect 
their interests because of the excessive time and effort needed to 
extricate themselves from the contract.
    In response to these findings, servicers updated their policies and 
procedures to be consistent with contractual terms.
2.4.5 Failure To Honor Contractual Cancellation Rights
    Examiners found that servicers engaged in abusive acts or practices 
when add-on product contracts allowed for cancellation with a pro rata 
refund within the first year, but the servicers denied consumers' 
cancellation requests.
    Servicers sold and administered add-on products that allowed 
consumers to cancel the product for a pro rata refund within the first 
year. Despite the contract allowing for refunds, servicers refused to 
provide refunds when consumers requested them.
    Servicers took unreasonable advantage of consumers by refusing to 
allow consumers to cancel add-on products when the products were 
cancellable under the contract. The servicers gained an advantage 
because they avoided paying refunds and the advantage was unreasonable 
because the servicers controlled the process and prevented consumers 
from exercising their contractual cancellation rights. Consumers were 
unable to protect their interests because even though the contract for 
the add-on product allowed for cancellation the servicers did not honor 
the provisions and consumers had no alternative method to obtain 
refunds.
    In response to these findings, servicers updated their policies and 
procedures to be consistent with contractual terms.
2.4.6 Failure To Ensure Refunds of Unearned Premiums
    Examiners found that servicers engaged in unfair acts or practices 
by failing to ensure consumers received refunds of unearned premiums 
for add-on products upon early termination of their auto loans in all 
States, either by ensuring that dealers or administrators provided 
refunds or by providing the refunds themselves.
    This practice caused or was likely to cause substantial injury to 
borrowers because these products were of no value once borrowers' loans 
were terminated due to early payoffs, repossession, or total loss (or 
in the case of some products, such as service contracts, only once the 
vehicles were repossessed or declared a total loss), and thus borrowers 
ended up paying for products they could no longer use. This practice 
results in inflated payoff and deficiency balances. Consumers could not 
reasonably avoid the injury because the servicers retain substantial 
control over their refund processes and the calculation of payoff and 
deficiency balances, and consumers may not understand that they cease 
to retain any benefit from the products following early termination of 
their auto loans or that they are eligible for a refund. The injury is 
not outweighed by any

[[Page 83847]]

countervailing benefits to consumers or competition.
    In response to these findings, servicers implemented processes to 
ensure consumers receive refunds of unearned premiums for ancillary 
products in all States, including those that do not mandate such 
refunds. This applies in instances of default or total loss, and upon 
early payoff where the products no longer provide benefits at the 
termination of the loan. Servicers also identified and remediated 
consumers from all States who did not receive such refunds.
2.4.7 Inaccurate Add-On Products Refund Amounts
    Examiners found that servicers engaged in unfair acts or practices 
by failing to provide the correct refund amount for add-on products 
after early termination of auto loans.
    In certain cases, servicers cancelled consumers' add-on products 
and provided refunds but miscalculated the refund amount due. This 
happened when, for example, the servicers used the date of a deficiency 
notice for making a pro rata calculation instead of the date of the 
repossession. In other instances, servicers rely upon calculations 
performed by third parties that were not consistent with the terms of 
the add-on product contract.
    This practice caused substantial injury to consumers because they 
did not receive refunds to which they were entitled. Consumers cannot 
reasonably avoid the injury because they do not have control over how 
servicers calculate the refunds and consumers reasonably relied upon 
their servicers to correctly calculate the refunds. The injury is not 
outweighed by countervailing benefits to consumers or competition.
    In response to these findings, servicers remediated consumers and 
implemented revised policies and procedures to ensure accurate 
calculations.
2.4.8 Delays in Applying Add-On Product Refunds
    Examiners found that servicers engaged in unfair acts or practices 
by failing to timely apply refunds of the unused portion of add-on 
product premiums to borrowers' accounts. In one matter, for example, 
refunds were applied an average of 84 days after the post-repossession 
sale of the vehicle sale, with at least one up to 423 days afterwards; 
in another matter, the refund delays ranged from 150 days to 664 days. 
Even if a consumer is ultimately granted a refund, the consumer may be 
injured by the delay in the interim, during which the consumer does not 
have access to funds to which they are entitled.
    This practice caused or was likely to cause substantial injury to 
borrowers because many consumers were unable to access funds to which 
they were entitled for significant amounts of time. The injury was not 
reasonably avoidable because the servicers controlled their refund 
processes. The injury is not outweighed by any countervailing benefits 
to consumers or competition.
    In response to these findings, servicers updated their policies and 
procedures to ensure consumers receive timely and accurate refunds of 
unearned premiums for add-on products.
2.4.9 Continuing To Collect Payments When Consumers are Covered by a 
GAP Product and Miscalculating Refunds
    Examiners found that servicers engaged in unfair acts or practices 
by collecting monthly payments even after they knew the GAP waiver 
would cover the outstanding balance, and then failing to accurately 
reimburse consumers who made these payments.
    Consumers often purchase GAP waiver agreements at the time they 
finance the vehicle in an effort to prevent owing a balance on their 
loan if the vehicle is totaled. After a total loss event, proceeds from 
auto insurance typically cover only the actual value of the vehicle at 
the time of loss, which generally is less than the amount financed. The 
GAP waiver generally waives the amount owed under the retail 
installment contract or loan as of the date of the total loss, less any 
unpaid loan payments or similar charges, and less the actual cash value 
of the collateral as of the date of a total loss. Servicers continued 
to collect monthly payments from consumers for months after a total 
loss event despite knowing that these consumers purchased GAP waivers 
to cover the outstanding balance. The servicers eventually refunded the 
payments made after the total loss event after the GAP waiver claim was 
finalized, but miscalculated the amount owed to consumers, resulting in 
underpayments.
    This practice caused substantial injury to consumers in two ways. 
First, servicers injured consumers because consumers were deprived of 
the use of funds for the months between the improper payment and the 
insufficient refund. During this period consumers may be forced to make 
multiple car payments, one for their totaled vehicle and another for a 
new vehicle. Second, servicers injured consumers when servicers 
miscalculated the amount due back to consumers after the GAP waiver 
processed, causing insufficient refunds. Consumers could not reasonably 
avoid the harm because they had no control over servicers' practices. 
If consumers ceased making these payments servicers would furnish 
negative credit reporting information. And the injury is not outweighed 
by countervailing benefits when servicers are aware that the amounts, 
they are collecting will be waived under the terms of the GAP waiver.
    In response to these findings, servicers remediated consumers and 
implemented new policies and procedures to cease collecting these 
amounts.

2.5 Furnishing Deficiencies

    Auto lenders and servicers that furnish information to CRCs for 
inclusion in consumer reports (auto furnishers) are subject to 
requirements under the Fair Credit Reporting Act (FCRA) and its 
implementing regulation, Regulation V.\11\ For example, the FCRA and 
Regulation V require auto furnishers to reasonably investigate disputes 
and to furnish data subject to the relevant accuracy requirements. In 
recent reviews, examiners found deficiencies in auto furnishers' 
compliance with the FCRA accuracy requirements.
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    \11\ 12 CFR part 1022.
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2.5.1 Reporting Information With Actual Knowledge of Errors
    Section 623(a)(1)(A) of the FCRA prohibits furnishers from 
furnishing any information relating to a consumer to any CRC if the 
furnisher ``knows or has reasonable cause to believe that the 
information is inaccurate.'' \12\ However, a furnisher is not subject 
to this prohibition if it ``clearly and conspicuously specifies to the 
consumer an address for'' the submission by consumers of notices that 
specific information is inaccurate.\13\ The FCRA does not require a 
furnisher to specify such an address. Though, if a furnisher clearly 
and conspicuously specifies such an address, the furnisher is instead 
subject to section 623(a)(1)(B) of the FCRA, which provides that a 
furnisher violates its duty to furnish accurate information to the 
extent it furnishes information after it has been notified by the 
consumer, at the address specified for such notices, that certain 
information is inaccurate and such information is, in fact, 
inaccurate.\14\
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    \12\ 15 U.S.C. 1681s-2(a)(1)(A).
    \13\ 15 U.S.C. 1681s-2(a)(1)(C).
    \14\ Id. (cross-referencing 15 U.S.C. 1681s-2(a)(1)(B)).
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    In reviews of auto furnishers, examiners found that furnishers

[[Page 83848]]

furnished information to CRCs while knowing or having reasonable cause 
to believe such information was inaccurate because the information 
furnished did not accurately reflect the information in the furnishers' 
systems and/or conflicted with other information the furnishers 
reported about consumers' accounts. For example, examiners found that 
furnishers reported inaccurate information about hundreds, and in some 
cases thousands, of consumers, including: inaccurate amounts past due 
for charged-off accounts; inaccurate scheduled monthly payment amounts 
for paid or otherwise closed accounts with zero balances; outdated 
payment ratings that corresponded with prior reporting cycles rather 
than the current reporting cycle; inaccurate dates of first 
delinquency; and inaccurate actual payment amounts following a payoff 
or settlement. In some instances, the furnishers' reporting errors were 
attributed to the furnishers utilizing systems not adequately designed 
to accurately furnish information about auto loans.
    Examiners also found that auto furnishers did not clearly and 
conspicuously specify to consumers an address for notices relating to 
inaccurate information, and thus were subject to the stricter 
prohibition under section 623(a)(1)(A) of the FCRA against furnishing 
information the furnishers know or have reasonable cause to believe is 
inaccurate. For example, furnishers disclosed a general-purpose 
corporate address or other methods of contact on their websites; 
however, examiners found that the furnishers did not specify to 
consumers the relevant address for notices relating to inaccurate 
information.
    In response to these findings, auto furnishers are conducting 
lookbacks and correcting the furnished information for all affected 
consumers.
2.5.2 Failure To Promptly Update or Correct Inaccurate Information
    Furnishers, including auto furnishers, also are subject to section 
623(a)(2) of the FCRA, which requires furnishers to promptly correct 
and update furnished information after determining that such 
information is incomplete or inaccurate.\15\ Examiners are continuing 
to find that auto furnishers are violating the FCRA duty to promptly 
correct and update incomplete or inaccurate information when the 
obligation arises. Specifically, in recent reviews of auto furnishers, 
examiners found that furnishers continued to furnish information for 
several months, and in some cases over a year, after the furnishers 
determined through monitoring or audit activities that the information 
was incomplete or inaccurate.
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    \15\ 15 U.S.C. 1681s-2(a)(2).
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    For example, examiners found that furnishers continued to furnish 
inaccurate amounts past due and balance information relating to certain 
consumers' charged-off accounts for over a year and a half after 
identifying the furnished inaccuracies through internal audits. 
Examiners also found that furnishers continued to furnish inaccurate 
payment history profiles and/or account statuses for certain accounts 
for over a year after identifying the inaccuracies through monitoring. 
Although the furnishers eventually corrected the inaccuracies after 
significant delay, examiners determined that the auto furnishers' 
delayed remediation of, including failure to submit prompt corrections 
to CRCs with respect to, the identified furnishing inaccuracies was 
inconsistent with the FCRA duty to promptly correct and update 
furnished information after determining that such information is 
incomplete or inaccurate.
    In response to these findings, auto furnishers are enhancing 
policies and procedures, including with respect to internal issue 
management, to ensure they promptly correct or update furnished 
information after determining it is incomplete or inaccurate.

3. Supervisory Developments

    Set forth below are select supervision program developments 
including advisory opinions, circulars and proposed rules that have 
been issued since the last regular edition of Supervisory Highlights.

3.1.1 CFPB Issues Buy Now Pay Later Product FAQs

    On September 17, 2024, the CFPB issued Buy Now Pay Later (BNPL) 
Product FAQs.\16\ The FAQs provide guidance on applying Regulation Z to 
Pay-in-Four BNPL products, such as how to apply credit card periodic 
statement requirements to Pay-in-Four BNPL products that are accessed 
by digital user accounts. These FAQs follow the interpretive rule in 
May 2024 that the CFPB released to explain how the Truth in Lending Act 
and Regulation Z apply to BNPL loans.\17\ The CFPB recognizes that many 
BNPL lenders are working diligently and in good faith to come into 
compliance with the interpretive rule. The CFPB issued the FAQs to 
support this transition.
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    \16\ The FAQs are available at: https://www.consumerfinance.gov/compliance/compliance-resources/consumer-cards-resources/buy-now-pay-later-bnpl-products/buy-now-pay-later-product-faqs/.
    \17\ The interpretive rule is available at: cfpb_bnpl-
interpretive-rule_2024-05.pdf (consumerfinance.gov).
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    In addition, the CFPB has stated it does not intend to seek 
penalties for violations of the rules addressed in the interpretive 
rule against any BNPL lender while it is transitioning into compliance 
in a good faith and expeditious manner. We expect that other Federal 
and State regulators will follow the same path.\18\
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    \18\ The CFPB blog is available at: https://www.consumerfinance.gov/about-us/blog/what-buy-now-pay-later-lenders-are-doing-to-be-upfront-with-borrowers.
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3.1.2 CFPB Issues an Advisory Opinion-Consumer Protections for Home 
Sales Financed Under Contracts for Deeds

    On August 13, 2024, the CFPB issued an advisory opinion which 
affirms the current applicability of consumer protections and creditor 
obligations under TILA and its implementing Regulation Z to 
transactions in which a consumer purchases a home under a ``contract 
for deed.'' \19\ When a creditor sells a home to a buyer under a 
contract for deed, that transaction will generally meet TILA and 
Regulation Z's definition of credit. Where the transaction is secured 
by the buyer's dwelling, the buyer will also generally be entitled to 
the protections associated with residential mortgage loans under TILA.
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    \19\ The advisory opinion is available at: https://www.consumerfinance.gov/rules-policy/final-rules/truth-in-lending-regulation-z-consumer-protections-for-home-sales-financed-under-contracts-for-deed/.
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3.1.3 CFPB Joins Federal Regulators To Propose Rule To Standardize Data 
Submitted to Federal Financial Agencies

    On August 2, 2024, the CFPB joined several other Federal financial 
regulatory agencies in announcing a proposed rule to establish data 
standards for certain information collections submitted to financial 
regulatory agencies.\20\ The proposal would promote interoperability of 
financial regulatory data across the agencies through the establishment 
of data standards for identifiers of legal entities and other common 
identifiers.
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    \20\ The proposed rule is available at: https://www.consumerfinance.gov/rules-policy/final-rules/truth-in-lending-regulation-z-consumer-protections-for-home-sales-financed-under-contracts-for-deed/.
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3.1.4 CFPB Warns Against Intimidation of Whistleblowers

    On July 24, 2024, the CFPB issued a circular to law enforcement 
agencies and regulators explaining how

[[Page 83849]]

companies may be breaking the law by requiring employees to sign broad 
nondisclosure agreements that could deter whistleblowing.\21\ The 
circular explains how, in certain circumstances, imposing sweeping 
nondisclosure agreements that do not clearly permit communication with 
law enforcement may intimidate employees from disclosing misconduct or 
cooperating with investigations. This could impede investigations and 
potentially violate Federal whistleblower protections.
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    \21\ The circular is available at: https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-04/.
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3.1.5 CFPB Proposes Rule on Earned Wage Access

    On July 18, 2024, the CFPB proposed an interpretive rule explaining 
that many paycheck advance products, sometimes marketed as ``earned 
wage'' products, are consumer loans subject to TILA.\22\ The guidance 
would ensure that lenders understand their legal obligations to 
disclose the costs and fees of these credit products to workers.
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    \22\ The interpretive rule is available at: https://www.federalregister.gov/documents/2024/07/31/2024-16827/truth-in-lending-regulation-z-consumer-credit-offered-to-borrowers-in-advance-of-expected-receipt-of.
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4. Enforcement Actions

    The CFPB's supervisory activities resulted in and supported the 
below enforcement actions.

4.1.1 Navient Corporation

    On September 12, 2024, the court entered a stipulated final 
judgment and order against the student loan servicer Navient for its 
years of failures and lawbreaking.\23\ The order permanently bans the 
company from servicing Federal Direct Loans and forbids the company 
from directly servicing loans issued under the Federal Family Education 
Loan Program (FFELP) or acquiring, with limited exceptions, any FFELP 
loans. These bans largely remove Navient from a market where it, among 
other illegal actions, steered numerous student loan borrowers into 
costly repayment options. Navient also illegally deprived student 
borrowers of opportunities to enroll in more affordable income-driven 
repayment programs and caused them to pay much more than they should 
have. Under the terms of the order, Navient paid a $20 million penalty 
and provided $100 million for redress for harmed borrowers.
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    \23\ The Proposed Order is available at: https://www.consumerfinance.gov/enforcement/actions/navient-corporation-navient-solutions-inc-and-pioneer-credit-recovery-inc/.
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4.1.2 TD Bank

    On September 11, 2024, the CFPB ordered TD Bank to pay $7.76 
million to tens of thousands of victims of the bank's illegal 
actions.\24\ For years, the bank repeatedly shared inaccurate, negative 
information about its customers to consumer reporting companies. The 
information included systemic errors about credit card delinquencies 
and bankruptcies. In addition to the redress, the CFPB is ordering TD 
Bank to pay a $20 million civil money penalty.
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    \24\ The Consent Order is available at: https://www.consumerfinance.gov/enforcement/actions/td-bank-na-furnishing-2024/.
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4.1.3 Fay Servicing, LLC

    On August 21, 2024, the CFPB ordered Fay Servicing to pay a $2 
million penalty for violations of mortgage servicing laws, as well as 
for violations of a 2017 agency order that addressed its illegal 
foreclosure practices.\25\ The company failed to implement the order's 
requirements and continued to break the law. Fay Servicing took 
prohibited foreclosure actions against borrowers requesting mortgage 
assistance, failed to offer borrowers mortgage assistance options 
available to them, and overcharged for private mortgage insurance. In 
addition to the civil money penalty, the CFPB's order requires Fay 
Servicing to pay consumer redress of $3 million and to invest $2 
million to update its servicing technology and compliance management 
systems. The order also puts compensation limits on Edward Fay, the 
company's Chairman of the Board and Chief Executive Officer, if Mr. Fay 
does not take actions necessary to ensure compliance with the order.
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    \25\ The Consent Orders are available at: https://www.consumerfinance.gov/enforcement/actions/fay-servicing-llc-2024/.
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4.1.4 Fifth Third Bank

    On July 9, 2024, the CFPB took action against repeat offender Fifth 
Third Bank for a range of illegal activities that will result in the 
bank paying $20 million in penalties in addition to paying redress to 
approximately 35,000 harmed consumers, including about 1,000 who had 
their cars repossessed.\26\ Specifically, the CFPB has ordered Fifth 
Third Bank to pay a $5 million penalty for forcing vehicle insurance 
onto borrowers who had coverage. The CFPB also filed a proposed court 
order that would require Fifth Third Bank to pay a $15 million penalty 
for opening fake accounts in the names of its customers.\27\ The 
proposed court order bans Fifth Third Bank from setting employee sales 
goals that incentivize fraudulently opening accounts.
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    \26\ The Consent Order is available at: https://www.consumerfinance.gov/enforcement/actions/fifth-third-bank-na-fpi-2024/.
    \27\ The Opinion and Order is available at: https://www.consumerfinance.gov/enforcement/actions/fifth-third-bank-national-association/.

Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2024-24093 Filed 10-17-24; 8:45 am]
BILLING CODE 4810-AM-P


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