CFPB Reports Troubling Trends in Auto Loan Servicing

On July 26, 2023, the Consumer Financial Protection Bureau (CFPB) issued a new Supervisory Highlights report (Report) that sheds light on the CFPB’s observations and findings of unfair, deceptive, and abusive practices in auto loan servicing, among other consumer financial products.  The Report – which covers CFPB supervisory examinations from July 2022 to March 2023 – “furthers [the CFPB’s] efforts to highlight conduct that violates federal law, including the prohibition on abusive practices in consumer financial services,” said CFPB Director Rohit Chopra.

The Report details the CFPB’s findings of unfair and abusive practices in auto loan servicing related to servicers’ charging and collection of interest on loan balances that servicers knew to be artificially and fraudulently inflated.  Examiners observed that car loan balances would be artificially inflated as a result of car dealers fraudulently representing on financing documents that the vehicle had options and enhancements that it did not actually have.  When discrepancies were identified, servicers often failed to take corrective action and would continue to charge interest on the fraudulently inflated loan balances, which the CFPB concluded was unfair and abusive.  In response to these findings, the CFPB ordered servicers to stop collecting interest on loan balances that the servicer knew to be artificially inflated.

The CFPB also found unfair practices related to servicers’ failure to provide adequate notice regarding material terms of automatic payment programs and specifically, that the final loan payment must be made manually and could not be withdrawn automatically.  Although disclosed to consumers in small print when they first enrolled in an automatic payment program, servicers would not provide further notice before final payment was required.  Servicers would cancel the automatic withdrawal of a final loan payment and if the final payment was not timely made manually, assess a late fee.  Examiners found this practice to be unfair.  In response to these findings, the CFPB ordered servicers to remediate affected consumers and revise their policies and procedures.

The Report further details the CFPB’s findings that servicers’ practices related to “cross-collateralization” – using a vehicle to secure both car debt and other, unrelated debt – were unfair and abusive.  Examiners observed that servicers, after repossessing a vehicle due to a default on the car debt, would accelerate the amount due on the car debt as well as the amount due on the other, unrelated debt and require the consumer to repay both debts to recover the repossessed vehicle.  The CFPB found that the blanket practice of cross-collateralizing loans and servicers’ practice of requiring consumers to pay other debts to redeem their repossessed vehicles were both unfair and abusive.  In response to these findings, servicers remediated impacted consumers and revised their policies and procedures.

The Report signals that lenders and servicers cannot rely solely on contract terms and disclosures to avoid a potential CFPB enforcement action alleging unfair, deceptive, and abusive acts.