In a comment letter sent last week to Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra, a key financial industry trade group raised concerns that a recent edition of the CFPB’s Supervisory Highlights did not provide sufficient details about the facts or analysis behind the Bureau’s conclusions regarding certain exam findings.  The letter from the American Financial Services Association (AFSA), dated October 25, 2023, asked the CFPB to withdraw portions of the Summer 2023 edition of the Supervisory Highlights regarding an auto industry practice known as “powerbooking” absent further factual information identifying the nature of any actual consumer harm arising from what the Bureau described as “fraudulent loan charges.”

We previously discussed the Summer 2023 edition of Supervisory Highlights, which covered the CFPB’s examinations in the areas of auto origination and servicing, consumer reporting, debt collection, deposits, mortgage origination and servicing, and payday and small dollar lending, that were completed from July 1, 2022 to March 31, 2023.  One of the issues identified in Section 2.2.1, titled “Collecting interest on fraudulent loan charges,” discussed “powerbooking,” which refers to instances in which an auto dealer misrepresents the model, features, or equipment on a vehicle to the finance source in order to induce the finance source’s decision to purchase the motor vehicle retail installment sales contract (RISC) or to purchase it on more favorable terms.

According to the CFPB, examiners found:

• Servicers engaged in unfair and abusive acts or practices in connection with RISCs for which dealers had fraudulently listed options that were not actually included on the vehicle.  Specifically, servicers were found to have collected and retained interest that borrowers paid on loans that included such options in the loan amount.  After initial processing of a RISC, servicers attempted to contact consumers to verify that listed options were in fact on the vehicle.  If consumers identified discrepancies, servicers reduced the amounts paid to the dealers for the RISCs by the amount of the missing options but did not reduce the amounts owed by consumers on the RISCs and continued to charge interest on the loan amounts tied to the nonexistent options.  Also, after repossession, servicers compared the options actually included with the vehicle to information provided by the dealer and where the options were not actually included, obtained refunds from dealers that were applied to the deficiency balances but did not refund to consumers the interest charged on the nonexistent options. In addition to finding that these practices were unfair, examiners concluded they were abusive because they took unreasonable advantage of a consumer’s inability to protect their interests in the selection or use of the product by charging interest on loan balances that were improperly inflated by the nonexistent options.  Servicers were aware that some percentage of their loans had inflated balances but nevertheless collected excess interest on these amounts while seeking and obtaining refunds on the missing options.  Consumers were unable to protect their own interests because at the time of loan funding, it was impractical for them to challenge the practice because they did not know that options were missing.

In its comment letter, AFSA acknowledges that powerbooking is a fraudulent practice, but points out that there is no injury to the consumer because neither the total sale price nor the amount financed are inflated in the RISC.  In other words, according to AFSA, the price paid by the consumer for the vehicle does not reflect the “inflated” features.  Rather, AFSA maintains that it is the finance source that is misled about the value of its collateral to induce the finance source to purchase the RISC. 

Thus, according to AFSA, the injury is to the finance source, which has no first-hand knowledge of the vehicle and agrees to purchase the RISC based on the misrepresentations.  As such, AFSA argues that the CFPB’s findings mischaracterize (i) where the fault lies in this practice when identifying it as an “abusive act or practice,” and (ii) its authority over the practice given that it is unrelated to the consumer transaction and causes no consumer injury.  In light of this, AFSA contends that the CFPB’s guidance in the Supervisory Highlights that auto lenders and servicers should review the findings to implement changes to avoid similar violations is misguided.

We agree with AFSA that, based on its description of “powerbooking,” such a practice is a fraud on the finance source rather than on the consumer.  We encourage the CFPB to review this finding and provide a revised Supervisory Highlights entry with additional facts to support its finding — or to reconsider and retract the finding itself.  

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