The CFPB also recently announced an $11.8 million settlement of a UDAAP (Unfair, Deceptive and Abusive Acts & Practices) enforcement action in the auto finance space. This action, where the CFPB made no allegations that a lender/servicer failed to follow TILA or other specific rules, highlights the continued need for auto and other consumer lenders and servicers to carefully address UDAAP risks, even in materials and messages that are compliant with those specific rules.

The settlement, through a Consent Order in which the auto lender/servicer neither admitted nor denied the CFPB’s charges, resolved allegations that it violated UDAAP by:

1. failing to communicate in marketing communications that a loan add-on product sold to consumers, guaranteed auto protection (or “GAP”), contained a meaningful limitation on the product’s coverage; and,
2. unrelatedly, failing to describe adequately to consumers the financial impact of agreeing to a loan extension, “including by obscuring” how much interest the consumers would owe.

Like other “GAP” products, this one generally promised, in the event of a total loss of the vehicle, to fill the “GAP” that often exists between a property insurer’s pay-out and the remaining loan balance. The feature allegedly not disclosed to consumers, in telemarketing or in the print and electronic media used by the lender, was not uncommon in the industry. It excluded coverage of any portion of the loan exceeding 125% of the vehicle’s value at the time of purchase. In other words, if the loan was for $10,000 but the vehicle’s value at the time of purchase (as determined by the terms of the GAP product) multiplied by 1.25 was only $9,500, this GAP product apparently would not pay off the last $500 owed on the loan.

Regarding these GAP allegations, we also note one distinction for context: though the Order is not entirely clear, it appears that the party who settled, given its direct-to-consumer marketing activity, was undertaking what the auto finance industry typically calls “direct lending.” In that model, the lender who ultimately will hold and service the loan also makes the loan directly to the consumer when the car is purchased. This model should be distinguished from the also common “indirect” model, where the seller of the car — the dealership — is the party that makes the loan directly to the consumer, and then immediately sells the loan to the institution that will hold and service it.

The Bureau’s interest-disclosure allegations (entirely unrelated to the GAP product) involved consumers who, after missing at least one payment on their loans, agreed to proposals by the lender to a restructured loan with a later maturity date. The CFPB charged that the lender did not adequately convey how interest on the extended loans would accrue and be paid. However, the Bureau did not order any restitution payment on those loans.

For the two alleged violations, the lender also agreed to a $2.5 million civil penalty, for a total payout of about $11.8 million. The parties also agreed to numerous, typical conduct provisions regarding the disclosures and compliance monitoring terms.