Why it matters

Continuing to keep a close eye on the auto lending industry, the Consumer Financial Protection Bureau (CFPB) ordered a "Buy Here, Pay Here" car dealer to pay $700,000 in restitution to customers, with a $100,000 suspended civil penalty. Herbies Auto Sales engaged in abusive financing schemes, the Bureau alleged, advertising a 9.99% annual percentage rate (APR) without disclosing additional costs, such as a required warranty and a payment reminder device, resulting in a much higher rate than was advertised. These actions triggered the prohibition on unfair, deceptive or abusive acts or practices found in the Dodd-Frank Wall Street Reform and Consumer Protection Act, the agency said, by "luring" consumers into the dealership and keeping them "in the dark" about the true cost of financing their cars. The CFPB agreed to suspend the civil penalty as long as the $700,000 in restitution is paid in full. In addition, Herbies must not misrepresent interest rates, finance charges, or other material facts concerning the financing of a motor vehicle going forward, and must "clearly and prominently" post the purchase price and provide certain information (the actual APR, price of the car, and all finance charges) prior to purchase. The action serves as a reminder that auto lending remains on the Bureau's enforcement radar, following a $48 million action against an indirect auto lender that allegedly engaged in deceptive debt collection practices used to coerce borrowers to make payments on car loans and the addition of the larger participants in the nonbank auto-financing ecosystem to the CFPB's oversight. The order is also significant in that it provides further guidance as to what the CFPB may view as "abusive" under the Dodd-Frank Act, which term the CFPB to date has effectively defined through enforcement actions rather than through the normal issuance of regulations.

Detailed discussion

For allegedly hiding auto finance charges and misleading consumers, the Consumer Financial Protection Bureau (CFPB) ordered Herbies Auto Sales to pay $700,000 in restitution to consumers, with a suspended civil penalty of $100,000.

Located in Greeley, Colorado, Y King S Corp., doing business as Herbies, ran afoul of the Dodd-Frank Wall Street Reform and Consumer Protection Act's prohibition on unfair, deceptive or abusive acts or practices (UDAAP) the Bureau said. The "Buy Here, Pay Here" used car dealer both sells the car and originates the auto loan without selling the loan to a third party.

For the period of 2012 through May 2014, Herbies offered financing to about 1,000 people. But according to the CFPB, the offers—found in marketing materials, showroom window displays, and Truth in Lending Act disclosures—were unlawful. Although the dealer advertised an annual percentage rate (APR) of 9.99%, it failed to disclose other finance charges that the CFPB asserted significantly increased the actual APR, including a $1,650 required warranty and $100 for a required GPS payment reminder device.

This financing scheme tricked consumers into visiting the dealership using false advertising, the Bureau charged, taking advantage of consumers' inability to protect their interests in selecting Herbies' financing and therefore in the CFPB's view constituting an "abusive" practice.

In addition, although the dealer was willing to negotiate prices with cash customers, Herbies refused to negotiate with those paying with credit, the CFPB alleged. The resulting finance charge for credit customers should have been included in the disclosed cost of credit, including the APR, but was not.

Pursuant to the consent order, Herbies will provide $700,000 in restitution to consumers who financed cars with the dealership since January 1, 2012. A civil penalty of $100,000 was suspended by the Bureau pending payment of the redress. Herbies is also required to halt future misrepresentations of any fact material to consumers concerning the financing of any motor vehicle, including interest rates, finance charges, or amounts financed. The purchase price of all automobiles must be "clearly and prominently" posted when auto financing is offered, and Herbies is required to provide a written statement with certain financing information—the actual APR, price of the car, and all finance charges, among other items—to consumers for a signed acknowledgment before or at the time financing is offered.

To read the consent order in In the Matter of Y King S Corp., click here.