When I think of “Herbies Auto Sales” I envision a warm and fuzzy used car lot that sells old Volkswagens to young Lindsay Lohan—something that Disney turned into a movie. When the CFPB thinks of Herbies, it sees a buy-here, pay-here auto lot that uses unfair, deceptive and abusive sales practices to unload its cars.
Last Wednesday, the CFPB announced a settlement against their version of Herbies Auto Sales in which Herbies agreed to pay $700,000 in restitution to customers.
It seems that Herbies, a Greeley, Colorado subprime auto finance lot sold cars and financed them without selling the “paper” to third party lenders. Herbies' advertising of 9.99% APR was a powerful tool in its business success. The only problem was that Herbies neglected to say in its advertising that to achieve the 9.99% rate, a customer would also have to buy a warranty (really a service contract) and would have to pay for a “reminder device”--what amounts to a starter interruption device. The CFPB found such conduct to be a violation of the Truth-In-Lending Act and Dodd-Frank Act as deceptive advertising and hiding finance charges.
The CFPB also determined that Herbies would negotiate the contract price on a car for a cash-customer, but not for a finance-customer. Consequently, resulting finance charges on the price differential not attained by the finance-customer was a hidden finance charge.
In its press release about this action, the CFPB said, “Herbies' financing scheme lured consumers with misleading advertising and then kept them in the dark about the true cost of financing the cars they were buying. This took advantage of consumers' inability to protect their interests in selecting or using Herbies' financing, among other things.”
In addition to the $700,000 in redress to customers, Herbies agreed to stop deceiving customers during the financing process, to start posting automobile prices clearly and conspicuously, and to start providing financing information in advance including the actual APR and the price of the car.
We report on this case for two major reasons: First, this action shows that the CFPB is targeting deceptive advertising under its UDAAP authority. Second, this action shows that, once again, the CFPB is going after the small companies—not just against the giants in the finance industry.