On January 21, 2016, the Consumer Financial Protection Bureau (CFPB) announced an administrative enforcement action against Y King S Corp., d/b/a Herbies Auto Sales (Herbies), a buy-here pay-here used car dealer located in Greeley, Colorado.
Herbies is a car dealer that sells cars and originates the related auto loan, without later selling or assigning the loan to a third-party. The CFPB alleges that Herbies engaged in abusive financing schemes by advertising a misleadingly low 9.99% annual percentage rate (APR), without disclosing a required warranty, a payment reminder device, and other credit costs as finance charges. Specifically, the CFPB alleges that Herbies violated the Truth in Lending Act and the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act by:
- Hiding finance charges and advertising a lower APR than consumers actually received;
- Hiding finances charges that related to a refusal to negotiate car prices for credit customers (even though Herbies would negotiate with cash purchasing customers); and
- Engaging in “abusive” practices by using a financing scheme consisting of false and misleading advertising to lure customers in and then keeping them in the dark about the true cost of financing the cars, which “took advantage of consumers’ ability to protect their interests in selecting or using Herbies’ financing.”
The CFPB and Herbies have entered into a consent order to resolve the allegations. Pursuant to the consent order, Herbies is required to:
- Provide $700,000 in restitution to consumers who financed cars with Herbies after January 1, 2012, except those which were charged off due to default;
- Pay $100,000 civil penalty, which is suspended as long as Herbies pays restitution to consumers;
- Prominently post the purchase price of all vehicles; and
- Provide consumers with certain information about financing offers, including the actual APR, price of the car, and all finance charges, and obtain a signed acknowledgment from consumers before or at the time financing is offered.
This marks the CFPB’s first public enforcement action of 2016. This action is also significant because it highlights the CFPB’s continued desire to target the auto industry, despite Congressional criticism of the CFPB’s past auto lending enforcement related practices. For example, on November 24, 2015, Republican members of the House of Representatives’ Financial Services Committee issued a report titled Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending, which blasts the CFPB for knowingly using unsound or weak methodology in challenging auto lending practices based on allegations of discrimination. That Congressional report came on the heels of a November 18, 2015, House of Representatives vote to nullify CFPB Bulletin 2013-02, related to indirect auto lending.
You can view the CFPB and Herbies consent order here: http://files.consumerfinance.gov/f/201601_cfpb_consent-order_y-kings-corp-also-doing-business-as-herbies-auto-sales.pdf.