The CFPB has warned that the indirect auto lending industry has been a target of CFPB supervisory and investigative scrutiny. In March 2013, the CFPB issued a bulletin explaining that it would hold indirect auto lenders accountable for unlawful discriminatory pricing. The CFPB highlighted that its enforcement action against the bank is part of a larger joint effort by the CFPB and DOJ to address discrimination in the indirect auto lending market. Industry participants are likely to see additional scrutiny and enforcement activity from both the CFPB and DOJ.
CFPB Alleges FDCPA, TILA, and Other Consumer Protection Violations in Indirect Auto Lending
On October 1, the CFPB ordered an indirect auto lender and its auto title lending subsidiary to pay more than $48 million in restitution and consumer relief over allegations that both companies engaged in unlawful debt collection practices in violation if the Fair Debt Collection Practices Act (FDCPA). Specifically, the CFPB alleged that the companies:
- Amended caller ID information to obtain information regarding the consumer's or the collateral's location.
- Misrepresented the likelihood of investigations or criminal prosecution.
- Misinformed consumers regarding the redemption of repossessed vehicles.
- Contacted consumers' employers, friends, and family members without consent.
- Misled consumers regarding the likelihood of repossession.
In addition to the companies' collection practices, the CFPB alleged violations of the Truth in Lending Act (TILA) and other consumer protection laws in the lender's advertising and account servicing. The CFPB alleged that the companies changed account due dates and extended loan terms without notifying borrowers. Further, the CFPB alleged that the companies did not adequately disclose annual percentage rates and instead used monthly or other rates in advertising and marketing materials.
The consent order requires the companies to comply with the Fair Credit Reporting Act (FCRA), TILA, and other consumer protection laws and end the alleged violative conduct. The CFPB also ordered the lender to pay $44.1 million in restitution, as well as a $4.25 million civil money penalty.
Joint FTC/DOJ Action on Indirect Auto Lending
On September 28, the CFPB and DOJ entered into settlements with a major bank regarding the bank's indirect automobile lending practices. "Indirect" auto loans are made through car dealers nationwide, who help their customers pay for their new or used car by submitting their loan application to the bank, rather than the bank taking applications directly from consumers.
The CFPB and DOJ alleged that the bank's indirect auto lending practices allowed car dealers discretion to mark up a loan's interest rate from the price initially set by the bank based on the borrower's objective credit-related factors. Dealers received greater payments from the bank for loans that included a higher interest rate markup.
The agencies claim that the bank charged borrowers higher interest rates because of their race or national origin and not because of the borrowers' creditworthiness or other objective criteria related to borrower risk. The CFPB and DOJ's joint investigation concluded that the bank's policies:
- Resulted in minority borrowers paying higher dealer markups: The CFPB and DOJ found that Fifth Third violated the Equal Credit Opportunity Act (ECOA) by charging African American and Hispanic borrowers higher dealer markups for their auto loans than non-Hispanic white borrowers. These markups were made without regard to the creditworthiness of the borrowers.
- Injured thousands of minority borrowers: The CFPB and DOJ found that discriminatory pricing and compensation structures resulted in minority borrowers being charged, on average, over $200 more for their auto loans.
Under the CFPB administrative order, the bank must:
- Substantially reduce or entirely eliminate dealer discretion.
- Pay $18 million in damages for consumer harm.
- Hire a settlement administrator to distribute funds to victims.
Additionally, the DOJ settlement ordered the bank to improve its monitoring and compliance systems. DOJ also ordered the bank to regularly report to the DOJ and the CFPB on the results of its efforts and discuss potential ways to improve results.
Takeaways and Considerations
- The CFPB has stated its focus on indirect auto lending, and recent enforcement actions indicate that the full range of consumer protection laws may be used in enforcement actions.
- ECOA and FDCPA violations are hot-button issues, but industry participants cannot ignore compliance with other legal requirements, such as FCRA, TILA, and unfair, deceptive, or abusive acts or practices (UDAAP) principles.
- The CFPB's enforcement actions are likely to be informed by supervisory examinations of covered nonbank auto finance companies.
Industry participants are encouraged to review the CFPB's regulatory and supervisory guidance and consult with counsel regarding their indirect auto lending programs.