Auto Loan Add-On Products May Be CFPB's Next Target

WASHINGTON — Recent actions taken by the Consumer Financial Protection Bureau indicate that one of its next targets will likely be add-on products for auto loans, according to observers.

The agency has already been stepping up actions related to add-on products such as identity theft protection, hitting U.S. Bank last week with a multimillion-dollar fine in that area.

Simultaneously, it has also been beefing up its supervision of auto lending. It unveiled a proposal two weeks ago to oversee the largest non-bank auto lenders while also releasing a paper justifying its pursuit of lenders that unintentionally discriminate against borrowers by allowing partnering dealerships to mark up the interest rate on loans.

The CFPB's very public concerns regarding both auto lending and add-on products has led observers to conclude the agency will soon focus specifically on add-on products tied to auto loans, such as extended warranties and theft-prevention services.

"The bureau has initially been focused on the dealer markups in the indirect auto space, but given its close attention to add-on products in the credit card space and concerns about a potential bubble in subprime auto lending, it may decide to look at add-on products in auto lending," said Linda Gallagher, a managing director and global head of the consumer protection practice at Promontory Financial Group, who noted she was not speaking about any specific case.

The CFPB put the industry on alert last June when it first cited U.S. Bancorp in Minneapolis for an auto lending program that allegedly misled military servicemembers on the cost of vehicle maintenance contracts and other add-on benefits. Although it was a smaller part of the overall charges against the firm, it was the first indication that the CFPB may dive further into that area.

Since then, the CFPB has ramped up its actions against misleading charges for add-on products outside of auto lending. The most recent example came Thursday, when the CFPB along with the Office of the Comptroller of the Currency charged U.S. Bank $57 million in fines and restitution for unfairly marketing and charging consumers for add-on products largely through credit cards, mortgages and bank accounts. U.S. Bank joins major creditors like Bank of America, American Express and Capital One Financial for being cited by regulators with regard to add-on products in recent years.

The move furthered industry expectation that the CFPB is looking at how add-on products are marketed and charged to consumers regardless of the type of account or credit that consumers sign up for.

"Anybody selling add-on products has to look at the CFPB's enforcement actions very closely … There's no reason to think the CFPB's interest in add-on products is limited to credit cards. When they take actions, they are often sending a signal to a broader market," said Lauren Saunders, an associate director at the National Consumer Law Center. "Add-on products can really increase the cost of a loan in ways that are very hidden and depending on the cost of loan, it can provide unfair practices."

When asked how concerned the CFPB is with regard to auto loan add-on products, a spokesman for the agency offered a broad response.

"The CFPB is charged with making sure that lenders are following federal consumer financial laws," said Sam Gilford, in an emailed statement. "We will continue to use our supervisory and enforcement authorities to promote a marketplace where costs and risks are clear, and where no consumer is harmed by unfair, deceptive, or abusive acts or practices."

But CFPB Director Richard Cordray specifically mentioned add-on products in opening remarks at an auto finance forum on Sept. 18.

Consumers "may encounter certain add-on products such as a warranty, rustproofing, roadside protection, service plans, and more. By the time they have made all those choices, they may be invested in the car and impatient to finish up and drive it home," Cordray said. "Consumers should not be lured into a deal by misleading statements about the benefits of the product they are being sold. And consumers should get clear and intelligible contracts centered on terms they can understand."

The agency's broad focus on add-on products, coupled with its recent proposal to supervise the largest non-bank auto lenders, suggests lenders should be on high-alert for how they, or their partnering dealers, tie any additional products to the auto loan.

"We tell our clients all time not to make the mistake of interpreting a guidance or enforcement action too narrowly," Gallagher said. "There are themes and other messages in enforcement actions and guidance that can be applicable to many areas."

There are two potential ways that observers say the CFPB could cite auto lenders for with regard to add-on products. Under the Unfair Deceptive Acts and Practices statute, the CFPB can cite lenders for misleading a consumer into a financial product or service in which they were typically overcharged. The agency could also look at add-on products for statistical evidence of discrimination in which, for example, minorities were more likely to be targeted and charged for add-on products than white male borrowers.

The second area the CFPB could look at is whether the lender considered the borrower's ability to repay as part of the underwriting process, like lenders are now required to do with mortgages. However, observers say it would be difficult to require lenders to determine the ability-to-repay with auto loans because the credit is viewed differently because the collateral is the value of the car. The value of a car declines as soon as the vehicle is driven off the lot, versus a home where the value can increase.

"I would find it highly unlikely that we see [an ability-to-repay] come out of some initial guidance at the CFPB with regard to auto lending," said Ed Kramer, executive vice president of regulatory affairs for Wolters Kluwer Financial Services. However, the CFPB could look at other forms of guidance because "at some point, part of the bureau's goal is to educate consumers to make their own assessments to take out additional debt."