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CFPB Cracking Down on Repossessions and Loan Servicing

In a recent release, the Consumer Financial Protection Bureau (CFPB) took action against auto finance companies for what it described as “wrongful auto repossessions and loan servicing breakdowns.” While consumer protection is essential, many in the dealer and finance community may view this latest move as another example of regulatory overreach. Let's break down the key findings of the report and discuss how these developments may impact dealers.

Repossession Concerns: Overreach or Genuine Issue?

The most concerning aspect for dealers may be the CFPB's findings on wrongful repossessions. The report states lenders are repossessing vehicles even when borrowers have made timely payments or after the lender agreed to work with the borrower by granting a loan extension. This raises red flags for auto dealers and finance companies. While there are cases where mistakes are made in loan servicing, the CFPB is blurring the line between isolated errors and systemic issues.

Another issue arises with liens. Since before chariots were sold, contracts have given lenders the right to recover collateral if agreed to in the contract by the borrower. Contracts predate liens by centuries and liens were created to put others on notice of the ownership rights of lien holders. This notice helps prevent the selling and transferring of goods from occurring until after a debt is resolved. However, the CFPB in its latest report is looking to extend what a lien is by requiring one before the repossession of vehicles. This is a clear example of the CFPB “moving the goalposts.” By suggesting that repossessions are invalid without a perfected lien, the agency appears to be imposing additional burdens on lenders that go beyond traditional contract law. Dealers and lenders should ensure their practices align with these evolving expectations, even as we challenge their reasoning.

CFPB Claims: Add-On Products and Payment Mismanagement

The CFPB's report also highlights a range of issues, with significant focus on two areas: the sale of add-on products and the misapplication of consumer payments.

According to the CFPB, some lenders and servicers were charging consumers for add-on products, such as extended warranties or gap insurance, without their knowledge or consent. Furthermore, these lenders allegedly failed to refund consumers for unused portions of these products when loans were paid off early or terminated.

Dealers know that add-on products are optional and can provide valuable benefits to customers. However, the CFPB's report suggests that lenders and dealers may need to be more diligent in ensuring transparency and clarity around the sale of these products. Miscommunication or errors during the sale of such products could invite scrutiny or fines. 

Payment Application: A New Target?

The CFPB also criticized some lenders for misapplying borrower payments, alleging that payments were applied to late fees or other charges before the principal or interest, resulting in inflated late fees. The agency directed servicers to ensure that payments were applied in the order disclosed on their websites or in the loan agreements.

For dealers working with finance companies, this serves as a reminder to review the practices of the lenders they work with carefully. Are payments being handled properly? Is there clear communication with borrowers about how payments are applied? The last thing any dealer wants is to be caught up in a lender's regulatory trouble.

Takeaways for Dealers

  1. Transparency is Key: With the CFPB's focus on transparency, particularly with add-on products, dealers should work closely with their finance partners to ensure clear and accurate disclosures are made to consumers. While add-on products can be beneficial, presenting these options without clarity could invite further regulatory scrutiny.
  2. Be Proactive on Loan Servicing Issues: The CFPB's push on loan servicing practices means dealers should stay proactive, working with their finance partners to ensure proper processes are in place. Whether it's how payments are applied or how repossession decisions are made, keeping everything above board will help avoid entanglements with regulators.
  3. Monitor Your Lender Relationships: As regulatory pressure builds on lenders, dealers must monitor their relationships with financing partners. Ensure you work with reputable companies that follow industry standards and legal requirements.
  4. Document, Document, Document: If there's one lesson to be learned from the CFPB's report, it's the importance of documentation. Make sure all customer agreements, add-on sales, and loan servicing practices are well-documented to protect your dealership if any disputes arise.
  5. Get Your Lien Recorded: As TIADA has always recommended, get your lien recorded as quickly as possible and check your white slip to ensure the tax office actually recorded the lien as requested.

Final Thoughts

The CFPB continues aggressively pursuing aggressive enforcement actions in the auto finance space, and it's clear that dealers and finance companies will be navigating an increasingly complex regulatory environment. While consumer protections are vital, this latest action feels like a step too far, particularly with the suggestion that repossessions are invalid without a recorded lien. Dealers should stay informed and vigilant, ensuring their practices align with legal requirements and customer expectations.

As always, TIADA is here to provide guidance and support as you navigate these challenges. Stay tuned for updates as we continue to monitor the CFPB's actions and their potential impact on the auto dealer community.

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