Promontory Sightlines: Consumer Financial Protection Developments


August 1, 2014

Regulatory interest in automotive finance is growing. The Office of the Comptroller of the Currency has reported on deterioration of lending standards and concentration of credit risk in parts of the market; the Consumer Financial Protection Bureau has announced a rulemaking to define its supervisory jurisdiction over nonbank auto finance companies. Enforcement actions and regulatory pronouncements, as well as reporting from advocacy groups and the media, suggest that the agencies will rely on a consumer protection theory tested elsewhere: that firms rely on unfair and deceptive practices to sell add-on products such as extended-service warranties, theft-prevention services, and optional features.

The CFPB’s first enforcement action addressed the sale of payment protection, credit monitoring, and other add-on products in the credit card market. A handful of similar actions, many of which were jointly brought with prudential regulators, followed. Recurring claims included misrepresenting costs, benefits, and consumer eligibility of add-on products; failing to inform consumers that obtaining credit did not depend on the purchase of add-ons; and charging consumers before they completed a multistep enrollment process.

Consumer advocates have long said that the dynamics at the heart of the credit card actions, including questions about suitability and discriminatory impact, also characterize the selling of automotive add-on products. Indeed, the CFPB has already cited two firms for deceptive statements about the cost and scope of vehicle service and guaranteed auto-protection insurance contracts financed as part of auto loans.

However, unlike credit card add-on products, regulatory scrutiny of automotive add-ons has potential implications that go far beyond sales practices. The frequency with which consumers roll the cost of add-on products into installment loans used to purchase cars means that regulatory suitability analysis will begin with an inquiry into the nature of the add-on and its appropriateness for consumers to whom its sold.

The inquiry will not end there. The suitability of an add-on will also affect how regulators view the lending decision. Ability-to-repay requirements haven’t been spelled out in auto lending, but regulatory analysis of whether a product has been provided responsibly will include a careful look at the relationship between product costs and default rates. Scrutiny is likely to be especially tight in used-car purchases, subprime markets, and in cases where the loan amount and cost are grossly disproportionate to the value of the vehicle or where the loan term extends far beyond the useful life of the vehicle. It is not clear whether the caps that many auto lenders place on add-ons will be enough to satisfy regulators.

But aggressive pursuit of issues arriving from automotive add-ons may face significant obstacles, including differences in the structure of credit card and auto finance markets and the CFPB’s limitations in regulating auto dealers.

While regulators may perceive similarities in the sale of credit card and automotive add-ons, the stakes for enforcement actions in auto lending are much higher due to the market’s profit structure. Although the sale of add-on products undoubtedly provided significant annuity revenue for card issuers, they also generated revenue from transaction fees, interchange, and interest. The profitability of common auto finance models — especially for dealers — may depend far more heavily on extended-service contracts, optional features, and similar products. Enforcement actions that curtail the sale of automotive add-ons and carry significant sanctions could limit the availability of automotive financing — far from a preferred outcome, given workforce dependence on automotive transportation.

The CFPB is likely to face political challenges and questions about its jurisdiction if it proceeds to regulate decisions made at the dealership about products such as paint or rust protection that are far afield from consumer financial products or services.

Lenders and dealers alike should be talking about how add-on products are sold. Monitoring dealer conduct will always be a challenge, given that sales negotiations that include add-ons tend to take place in person. Nevertheless, lenders can define expectations for providing accurate sales information, transparent pricing disclosures, and appropriate sales techniques. They can also create controls to limit discretionary pricing; ensure access to customer complaints, enrollment data, and claims rates; establish training requirements for finance and insurance staff; and vet vendors critical to the provision of add-on products.

Yours truly,

Linda Gallagher
Managing Director and Global Head of the
Consumer Protection Practice
+1 202 370 0411

Jennifer Faulkner
+1 202 384 1126
Linda Gallagher

Jennifer Faulkner


CFPB, State AGs Shut Down Service-Member Lender

The CFPB and 13 state attorneys general on July 29 announced that they permanently banned Colfax Capital, Culver Capital, and their two owners from consumer lending. According to CFPB Director Richard Cordray, the businesses, also collectively known as Rome Finance, were predatory lenders that, among other things, “lured servicemembers in with the promise of instant financing on expensive electronics, then masked the finance charges with inflated prices in marketing materials and later withheld key information on monthly bills.” The settlement called for Rome to stop collecting on $92 million of contracts owed by about 17,000 service members and consumers. The consent order is here.

GAO Calls for More Transparency in Use of Penalty Funds

A Government Accountability Office report released on July 28 said the CFPB should be more transparent about how it uses the civil penalty funds it collects. The report recommended that the bureau “ensure that the Fund Administrator documents the specific factors considered in determining the amount of funding, if any, allocated to consumer education and financial literacy programs.” The GAO posted highlights from the report here.

CFPB to Modify HMDA Data Collection

On July 24, the CFPB said it was seeking to update the reporting requirements of the Home Mortgage Disclosure Act. The proposal includes the reporting of “specific new information that could help identify potential discriminatory lending practices and other issues in the marketplace,” such as applicants’ ages and credit scores; and more information about underwriting and pricing, such as applicants’ debt-to-income ratios and total discount points charged for loans. The proposed rule is here.

CFPB, FTC, and 15 States Take Action Against Foreclosure-Prevention Scams

On July 23, the CFPB, the Federal Trade Commission, and 15 states announced a “sweep against foreclosure relief scammers that used deceptive marketing tactics to rip off distressed homeowners across the country” in violation of the Mortgage Assistance Relief Services rule. The bureau is filing three lawsuits against companies and individuals that collected illegal advance fees for bogus foreclosure-relief services, the FTC is filing six lawsuits, and the states are filing 32 actions. “Consumers were lured in by deceptive marketing, including inflated success rates, and false promises of legal advice,” said CFPB Deputy Director Steven Antonakes in a press call. The companies required upfront fees, and many consumers didn’t receive modifications.

CFPB Accepting Complaints on More Products, and Proposes to Publish Complaint Narratives

The CFPB announced on July 21 that it began accepting consumer complaints on prepaid-card products, debt-settlement services, credit-repair services, and pawn and title loans. The bureau on July 16 proposed a new policy that would allow customers to use the bureau’s complaint database to publish narrative accounts of their experiences with specific banks or financial products. “Publishing consumer narratives would provide important context to the complaint, help the public to detect specific trends in the market, aid consumer decision-making, and drive improved consumer service,” said the bureau’s press release.

FTC and N.Y. Attorney General Halt Debt-Collection Operation

The FTC and New York Attorney General Eric Schneiderman announced July 21 that a U.S. District Court halted the debt-collection operations of three individuals and nine interrelated companies based in Buffalo, New York, on charges of falsely accusing consumers of committing criminal acts; falsely threatening arrests, imprisonment, lawsuits, wage garnishment, or property liens; charging illegal fees; and improperly revealing consumers’ debts to third parties.

CFPB Publishes Second Annual Financial Literacy Report

The CFPB announced in a July 21 blog post that it published its second annual financial literacy report to Congress. “The results show that 15-year-olds in the United States are in the middle of the pack, compared to their peers in 17 other nations and regions that participated in the study,” the post said.

FTC and CFPB Event to Address Debt-Collection Issues Affecting Latinos

On July 15, the FTC and CFPB announced that they will co-host a roundtable in Long Beach, California, on Oct. 23, 2014, to examine debt-collection issues affecting Latino consumers, especially those with limited English proficiency.

CFPB Sues Alleged Default Litigation Mill

The CFPB announced on July 14 that it sued Georgia-based firm Frederick J. Hanna & Associates for allegedly churning out “hundreds of thousands of lawsuits that frequently rely on deceptive court filings and faulty or unsubstantiated evidence” to intimidate consumers into paying debts that they may not owe. The bureau’s complaint is here.

CFPB Issues Guidance on Treatment of Mini-Correspondent Lenders

The CFPB issued July 11 guidance setting out how the bureau evaluates mortgage transactions involving mini-correspondent lenders. The evaluation involves “examining how the mini-correspondent lender is structured and operating, for example: whether it is continuing to broker loans; its sources of funding; whether it funds its loans through a bona fide warehouse line of credit; its relationship with its investors; and its involvement in mortgage origination activities such as loan processing, underwriting, and making the final credit approval decision,” the CFPB said in its press release.

Tampa Payday-Loan Brokers Settle with FTC

The FTC announced July 11 that two Tampa, Florida-based payday-loan brokers and the five companies they controlled have agreed to settle charges that they “falsely promised to help consumers get loans, but instead used consumers’ personal financial data to take money from their bank accounts without their consent.”

CFPB Action against Payday Lender Addresses Collections and Sustained Use

The CFPB on July 10 announced an enforcement action against Texas-based payday lender ACE Cash Express over illegal debt-collection practices, including harassment and false threats of criminal prosecution, to pressure borrowers into taking out more loans. “ACE will provide $5 million in refunds and pay a $5 million penalty for these violations,” the bureau’s press release said. The company stated in a press release that a third party had determined that more than 96% of its collection calls complied with applicable standards. The consent order is here.

FTC Halts Operations of Georgia Debt Collector

The FTC announced on July 1 that a U.S. District Court halted a Georgia-based debt-collection operation for allegedly using a variety of false threats to “bully” consumers into paying phantom payday-loan debts. The complaint and injunction are available here.

CFPB Clarifies Rule on Surviving Heirs of Mortgage Borrowers

On July 8, the CFPB said it has issued an interpretive rule to clarify that when a borrower dies, the name of the borrower’s heir generally can be added to the mortgage without triggering the ability-to-repay rule and “without jumping through unnecessary hoops.”

Regulators Release Guidance on HELOCs Nearing End-of-Draw Periods

On July 1, four federal regulators and the conference of state bank supervisors released interagency guidance on home equity lines of credit nearing their end-of-draw periods. “As HELOC draw periods approach expiration, lenders should communicate clearly and effectively with borrowers and prudently manage exposures in a disciplined manner,” it said.

CFPB to Increase Involvement in Virtual Currencies

A GAO report released June 26 recommended that the CFPB participate in interagency working groups addressing virtual currencies. The CFPB said in a response included in the report that it concurred with the recommendation and it looked forward to “increasing our involvement in formal working groups as they engage on specific issues relating to consumer protection.”

FTC Halts Operations of Houston Debt-Collection Company

On June 25, the FTC announced that it has halted operations of Houston-based debt-collection company RTB Enterprises over allegations that the firm trained collectors to extract “convenience fees” and “transaction fees” on telephone payments by deceiving “consumers into believing that payments were not accepted by U.S. mail and that the fees were unavoidable.” The FTC’s complaint is here.

Cordray Issues Memo on Treatment of Same-Sex Marriages

On June 25, CFPB Director Richard Cordray issued an internal memo to all bureau staff to clarify that the CFPB will recognize all lawful marriages valid at the time of the ceremony in the jurisdiction in which the marriage was conducted. “The Bureau will use and interpret the terms ‘spouse,’ ‘marriage,’ ‘married,’ ‘husband,’ ‘wife,’ and any other similar terms related to family or marital status in statutes, regulations, and policies administered, enforced, or interpreted by the Bureau to include same-sex marriages and married same-sex spouses,” the memo said.


Promontory's Consumer Protection Team includes:

Konrad Alt

Konrad Alt
Managing Director
+1 415 986 4160

Michael Dawson

Michael Dawson
Managing Director
+1 202 384 1080

Linda Gallagher

Linda Gallagher
Managing Director and Global Head
of the Consumer Protection Practice
+1 202 370 0411

Stuart King

Stuart King
Managing Director
+44 207 997 3402

Simon McDougall

Simon McDougall
Managing Director
+44 207 377 2367

BJ Sanford

BJ Sanford
Managing Director
+1 202 384 1020

Julie Williams Julie Williams
Managing Director and
Director of Domestic Advisory Practice
+1 202 384 1087
Promontory Sightlines Consumer Financial Protection Developments


P-R Stark


Linda Gallagher


Eugene A. Ludwig

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