Regulators put onus on lenders in ‘junk fee’ crackdown

Auto lenders must review their contract and disclosure processes as the Consumer Financial Protection Bureau expands its investigation of fees charged during the auto purchase and financing processes. The FTC along with the CFPB are paying close attention to added fees, Natalia Kruse , Husch Blackwell senior associate attorney, said during Auto Finance Summit 2023 last month. What is considered a “ junk fee ” by regulators has expanded to include “things that you wouldn’t consider a fee,” she said. Both agencies proposed rules in 2022 prohibiting fees regulators deem excessive or unclear and have kept a close eye on fee practices since. The fees can include convenience fees, overdraft and late fees, along with unexpected fees for products or services. “This is clearly a concerted effort from the administration and a focus that we'll see for a while,” Kruse said. “All fees are being scrutinized by regulators.” In fact, the CFPB last month released a special edition of supervisory highlights addressing junk fees. The FTC, too, continues to push forward on its proposed rule but is facing pushback from dealer groups and Congress. The U.S. House Committee on Oversight and Accountability is investigating the FTC’s proposed rule that seeks to enact additional requirements on car dealers related to fees, disclosures and sales tactics, according to a committee release. The committee has requested that the FTC provide documents and answers to questions about the rule by Nov. 30. The proposed FTC rule seeks to require dealers to provide the full purchase price up front and obtain written consent from consumers for add-on products, among other changes, John Redding , partner at Alston & Bird , told Auto Finance News . “The proposed rule has received significant pushback from dealers and Congress, who argue it will fundamentally change the car buying process, making it more difficult and confusing for consumers to buy a car,” Redding said. If the rule is implemented, the changes could have a substantial impact on auto dealers and lenders, Jason Bichsel , member at McGlinchey , told AFN . “One of the challenges that our industry always has is when you buy a retail installment contract from a dealer, you're subject to the FTC ,” he said. “You could be purchasing claims that the dealer misrepresented some element of the transaction to the consumer.” Burden on the lender Auto lenders must ensure that contracts properly disclose fees and that fees are being assessed in line with the language included in the contract signed by the consumer, Husch Blackwell’s Kruse said. “That's the best you can do; it may still catch attention from a regulator given what we're seeing them focus on and the litigation that's coming out,” she said. Lenders must also be aware of fees associated with third-party providers such as payment processors, Raymond Naples , in-house counsel at Santa Ana, Calif.-based subprime auto lender Veros Credit , said at the summit . “You have systems that consumers use [to make payments] that they pay a fee which is not within the finance company’s control,” he said. “If you’re going to use payment processors that can charge a fee to consumers, disclose that.” Regulators have made clear that lenders are responsible for managing the vendors they use and ensuring practices are compliant, Mark Edelman , chair of the consumer financial services compliance practice at McGlinchey, said at the summit . For example, the CFPB has taken the stance that if auto financiers miscalculate refunds for add-on products such as Guaranteed Asset Protection, the servicers have engaged in an unfair act or practice, according to the bureau. “The latest supervisory highlights put the burden on the financial institution to check the math of the third-party vendor who was calculating the [add-on product] refund,” Edelman said.

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