Lawyer: CFPB on ‘Warpath’ for Auto-Lending Add-On Products

Auto lenders are under the Consumer Financial Protection Bureau’s microscope, as the agency issued subpoenas regarding the sale of extended warranties and other financial products, people close to the matter said in a published report.

Lenders worry the investigation could put the brakes on strong auto-loan activity. Any impending regulation could affect millions of borrowers for new and used vehicles as add-ons, like extra insurance, are widely used methods car dealers use to increase profits. Nearly three-quarters of all new-car sales are financed or include add-on products, according to the National Automobile Dealers Association. 

Watchdogs, however, are looking into whether prices and terms are sufficiently divulged, and the CFPB has similarly penalized credit card companies for using marketing practices that may be misleading to push extra products such as identity-theft protection.

At a panel discussion at George Mason University in Fairfax, Va., yesterday, Jon Seward, deputy chief of the Justice Department’s housing and civil-enforcement division, said the department is examining auto dealers who provide loans to borrowers with bad credit and charge higher rates. The department, Seward said without being more specific, plans to take action this year.

These are regulators’ latest attempts to restrain what they see as dubious auto lending practices. In March, the CFPB urged lenders to overhaul deals that allow auto dealers to raise interest rates on low-credit customers, which it says is discriminatory against Hispanics and African-Americans. Lenders and dealers then share proceeds from the extra interest, which can be as much as 2.5% of the loan amount, according to financiers and dealers.

Both lenders and dealers debate such discrimination, and say that any restrictions on auto lending could derail a lending-industry bright spot during a period that lenders are battling low interest rates and loan demand. The Federal Reserve Bank of New York reported that outstanding auto loans, which totaled $783 billion at yearend 2012, were the highest in roughly four years, rising 10% since the end of 2010.

Add-on products are generally included in a car’s total purchase price, and account for a major part of dealer revenue. “It is very clear that these products are optional,” said NADA’s Senior Director of Legislative Affairs and Communications Bailey Wood.

Recently, the CFPB sent civil subpoenas to banks and captives that could result in civil charges and fines. The bureau asked dozens of questions and requested data on auto lending practices, including sales of warranties and insurance, according to Alan Kaplinsky, a partner at law firm Ballard Spahr LLP. “The CFPB is on the warpath when it comes to add-on products,” he added.

The agency has not determined if it will conduct regular examinations of captives — “Not yet,” Assistant Director Richard Hackett said during a compliance panel at the Auto Finance Risk Summit in Dallas this week — but it is able to fine them should it decide they have broken laws.