The Consumer Finance Protection Bureau’s latest Supervisory Highlights focused exclusively on the auto finance industry detailing UDAAPs, including aftermarket product-related UDAAP violations, across the spectrum of consumer experiences with the auto finance industry. In this alert, we’re focused on abusive practices with regards to F&I products and outlined below is a table with the violations in question, remediation measure(s) directed by the bureau and measures already afforded to F&I Sentinel clients.
Aftermarket Product-related UDAAPs, Bureau Directives & F&I Sentinel Measures
| UDAAP | Bureau-directed Measure(s) | F&I Sentinel Measure(s) |
|---|---|---|
| Subprime auto finance lenders committed an aftermarket product-related UDAAP when the service providers they contracted with to market refinance loan options to existing borrowers and prepare origination documents failed to disclose the optional nature of the F&I product included in and financed as part of the refinanced loan. | 1. Cease collecting and retaining amounts for optional products that consumers did not agree to purchase or that they agreed to purchase based on misrepresentations as to products’ voluntary nature or cost. 2. Update and revise language in contracts with service providers to set forth clear expectations about the service providers’ compliance with and consequences for failure to comply with applicable Federal consumer financial law. 3. Enhance their risk-management program to mitigate unwarranted risks to consumers from service providers and to ensure that service providers understand their consumer compliance responsibilities and comply with Federal consumer financial laws. 4. Conduct second-level reviews of all retail installment contracts prior to funding. | Lender clients leveraging CITADEL® for managed originations are protected from this through: A. The Minimum Business Requirements [MBRs] document co-developed by our Concierge Compliance Team and Lender representatives. B. The Product Submission Agreement [PSA] executed in favor of the Lender by add-on providers with clear protocols and rules of engagement between Lenders and the add-on product providers ensuring that their treatment of the Lender and its consumers aligns with the core values of the Lender. C. All F&I products funded by Lender clients and associated marketing materials are pre-vetted [aka credentialed] by the Concierge Compliance Team against the Lender’s MBRs and all applicable state and federal requirements. |
| Lender financing of void F&I products such as GAP products included with the financing of salvage vehicles. The consumer paid for the GAP coverage but derived no benefit. | 1. Develop and implement policies and procedures to conduct title history searches to determine the eligibility of the vehicle for F&I products. | A. This is one of the broad range of areas addressed by each Lender client’s MBRs and PSAs. |
| Failure by the lender to identify the F&I product(s) payee [or bought retail installment sales contracts that did not identify] is a violation of certain provisions of Regulation Z. | 1. Implement practices that will bring all retail installment sales contracts into compliance with Regulation Z. | A. F&I Sentinel Lender clients leveraging CITADEL® for managed originations always have access to the correct name of the F&I product administrator, down to the state level, to ensure the correct payee is listed on the retail installment sales contract. |
| Requiring consumers to make two visits to the dealership — once to speak to the general manager about the F&I product cancellation and the second time to pick up the refund check — triggered a lender an aftermarket-related UDAAP violation. | 1. Update cancellation procedures to be consistent with contractual terms | A. This is one of the areas addressed by each Lender client’s MBRs and PSAs. |
| Denial of pro rata refunds by aftermarket product third-party administrators of products that allow for refunds of this nature within the first year triggered a UDAAP for the lender that financed the retail installment sales contract. | 1. Update cancellation procedures to be consistent with contractual terms. | A. F&I Sentinel mitigates risk in this area through MBRs and PSAs. B. Through these two instruments, lender clients have the option to cease financing products from companies that don’t prioritize regulatory compliance or consumer interests. |
| Failure to ensure consumers in all states received refunds on unearned premiums for F&I products when a loan is terminated early due to early payoff, repossession, or total loss. | 1. Implement processes to ensure consumers receive refunds of unearned premiums for ancillary products in all states, including those that do not require it. 2. Identify and remediate consumers from all state who did not receive their refunds. | A. Lender clients leveraging our managed cancellations Express Recoveries platform receive refund data across the full spectrum of F&I products in all 50 states. B. Lender clients leveraging managed cancellations via CITADEL® and its FAIRRCalc quote engine receive near real-time refund quotes for GAP waiver and CLAH products in all 50 states. |
| Providing inaccurate product refund amounts after the early termination of loans also triggered an aftermarket product-related UDAAP. The bureau cited: 1. Use of incorrect data values in calculating refund amounts and, 2. The reliance on third-parties such as product companies that used refund calculation methods that were not consistent with the terms of the F&I product contract as sources of the error. | 1. Remediate consumers. 2. Implement policies and procedures to ensure accurate calculations. | A. F&I Sentinel offers the only F&I product refund solution in the industry that validates refund amounts against the provisions of the F&I product contract. |
| Failing to provide consumers their refund for unused portions of F&I product premiums also triggered a lender UDAAP. | 1. Implement policies and procedures to ensure accurate and timely refunds. | A. F&I Sentinel offers the only F&I product refund solution in the industry that validates refund amounts against the provisions of the F&I product contract and provides near real time refund quotes for GAP waiver and CLAH products. |
Looking Ahead in Avoiding Aftermarket Product-related UDAAPs
F&I Sentinel’s lender and product company clients leveraging CITADEL® are mostly insulated from the aftermarket product-related UDAAPs outlined above in the origination and funding or ‘upstream’ process. However, the fluid nature of the regulatory landscape and the continued scrutiny on refunds call for constant rigor and vigilance. In prior years, regulators required lenders to provide refunds to consumers but if this latest Supervisory Highlights is any indication, we believe that lenders’ ability to ‘VALIDATE’ will be central to keeping in compliance at the next exam. To be in compliance, lenders must validate an add-on product for compliance before funding. To be in compliance, lenders must have the requisite data to validate refund amounts for accuracy.
About F&I Sentinel
F&I Sentinel is the industry’s trusted provider of managed compliance solutions – from funding to servicing to refunds. With a repository of more than 120,000 F&I product forms, our tech-enabled Concierge Compliance Team helps auto lenders navigate the regulatory landscape surrounding the financing and resolution of voluntary protection products. Schedule a no-obligation meeting with a member of Concierge Compliance team today.
The information provided in this post does not, and is not intended to, constitute legal advice; instead, all information, content, and materials referenced are for general informational purposes only. Readers should contact their attorney to obtain advice with respect to any particular legal matter.
