By Rick Hackett, former CFPB Assistant Director and F&I Sentinel Advisory Board Member
I recently spent some time with Paul Metrey of NADA and John Culhane of Ballard Spahr discussing the FTC’s proposed rule on Add-On Products in auto finance. You can hear that discussion in Ballard’s latest podcast here.
Harking back to my time as Assistant Director at CFPB with jurisdiction over auto finance, my focus in this discussion is the significance of the FTC proposal for auto lenders, and the underappreciated exposure to Add Ons that lenders face today. Go to minute 35:45 to hear this discussion.
The gist is as follows:
- The FTC proposal creates unquantifiable and uncontrollable risk to lenders because of the FTC Holder Rule: any problem under the rule created by dealer activity would pass through to the lender.
- The lending industry asked the FTC to create a “face of the contract” safe harbor for lenders (see, e.g., TILA) such that any violation not apparent on the paperwork passed to the lender by the dealer would not affect the lender’s rights.
- That safe harbor may be mined. Many lenders don’t see the face of even their own loan contracts. Specifically, the GAP waiver, which becomes part of the finance contract if the dealer sells one, is neither reviewed in advance nor is the complete GAP waiver captured by the deal jacket. This means the lender can’t know its servicing obligations under the GAP waiver contract, let alone whether the contract complies with applicable state and federal requirements.
- CFPB has called out this servicing issue in recent Supervisory Highlights here; and, most recently, in sanctioning a large auto lender for tens of millions of dollars
- The Supervisory Highlights and the recent consent decree make clear CFPB’s position: if state law creates a consumer right for a financial adjustment in an Add On contract, it is a federal UDAAP under Dodd Frank to fail to reflect that financial right in loan prepayments, post-repossession collections, and any other situation where a change in the contract duration creates a change in the value of the Add On product. This is true not only for GAP but also for credit life/accident/health and, in some cases, in VSCs.
The message to lenders: know precisely what you are financing when buying contracts that include Add Ons.
