A well-known advertising campaign asks consumers “What’s In Your Wallet?” Given recent Consumer Financial Protection Bureau (CFPB) activities, lenders might feel the Bureau is pushing a variation on this theme – “What’s In Your Deal Jacket?”
The CFPB is increasingly holding auto lenders accountable for mishandling contractual provisions in their loans, especially if it involves so-called “junk fees.” This includes commitments made to consumers in supplementary agreements like GAP waiver provisions, vehicle service contracts, and other voluntary protection products.
Consider the following: The CFPB has imposed supervisory and enforcement penalties against auto lenders and servicers for:
- Overcharging late fees in excess of amounts permitted by the underlying contract;
- Miscalculating refunds for add-on products after early loan termination;
- Failing to provide refunds for add-on products where loan is paid-off early or otherwise terminates early;
- Double billing for force-placed insurance or collateral protection insurance;
These penalties come from not fulfilling the terms of the loan or having unfair contractual provisions.
To add fuel to the fire, the CFPB recently issued a circular (2024-03) on unenforceable terms in contracts.
The Circular advises lenders that it’s a potentially deceptive practice under the Consumer Financial Protection Act (CFPA) for a lender to add unlawful or unenforceable terms and conditions in consumer contracts.
Under the CFPA, a representation, omission, act or practice is deceptive when:
- It misleads or is likely to mislead the consumer;
- The consumer’s interpretation of the representation, omission, act, or practice is reasonable under the circumstances; and
- The misleading representation, omission, act, or practice is material.
The Circular notes that a lender does not get a safe harbor by using exculpatory language in the contract such as “except where prohibited by law.” In the CFPB’s views, the damage is already done because the misleading provisions might discourage consumers from exercising their legal rights in the event of a dispute.
These new deception risks in contracts are not hypothetical. In 2020, the CFPB issued a consent order against an auto lender, in part, for allegedly making a deceptive statement in a contract that appeared to limit a consumer’s bankruptcy protections, even though such limits are generally not permitted as a matter of public policy.
The trend line seems pretty clear. Regulators are pushing lenders to take more accountability for the contents of their deal jackets. With this new CFPB circular, lenders may wish to look for impermissible terms not only in the loan itself, but in supplementary agreements.
