On January 4, the CFPB and the New York State Office of the Attorney General filed a complaint against a prominent subprime auto lender in the Southern District of New York. The complaint alleges that the auto lender misrepresented costs in loan agreements and tricked customers into high-cost loans on used cars in violation of the CFPA and New York usury limits. Specifically, the complaint alleges that the auto lender harmed consumers in the following ways:
- The auto lender’s loan agreements state that consumers would pay interest at an average of 22% APR. The true cost of credit offered is far higher, however, because the auto lender’s business model urges dealers to increase the prices of vehicles sold, thus inflating the principal balances of consumer loans.
- The auto lender provided loans without regard to whether the borrower could afford them, predicting for almost 40% of loans that it would not be able to collect the full amount financed. The auto lender ensured its own profits even when borrowers were unable to pay in full by engaging in aggressive debt collection methods.
- The auto lender profited by incentivizing dealers to add extra products to loans to the tune of approximately $250 million in revenue in 2020, without regard for whether customers were being misled into thinking the add-on products were required.
The complaint requests that the court permanently enjoin the auto lender from engaging in the alleged illegal practices and order it to reimburse harmed customers, pay back wrongfully earned gains, and pay various civil penalties. The auto lender agreed to pay $27 million to settle a similar lawsuit brought by the Massachusetts Attorney General last year.
Putting it into Practice: The rising cost of vehicles in recent years has spurred a corresponding increase in consumer borrowing, making auto loans the third largest category of outstanding consumer debt behind only mortgages and student loans. The CFPB and other regulatory authorities have accordingly made monitoring the auto lending market a high priority (see previous blog posts here, here and here). To avoid becoming the subject of a similar enforcement action, auto finance companies should review their consumer lending practices and ensure they heed recent CFPB and state regulator warnings regarding predatory auto lending and obligations to monitor dealer practices (see recent CFPB blog posts addressing best practices for consumer auto lending here and here).