2023 Year in Review: Auto Loan Origination and Servicing

Looking Ahead to 2024

We anticipate that the CFPB will continue its attempts to combat illegal or junk fees in the auto market.

Auto lenders may be subject to exams and enforcement actions related to the newly issued Combating Auto Retail Scams Trade Regulation Rule (CARS Rule) which takes effect on July 30, 2024, assuming challenges to the rule are unsuccessful.

Key Trends From 2023

In 2023, Goodwin tracked nine publicly announced auto lending enforcement actions. This represents a marked decrease from the 13 actions tracked the previous year. Unlike in 2022, when the majority of actions were brought by state regulators, state and federal enforcement agencies were equally active in this pace during 2023. Though the number of actions decreased, the total amount enforcement agencies recovered in monetary relief and civil money penalties in 2023 was approximately $80 million — nearly double the amount recovered in 2022 ($48.3 million).

In the News

Throughout 2023, the CFPB continued to focus its supervisory and enforcement priorities on excessive fees and costs in connection with auto loans. Notably, as set forth in its summer 2023 “Supervisory Highlights,” alleged that CFPB examiners found violations including false and deceptive auto loan advertising, the charging of interest on artificially inflated loan amounts, and improper payment practices. The examiners’ efforts continued, as set forth in its fall 2023 “Supervisory Highlights,” by identifying unfair practices related to add-on products or failures to properly calculate or issue refunds.

Outside the CFPB, in May, the FTC asked for public comment on a petition for rulemaking related to so-called yo-yo financing, submitted to the FTC by the National Association of Consumer Advocates (NACA). Yo-yo financing occurs when “weeks or even months” after the consumer purchases a vehicle, “the dealer summons them with demands to change the credit terms (typically with terms that are less favorable), change the purchased vehicle, or unwind the deal completely.” In its petition, NACA asserted that dealers often include fine print in the sale and financing transaction documents that authorizes the dealer to make certain changes to those terms, depending on its ability to sell or assign the credit contract to a third party. While the comment period has now closed, it is unclear whether the FTC will take action to address NACA’s concerns beyond those protections for consumers already included in the Combating Auto Retail Scams rulemaking discussed below.

In December, the FTC announced that it had finalized its CARS Rule, which contains various requirements aimed at curtailing allegedly unfair or deceptive practices within the car buying and lending process, including bait-and-switch tactics and hidden charges. The rule prohibits auto lenders from misrepresenting material information related to the sale of a vehicle, including the costs or terms of financing a vehicle, and the costs, limitations, or benefits of any add-on product or service. The rule also requires lenders to disclose the total amount a consumer will pay for a financed transaction after making all payments as scheduled and prohibits lenders from charging consumers for add-on products that do not provide a benefit to consumers. This rule goes into effect on July 30, 2024. Two trade groups have already challenged the rule by filing a petition asking the U.S. Court of Appeals for the Fifth Circuit to vacate or modify the rule and stay its enforcement pending review of the petition on the grounds that the rule is arbitrary, capricious, an abuse of discretion, without observance of procedure required by law, or otherwise not in accordance with law.

2023 Enforcement Highlights

FTC and Wisconsin Reach $1 Million Settlement With Auto Financing Company Resolving Allegations of Discrimination and Unlawful Junk Fees

In October, the FTC and the state of Wisconsin filed an action against Rhinelander Auto Center Inc. and its affiliates for allegedly charging consumers up to thousands of dollars in junk fees and discriminating against Native Americans by charging them higher interest rates on purchases financed by companies that allow discretionary markups. In a proposed settlement that was filed simultaneously, the current owners of the companies agreed to cease the targeted practices, establish a fair-lending program, and pay $1 million in refunds to affected customers. Additionally, the former owners separately agreed to permanently wind down their business and pay $100,000 in refunds to affected consumers.

CFPB Enters Into Consent Order With Auto Lender for $60 Million

In November, the CFPB entered into a consent order with an auto lender, resolving allegations that the corporation engaged in unfair or abusive acts and practices in violation of the CFPA and violated the FCRA. According to the CFPB, the auto lender engaged in a series of unlawful practices, including preventing borrowers from canceling bundle packages, which ultimately led to elevated monthly car loan payments; withholding refunds or refunding incorrect amounts on bundled products; and knowingly furnishing false information to credit reporting agencies. Under the consent order, the auto lender agreed to pay $48 million to affected consumers and a $12 million penalty directed toward the CFPB’s victim relief fund.

CFPB and New York Attorney General Sue Auto Lender for Allegedly Issuing Unlawful Loans and Concealing Auto Loan Costs

In January, the CFPB and New York Attorney General’s Office initiated a joint litigation against an auto lender, alleging that the lender had engaged in abusive and deceptive acts and practices in violation of the CFPA and New York state law. Specifically, the complaint alleges that the lender marketed itself to consumers with limited credit options and used an underwriting algorithm that evaluated the return to the lender over the life of the loan rather than considering a consumer’s ability to repay. The complaint also alleges that the lender hid the true cost of credit and issued loans that exceeded New York’s 25% penal usury cap. The auto lender had previously entered into a $27 million settlement with the Massachusetts Attorney General’s Office in 2021 to resolve similar allegations. The U.S. District Court for the Southern District of New York stayed the case in August pending the Supreme Court’s ruling on the constitutionality of the CFPB’s funding mechanism.

Colorado Attorney General Settles With Two Credit Unions, Resolving Allegations of Impermissibly Retained Unearned GAP Fees

In January, Colorado’s office of the attorney general (AG) announced that it had entered into settlement agreements with Bellco Credit Union and Canvas Credit Union, resolving allegations that both lenders impermissibly retained unearned guaranteed automobile protection (GAP) fees in violation of Colorado GAP rules. Under Colorado law, GAP insurers are required to issue a refund to consumers for unearned fees or premiums paid for GAP protection when the loan is prepaid prior to maturity or when the vehicle is no longer in the consumer’s possession. Under the settlement agreements, Bellco Credit Union and Canvas Credit Union agreed to provide $1.4 million and $2.6 million respectively in refunds to consumers, and each agreed to pay $100,000 in costs to the Colorado AG.

Click to access all 12 chapters of our Consumer Financial Services 2023 Year in Review, including a market overview about the industry overall and chapters on 11 industry segments. 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.