3 elements latest CFPB material says about add-ons
FNI Inc. president David Bafumo focused his latest industry recommendations by plucking relevant material pertaining to add-on products out of the 54-page addition to the Supervisory and Examination Manual the Consumer Financial Protection Bureau released when it established its final “larger participant” rule earlier this month.
Bafumo broke down the CFPB’s latest regulatory offerings that were connected with add-on products into three segments, including:
— Scope of product authority
— Product examination specifics
— Service provider oversight
“The newly updated examination procedures provide great insight into the bureau’s thinking about auto finance add-on products, settling some lingering industry speculation about the regulatory spotlight on add-on products and raising new ones,” Bafumo said in his latest FNI newsletter.
Scope of product authority
Bafumo explained that many operations in the product industry have long maintained the bureau has little or no authority to directly regulate product providers or administrators.
“That may be true, just as the bureau may not directly supervise automotive dealers,” he said. “In reality though, that has never been the issue for auto finance providers. The real issue is whether and how the bureau intends to hold auto finance companies responsible for how products are financed and sold in conjunction with an auto loan.”
Bafumo acknowledged there might be executives and managers not convinced about the CFPB’s intentions coming out of the June 2013 consent orders the bureau reached with U.S. Bank and Dealer Financial Services. He recapped the CFPB held both entities responsible for how GAP and vehicle service contracts were sold to consumers.
According to the new examination procedures, the CFPB spells out three types of “ancillary products and services” that are specifically subject to review in conjunction with an auto finance company examination. That group includes:
— GAP insurance
— Extended warranty or vehicle service contract
— Vehicle add-ons.
Regulators define these products as “back-end products … (and) other pieces of equipment or finishing items that can be purchased with the vehicle such as Lo-Jack systems, (VIN) etching (anti-theft precaution), and paint protection.”
In addition, Bafumo pointed out the first two examination procedures in the CFPB’s optional product section name the following products as examples of optional products and services subject to the exam process:
— Biweekly payment plans
— Payment protection
— Credit protection
— Extended warranties
— Debt cancellation
— Debt suspension.
Bafumo also mentioned the optional products section answers “another big scope question.”
He added, “Does this product review apply for companies offering products of their own or for any company who provides additional financing for optional add on products?”
In answering his own question, Bafumo returned to the CFPB’s material, which states, “Determine whether the servicer (entity being examined) offers or finances optional products or services.”
With emphasis added, Bafumo said, “There is no distinction for a finance company that offers products directly or one that merely provides additional financing for optional products.”
Product examination specifics
Once it has been determined optional products are at issue, Bafumo indicated that CFPB examiners are instructed to investigate the following:
— How optional products are “monitored” overall
— Monitoring and timeliness of product cancellations
— Involvement of a product service provider
— How the finance company ensures products are optional
— Review of product marketing materials
— Prominent disclosure of product cost and terms
— Explicit consumer authorization to purchase
— Specific requirements for bi-weekly pay plans
Bafumo acknowledged there is not a lot of new information here.
“Previous guidance bulletins and multiple enforcement action consent orders in the add-on product space have already identified most of the above, and hinted at some, like a focus on product cancellation issues,” Bafumo said. “And while an itemized instruction point for the marketing of bi-weekly pay plans is notable, the bureau’s interest in that particular product/service is well documented.
“What’s missing from the exam specifics is actually what’s most interesting,” he continued. “While the procedures clearly include products that are ‘offered or financed’ and offers specific direction for examining call centers, Web-based marketing and third party ‘service providers’ of products for a supervised entity, the fact that the vast majority of add-on products are actually sold by automobile dealers is curiously absent.
“In fact the words ‘auto dealer’ do not appear at all in the entire exam section for optional products,” Bafumo went on to say.
The FNI president wondered himself how that situation can be, especially since the CFPB knows dealers sell add-on products offered by or financed by (or both) auto finance companies.
Bafumo even pointed out that the bureau’s acknowledgement appears in the first sentence of the ancillary product and services definitions, which state, “In addition to the actual vehicle, auto dealers and auto financers offer ancillary services and products at the time of vehicle purchase.”
As a result, Bafumo made this assessment.
“One possibility is that the CFPB is signaling an intention to consider auto dealers who originate retail installment contracts in indirect auto finance transactions to be finance company ‘service providers’ as defined in the bureau’s original service provider Bulletin 2012-03,” he said.
Service provider oversight
Signaling of intentions or not, Bafumo contends the latest regulatory material from the CFPB sets forth the examination topics relating to service provider oversight. Those subjects include:
— Controls for selecting and monitoring service providers
— Ensure service providers are licensed or registered (as applicable)
— Initial due diligence on service providers before entering agreements
— Monitoring of screening, hiring and training of service provider employees
— Documentation of audits of service providers’ activities and remediation of concerns
Bafumo explained the examination instructions for service provider oversight include several noteworthy items and valuable guidance.
“First for example, a specific standalone directive to ensure service providers are properly ‘licensed or registered to the extent required, interestingly, has not been previously singled out in service provider guidance,” Bafumo said. “Perhaps another clue about bureau intentions about persons or entities that actually do the selling of add on products offered or financed by supervised companies.
“Secondly, examination inquiries into service provider due diligence are directed specifically at ‘prior regulatory compliance history’ and ‘existence and extent of any prior enforcement actions against the service providers,’” he continued.
What might be next
Bafumo also mentioned the new exam procedures include some “odd” language choices by the bureau. For instance, he noted the repeated reference to GAP as an “insurance policy” and then what appears as a careful avoidance of using the “I-word” (insurance), when it comes to “credit protection” and “payment protection.”
Bafumo said, “Some might argue sloppiness or a misunderstanding of industry products or procedures. I suggest the opposite and that the bureau’s words are carefully chosen.
“While some in the insurance industry cling to a hope that the ‘business of insurance’ remains hands-off to the bureau and federal regulators by specific exclusion in Dodd-Frank and the now seventy year old McCarran–Ferguson Act (which arguably would not apply in the context of GAP since most states have decided not to regulate GAP as insurance),” he continued, “I believe the inclusion of GAP “Insurance” by name and “credit protection” here are clear signals of the bureau’s intention to hold supervised entities ultimately responsible for UDAAP violations tied to optional add-on products, regardless of insurance classification, when they are connected to an auto finance transaction.”