The Consumer Financial Protection Bureau indicated that it took a deep look at what it called “unfair and deceptive practices” regarding rebates for certain ancillary products after examining the protocols executed by at least one captive finance company.
CFPB officials recapped through its latest Supervisory Highlights that vehicle buyers sometimes also finance the purchase of ancillary products such as an extended warranty when they take delivery and enter into a retail installment sales contract. Then as finance companies know, if the contract holder later experiences a total loss or repossession, the servicer or contract holder may cancel such ancillary products in order to obtain pro-rated rebates of the premium amounts for the unused portion of the products.
In these situations, the bureau acknowledged the rebate is payable first to the servicer to cover any deficiency balance and then to the borrower.
“Generally, the servicer contractually reserves the right to request the rebate without the borrower’s participation, although it does not obligate itself to do so. The borrower also retains a right to request the rebate,” the CFPB said in the latest Supervisory Highlights.
During its examinations of extended warranty products and policies used by this unnamed captive, the CFPB found the amount of a potential rebate for the products depended on the number of miles driven. The bureau said its examiners observed instances where one or more servicers used the wrong mileage amounts to calculate the rebate for extended-warranty cancellations.
“For some borrowers who financed used vehicles, the servicers applied the total number of miles the car had been driven to calculate rebates,” the CFPB said. “However, the servicer(s) should have applied the net number of miles driven since the borrower purchased the automobile.
“The miscalculation reduced the rebate available to certain borrowers and led to deficiency balances that were higher by hundreds of dollars. The servicer(s) then attempted to collect the deficiency balances,” the bureau continued.
“One or more examinations found that servicer attempts to collect miscalculated deficiency balances were unfair,” the CFPB went on to say. “Collecting inaccurately inflated deficiency balances caused or was likely to cause substantial injury to consumers. And these borrowers could not reasonably have avoided collection attempts on inaccurate balances because they were uninvolved in the servicer’s calculation process.”
The CFPB explained the injury of this activity is not outweighed by the countervailing benefits to consumers or competition. For example, officials emphasized the additional expense the servicers would incur to train staff or service providers to ensure that refund calculations are correct would not outweigh the substantial injury to consumers.
In response to these findings, the CFPB said the finance companies conducted reviews to identify and remediate affected contract holder based on the mileage they drove before the repossession or total loss of their vehicles. The bureau added that the finance companies also began to verify mileage calculations directly with the issuers of the products subject to rebate.
Additionally, the bureau pointed out its examiners observed instances where one or more servicers did not request rebates for eligible ancillary products after a repossession or a total loss. The regular indicated that the finance company then sent these contract holder deficiency notices listing a final deficiency balance purporting to net out available “total credits/rebates,” including insurance and other rebates. The notices also stated that future additional rebates may affect the amount of the surplus or deficiency, but that “at this time, we are not aware of any such charges.”
The CFPB said that the servicers’ records contained information that it had not sought the eligible rebates. Examinations showed that the average unclaimed rebate was roughly $1,700.
“One or more examinations identified these communications as a deceptive act or practice. The deficiency notice misled borrowers because it created the net impression that the deficiency balance reflected a setoff of all eligible ancillary-product rebates, when in fact, the servicers’ systems showed that it had not sought one or more eligible rebates,” the CFPB said.
“It was reasonable for consumers to interpret this deficiency balance as reflecting any eligible rebates because the servicers were both contractually entitled and financially incentivized to seek and apply eligible rebates to the deficiency balance. And the misrepresentation was material to consumers because they may have pursued rebates on their own had the servicers not represented that there were not additional rebates available,” the bureau continued.
“In response to these findings, the servicers conducted reviews to identify and remediate affected borrowers. The servicers also changed deficiency notices to clarify the status of eligible ancillary product rebates,” the CFPB concluded.