FNI’s 3-Point Breakdown of CPFB’s First Auto Finance Enforcement Action
RALEIGH, N.C. — Last week's enforcement action by the
Consumer Financial Protection Bureau against U.S. Bank and Dealers' Financial
Service is pushing service providers in the vehicle financing industry to
sharpen their protocols to avoid a similar fate.
For example, David Bafumo, president of FNI Inc. — a
collateral protection and consumer benefit program product and compliance
agency for auto finance providers — made a series of recommendations based on
the punishment stemming from the Military Installment Loans and Educational
Services (MILES) auto loans program orchestrated for more than 10 years by U.S.
Bank and Dealers' Financial Services. The firms are being ordered to reimburse
service members approximately $6.5 million in connection with loans secured
through the program.
In his company's July newsletter shared with SubPrime Auto
Finance News, Bafumo emphasized that the CFPB "has plainly settled the question"
of whether F&I products such as GAP insurance and vehicle service contracts
are indeed "add-on products."
Bafumo acknowledged that some auto finance operation
believed enforcement actions in connection to these kinds of products were
limited to credit card direct marketing programs or were exempt from bureau
oversight as "insurance" products.
However, for the purpose of the order against U.S. Bank,
Bafumo explained that add-on products are defined as:
—Included in the vehicle financing
—Selected, recommended, marketed or effectively required as part of the program
by the auto finance company
Second, Bafumo pointed out the order against DFS identified
telephone scripts, websites, product brochures and dealer presentations as the
types of product marketing scrutinized in the investigation.
Then, Bafumo noted the bureau specified statements and
marketing practices regarding product cost and scope of coverage that were
considered deceptive and misleading:
—VSC Brochure and Contract: Contained subheadings listing
vehicle systems (such as brakes, engine, transmission, etc.) without stating
important parts that were actually excluded.
—VSC Brochure: Coverage would add "just a few dollars a
month" to monthly payment while the CFPB calculated an average add of $40 per
—VSC Brochure: Six-point font disclosure referring to
contract for coverage details insufficient and service contract the only place
exclusions were explained.
—GAP Phone Marketing: "Add just a few cents to your car payment"
and "only a few pennies a day," while the CFPB calculated an average of $12.55
a month or $.40 a day.
—VSC Phone Marketing: "You would never think about not
insuring your home or your health. However, the likelihood of an auto claim is
much higher." And, "At MILES we don't want you to have to decide between fixing
your car and paying your bills."
In light of all of those points, Bafumo said, "The bureau
appears to rely solely on the allegedly deceptive language of the product
brochures and contracts for its finding that dealer presentations to consumers
"No examples of deceptive language are specified in website
marketing although the existence of a website is referenced several times. FNI
assumes the website incorporated product marketing materials," he continued.
What The Action Could Predict About the Future
Bafumo indicated the CFPB's settlement terms with DFS offer
useful insight into the agency's intent for add-on products.
"Other than the steep financial penalty, the centerpiece of
the order is a mandatory product disclosure form to be provided by DFS' selling
dealer network to customers who are presented with add-on products," Bafumo
Going forward, Bafumo explained this disclosure form must
—Total cash price of the products
—Products are optional
—Customer does not have to finance
—Difference between cash & finance price
—Product is cancellable
—Clearly state all coverage terms
"Note that the CFPB's calculation of product monthly and
daily cost for purposes of determining ‘deceptive practice' includes the impact
of interest rate over the term," Bafumo said.
"This is a significant departure from the traditional auto
F&I product training world and current auto finance practice, where product
cost is typically represented in a single retail price, like the car being
financed, and monthly or daily cost in dollars or cents by dividing solely by
the loan term," he continued.
"This change to the rules of product presentations
demonstrates the higher level of transparency demanded by the CFPB and is
further evidence of the distinction between traditional auto F&I product
training and what is required today for compliance," he went on to day.
Recommendations for Practical Impact
Bafumo wrapped up his latest newsletter by offering three
takeaways for how finance companies should plan their campaigns going forward. They
—Product benefit and exclusion transparency is
—CFPB has changed the rules on calculating and explaining
preferred product cost.
—Lender provided dealer product marketing training is
Bafumo also suggested non-cancellable optional products may
be disfavored by the bureau.
"A little bit of good news: despite the CFPB's ‘anti-profit'
reputation, the MILES products retail pricing and underwriting terms were not
directly attacked," Bafumo said.
"It is worth noting however that MILES GAP retail pricing at
‘the lesser of state required limits or $495' according to the order, is quite
modest in comparison with the terms of other auto finance providers," he
"In addition, backing out of the CFPB's interest-including
calculation of an ‘average cost,' the actual VSC retail price falls in the
low-to-mid range versus other finance programs," Bafumo went on to say.
For more details of FNI's services, visit www.myFNI.com.