BCFP Fines Auto Lender for GAP Marketing Practices
Michael Aphibal and Arshawn Teymoorian
11/30/18—Last week, the Bureau of Consumer Financial Protection (“BCFP” or “Bureau”) announced a settlement with a Dallas-based consumer financial services company. The company agreed to pay a $2.5 million fine and $9.3 million in restitution to auto loan borrowers to settle allegations that it deceptively marketed an add-on GAP product to its auto loans. The Bureau also alleged that the company misled consumers about the terms of a loan extension program, where the company would allow borrowers to pause payments on their auto loans for several months.
GAP is a product that a borrower may purchase as an add-on to an auto loan. It protects a borrower from having to make auto loan payments after a vehicle is involved in an accident or is stolen and is declared a total loss. If the collision insurance payout for the vehicle is not enough to cover the current balance of the auto loan, the GAP product would typically extinguish any remaining debt.
The central thrust of the Bureau’s allegations revolved around a 125% loan-to-value GAP benefit limitation. If a borrower obtained an auto loan with a loan-to-value ratio higher than 125% at the time the loan was made, then any benefit provided by the GAP product would be reduced by the amount that exceeded 125% of the vehicle’s value. The Bureau alleged that the GAP marketing materials, which stated that GAP would provide “true full coverage” and “GAP takes care of the rest,” were deceptive in light of the 125% limitation.
The Bureau also took issue with the company’s loan extension program. Under this program, the company permitted borrowers to pause their loan payments for several months; interest would continue to accrue during the loan extension. The company explained to borrowers that their payments during the extension period would be “moved to the end of the loan” and that the extension would “extend the maturity date of [the borrower’s] Contract for the same number of months” (emphasis added).
The Bureau alleged that these statements misled borrowers because they did not indicate how payments would be allocated between principal and interest after the borrower resumed making payments. Furthermore, because of the way the company allocated payments, the loan maturity date ended up being extended longer than the number of months that the borrower stopped making payments.
The Bureau’s allegations that the company engaged in deceptive practices in relation to GAP products or to loan extensions are nothing the industry hasn’t seen before.
However, what’s new is the marketing language that the Bureau found fault with. The Bureau has never before gone after a company for its marketing language in relation to a loan-to-value limitation in a GAP product. Similarly, we have never seen the Bureau target language that explains to borrowers how a debt extension or suspension product works.
The Bureau first dived into regulating debt protection products, such as GAP, in 2012 under then acting Bureau Director, Richard Cordray. During that time, the Bureau brought a number of enforcement actions against lenders offering add-on products. As a result, many financial services companies modified their marketing materials to ensure that consumers could not be misled. Common changes in the auto lending industry were to soften the language from phrases such as “GAP will cover all the difference in what you owe” to “GAP helps pay the difference in what you owe.” These types of changes were widely adopted in the industry.
This most recent consent order illustrates that although Mulvaney’s BCFP may be more reserved when it comes to pursuing novel enforcement theories, it is still willing to impose big fines when enforcing consumer protection laws under traditional UDAAP theories. Moreover, the BCFP, under Mulvaney’s leadership, is willing to charge companies for UDAAP violations due to a specific practice, even if that specific practice had not been found to be a UDAAP violation in the past. Accordingly, companies should periodically review their advertisements, call scripts, and other marketing materials with legal counsel to ensure compliance with consumer protection laws.