CFPB warns against illegal auto loan practices — here’s how to spot them

The Consumer Financial Protection Bureau (CFPB) is cracking down on the illegal practices in the auto lending industry it detailed in a recent publication of its Supervisory Highlights. The report broke down common unlawful practices, such as lenders providing inaccurate loan details or unfairly pushing borrowers to purchase add-ons. Such practices may be more common among subprime lenders. 

Luckily, by paying careful attention to the fine print and monitoring your payments, you can avoid many of these shady practices — or at least spot and address them early.

How to avoid common illegal practices

Previously, the CFPB has taken companies like Wells Fargo and Toyota Motor Credit to task for illegal practices like withholding refunds and wrongful fees. Now, the CFPB is taking a closer look at auto finance companies — and especially subprime lenders — to ensure borrowers are not being exploited.

This is especially important because vehicle purchases are so costly. “Borrowing to buy a vehicle is one of the largest sources of household debt for American families, and many deal with unnecessary costs and challenges paying for their car,” Rohit Chopra, CFPB director, stated in a CFPB release. 

Chopra explained that the CFPB has a duty to take action against lenders that overcharge and repossess even after borrowers have made payments. While the CFPB’s work helps mitigate risks and address wrongdoing by specific lenders, it is important for borrowers to look out for common illegal lender practices. 

Sneaky add-on products  

An add-on product is an extra feature that you can finance with your auto loan. These tend to be options such as gap insurance, tire and wheel protection, or other extended warranties. They frequently offer low value compared to their cost. Because they are “added on” to your balance, you pay interest on them, resulting in a higher monthly and overall cost.  

The CFPB found that certain subprime lenders charged borrowers for add-ons that they did not agree to. In addition, lenders continued to charge borrowers even after the loan was terminated. More troubling, servicers required borrowers to come in person two separate times to the dealership to cancel these products. The CFPB ordered the auto-finance companies to stop these practices and make clear to consumers that add-ons are optional. 

Wrongful vehicle repossession 

Borrowers who fail to keep up with monthly payments or follow requirements outlined in the auto loan agreement may face legitimate vehicle repossession. However, the CFPB found some servicers taking advantage of this process and wrongfully repossessing borrowers’ vehicles. 

Even after borrowers made necessary payments, secured loan deferment or modification — all moves that prevent or delay repossession — servicers still took their vehicles. The report also found that vehicles were taken even when the lender lacked a valid and documented lien. 

The CFPB requires servicers to properly document liens before repossession.

Misallocated loan payments 

When a borrower makes an auto loan payment, the payment should be applied to the loan’s interest and principal as laid out in the loan agreement. The CFPB found that some servicers apply loan payments improperly, resulting in borrowers owing unfair fees. 

One example was payments being applied to existing late fees rather than the loan principal and interest. This resulted in borrowers stuck with late fees on their next owed payment as well, even if they paid on time. The CFPB ordered these servicers to fully refund impacted accounts. 

Inaccurate rate disclosures

When comparing auto loan rates, borrowers should be able to trust a lender’s word that they could qualify for an advertised rate. CFPB examiners found that this is not always the case. Sometimes, lenders mislead borrowers about what rates they could qualify for.  

For example, borrowers would be told they could qualify for rates “as low as” a certain percentage when in practice, the lender’s lowest offered rates were at least double the advertised one. The CFPB has ordered lenders using these tactics to stop using misleading marketing and “bait and switch” marketing tactics. 

False credit reporting 

Making timely payments on an auto loan should help most borrowers build a better credit score and history, but the final practice the CFPB outlined puts borrowers’ credit scores at risk. Lenders put inaccurate loan information on borrower credit reports, potentially impacting thousands of consumers. Servicers would outline incorrect loan payment dates or false loan payoff amounts. 

The CFPB also noted instances of lenders using unreliable computer systems that were unable to log auto loan information accurately. Lenders are now reviewing and updating the information for impacted borrowers.