Compliance Blog

At the end of February 2022, the Consumer Financial Protection Bureau (CFPB) released a compliance bulletin regarding the potential for illegal automobile repossessions, in violation of the Dodd-Frank Act’s prohibitions against unfair, deceptive, or abusive acts or practices (UDAAPs).  The bureau noted the COVID-19 pandemic’s effect on the auto market, which lead to markedly increased demand (and prices) for used vehicles.  Based on the high demand for used vehicles, the CFPB “is concerned that these market conditions might create incentives for risky auto repossession practices, since repossessed automobiles can command these higher prices when resold.”  To that end, the bureau published its guidance as a reminder of the potential UDAAP pitfalls that may arise in the repossession process.

Before moving into the content of the bulletin, I’d like to note that, in general, the actual repossession process is governed by contract law, as the right to repossess a vehicle arises from the contract (governed by state law) and the security interest lenders receive in exchange for the loan.  This post will not get into the specifics of how a credit union can or should repossess a vehicle; instead, it will discuss what a credit union can do to avoid UDAAPs during the process.

The CFPB opens the substantive portion of its compliance bulletin with a section on UDAAPs, and provides brief explanations of “unfair,” “deceptive,” and “abusive” acts or practices.  For a more in-depth look at UDAAPs, NAFCU published an Issue Brief on the topic in May 2021 that is worth the read.  The bureau then proceeds to provide examples of unfair, deceptive, and abusive acts or practices it has found in automobile repossessions.  The CFPB state that it “intends to hold loan holders and servicers accountable for UDAAPs related to the repossession of consumers’ vehicles.”

Examples of unfair or deceptive practices during the repossession process that the bureau has identified through its Supervisory and Enforcement work include the following:

Wrongful repossession of consumers’ vehicles

• Some servicers failed to prevent repossession after borrowers successfully completed a workout option to avoid repossession.  At least one servicer notified borrowers of its policy to not repossess if the borrower entered into an agreement to extend the loan, or promised to pay on a certain date.  The servicer then proceeded to repossess vehicles from borrowers who had entered into loan extensions or promised to pay, in contradiction of its policy. 
• The CFPB noted that these violations mainly occurred due to various human errors, such as incorrect coding of delinquencies, failure to cancel repossession orders, and failure to confirm that repossession orders were still active. 
• The bureau also found instances of repossession of vehicles subject to the Bankruptcy Code’s automatic stay barring collection activity, which includes repossession.

Representations of amounts owed

• The bureau found that servicers failed to provide borrowers with accurate amounts required to bring their loans current, resulting in a deceptive act or practice.  One servicer provided an amount due that was less than what was owed.  The borrower paid the insufficient amount, but the vehicle was subsequently repossessed, which would not have occurred if the correct information had been provided.

The CFPB also provided examples of unfair or deceptive practices that could lead to repossession:

Applying payments in a different order than disclosed

• At least one servicer listed its payment allocation on its website, then proceeded to apply the payment in a different order than disclosed.  The bureau found this act deceptive, even though the underlying contract “provided the servicer the right to apply payments in any order.”

Unlawful fees that push consumers into default and repossession

• One example of unlawful fees consists of a bank which operated its force-placed insurance program unfairly, by purchasing duplicative or unnecessary policies, and continuing to charge the borrower.  The additional policy charges resulted in fees which caused delinquency or default leading to repossessions.

The bureau also discussed unfair practices that resulted in illegal fees after repossession, such as charging illegal fees to borrowers for obtaining their personal property from repossessed vehicles, or continuing to charge for collateral protection insurance, even after repossession.

The bulletin wraps up with a section on the CFPB’s expectations, and a listing of items that could constitute UDAAPs in the repossession process.  Another list provides things credit unions can consider doing to avoid committing UDAAPs, such as reviewing policies and procedures related to payment allocation, collections, and repossessions, ensuring prompt communication with the repossession service provider, and monitoring all aspects of the repossession process, among others.  Check out the bureau’s compliance bulletin for the full list.