Compliance Blog

I have been traveling recently to attend the American Bar Association’s Business Law Section fall meetings in Chicago and NAFCU’s Risk Management Seminar in Louisville. Side note: Wrigley Field is as great as advertised! These conferences are a great opportunity to meet and discuss relevant issues with credit card industry professionals. Some topics that came up during these conversations were auto loan defaults and collections. This may be a good time to revisit an early August complaint filed by the Consumer Financial Protection Bureau (CFPB or bureau) against USASF Servicing (USASF) to see what type of alleged behaviors may be on the CFPB’s radar. The bureau alleges that USASF illegally disabled cars, failed to refund premiums to its customers, double-billed consumers and misapplied payments, and wrongfully repossessed vehicles.

The complaint alleges that USASF deactivated cars by using a device on the car called a starter-interruption device (device). These devices are used by auto loan servicers to either play a warning tone alerting the consumer or disable the vehicle altogether. These devices were only used in practice by USASF on leased cars. According to the complaint, USASF activated the device when a customer missed one payment. As a result, the device “would activate warning tones for the first four days following a missed payment and would disable the vehicle once the consumer was five days past due[,]” but would not disable the device once the customer “…made a promise to pay their loan.” Citing human errors as the reason, USASF would disable vehicles when they should not have or promised not to and sent warning tones to consumers who were not in default or made payments.

Guaranteed Asset Protection (GAP) and the reimbursement of unearned premiums are at the heart of another alleged bad practice. The bureau alleges USASF did not follow its GAP refund policy. According to the complaint, USASF’s policy requires USASF to apply any GAP refund to the deficiency balance on the loan. This would in practice reduce the amount the customer owed on the loan. However, USASF did not follow this policy. In an alleged practice, the CFPB alleges USASF requested payoff amounts for the full term of the loan contract despite the consumer paying off the loan contract early. On the other hand, USASF allegedly used the date of the loan payoff as the date GAP was cancelled when the loan was settled by a third party but not when the loan was paid off by the customer. The bureau suggests USASF would only then submit a refund request when the consumer requested the refund of the unearned premiums. The practice of using the refund request date instead of the payoff date allegedly led to lower payouts to customers.

The bureau also alleges USASF double-billed its customers for collateral-protection insurance. Collateral-protection insurance is designed to protect lenders if the customer’s auto insurance does not cover the amount on the loan. The complaint outlines alleged practices of double-billing, where customers were billed twice and charged twice for collateral-protection insurance. The bureau suggests this occurred due to manual and system-processing failures.

The complaint outlines alleged practices of wrongfully repossessed customer vehicles. The bureau alleges USASF’s failure to institute processes and controls led to wrongful repossession. According to the complaint, USASF’s policy is to repossess a vehicle if a deferred down payment is missed, or if the consumer is sixty days past due. In addition, the complaint suggests USASF did not send a notice to a customer to inform them of plans to repossess vehicles unless state law requires a right to cure. The crux of this alleged practice hinges on the communication failures between USASF and its repossession agents relating to holds on repossession and the lack of a process to flag activities on accounts that establish repossession holds. This lack of communication led to the repossession of customer vehicles who had holds on their accounts.

While not all credit unions may service their own loans, this may be a good opportunity for those that do to review the processes to avoid any potential pitfalls. If there are any questions, please do not hesitate to contact NAFCU’s compliance team at compliance@nafcu.org.

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