Lessons From In the Matter of Lobel Financial
On September 21st, the Consumer Financial Protection Bureau (“CFPB”) announced a $1.4 Million settlement with Lobel Financial, following complaints of abuse in Lobel’s use of Loss Damage Waivers (the “Waivers”). For several years the California subprime finance company had used the Waivers as an alternative to collateral protection insurance, effectively force placing them on customers who failed to maintain required physical damage insurance. The $1.4 Million “redress” fund is only one part of an expensive settlement that also requires Lobel to track down and indemnify customers as far back as 2011, correct misleading credit reporting data and self-report to the CFPB over the next five years. The expense of these mandatory prospective requirements, heaped atop the reputational damage, may be the most costly penalty.
In re Lobel is an eye-opening cautionary tale with a lot to unpack. We’ll do that in a later post, so stay tuned. Today we deliver the Cliff’s Notes version, with a quick plot summary and a few salient observations.
The facts – What the heck happened here?
Lobel used the Waivers as a substitute for collateral protection insurance. When customer insurance lapsed, Lobel would “force place” the Waiver and charge the customer $70 per month until or unless the customer provided satisfactory evidence of insurance. In return, Lobel agreed to waive the outstanding debt in the event of a total loss, and to pay for repairable accidental damage.[1]
The CFPB identified two serious problems with Lobel’s handling of the Waiver product. The first was that the company charged the $70 monthly fee on waivers that were no longer in force. The terms of the Waiver automatically suspended coverage if the customer’s account became delinquent by 10 days. Lobel enforced the coverage suspension on delinquent accounts, but continued charging and collecting the $70. The second problem was that when settling Waiver claims, Lobel saddled customers with extra-contractual charges. Specifically, the company charged customers for the salvage value of totaled collateral and for the installment payments due between the date the customer reported the loss and the date that Lobel determined the damage to be unrepairable – an astonishing three months on average! This was gratuitous, Bond-villain behavior.
Takeaways- What can we learn?
First, follow the damn rules. As abusive and wrongheaded as Lobel’s behavior may have been – and it was bucketloads of both – the CFPB got after the company for failure to follow its own contract. Charging fees on suspended Waivers. Netting salvage value from settlements. Forcing customers to pay up to three months of installments after reporting a total loss. Had the company simply adhered to the terms of its own Waiver, none of this would have happened.
Second, it’s easy to overlook the value of regulated insurance products. In other words, attractive (and financially lucrative) in-house solutions may come with unanticipated regulatory risks. The Lobel consent decree references Lobel’s choice to deploy the Waivers “as a substitute for collateral protection insurance.” There is a subtle implication in those words: Had Lobel used CPI, the CFPB likely would have deferred to the jurisdiction of the state insurance department. Thank you, McCarran-Ferguson Act. This would have benefited Lobel twofold, first from the regulatory shield provided by the licensed insurer and again by virtue of the regulated nature of the insurance product itself, which would have been subject to prior state regulatory approval. No guarantees, but a big help.
For those who ask whether the Lobel settlement will change the way your CPI coverage works, the short answer is it will not. That said, the case still has a lesson to offer. Enforce burdensome contract terms with care, and with the understanding that your actions may come under unfriendly scrutiny down the road. Creditors using CPI will benefit from managing the CPI collection process, enforcement of claim deductibles and claim submissions in a manner that adheres to the insurance contract while also furthering the risk management purpose of the program. Expect more on this topic in the coming days. For now, relax in the knowledge that CPI is a regulated insurance contract, issued by a licensed insurer and approved by the state insurance department.
[1] There are some nasty problems with both the force placement of waivers and the use of waivers as instruments of indemnity, that the CFPB, for good reasons, did not address. More on that in the coming long-form edition.
