The Consumer Financial Protection Bureau Weighs in on Collateral Protection Insurance
Of interest to compliance nerds and insomniacs, the CFPB publishes the periodical, Supervisory Highlights, to share key findings from the Bureau’s supervisory examinations. The Summer 2021 issue addresses, among other things, Collateral Protection Insurance. The findings are noteworthy.
I’ve been waiting for the CFPB to weigh in CPI. In fact, I’ve been banging my spoon against my highchair for the better part of a decade over the CFPB’s potential impact on CPI. The Bureau does not regulate insurance directly – that’s the province of individual states – but its authority to implement and enforce consumer financial laws grants the CFPB broad powers where insurance and consumer finance intersect. CPI is an example of one such intersection, where a creditor purchases insurance to protect itself and charges the cost of coverage to the consumer. By dictating how, or even whether, a creditor may use CPI, the CFPB can exert an outsized indirect regulatory impact.
In the early days of the CFPB, I assumed the worst, that the indirect regulatory leverage would be brutal. To my surprise, it wasn’t. For the most part, nothing happened. But I kept hammering away with my spoon, warning everyone within in earshot to be careful – to follow strict best practices.
Now the CFPB has given us their notes. And they aren’t terrible.
CFPB examiners identified two practices that they deem to be unfair: Charging for unnecessary CPI and charging for CPI after repossession.
Unnecessary CPI – Given that CPI is designed to be used only when the consumer fails to provide or maintain his own coverage, CPI is “unnecessary” whenever it duplicates the consumer’s existing personal auto coverage. While acknowledging that good faith errors can occur, the Bureau is clear that creditors have an obligation that goes beyond merely processing insurance documentation. They have a responsibility to help consumers avoid unnecessary
CPI charges. For example, the Bureau cites as an unfair practice the failure to “have adequate procedures for processing insurance cards submitted as proof of insurance.” The implication of this finding is that if consumer makes some effort to show proof of insurance – e.g., providing an ID card that indicates nothing about physical damage coverage, but proves that the consumer has liability insurance – the creditor must take steps to help them finish the job before resorting to CPI. Not surprisingly, the sixty-four dollar question, How many steps and for how long? is unanswered.
The Bureau also expects creditors to take steps to avoid charging consumers for CPI when returned mail suggests that the consumer may have missed a warning notice after changing addresses. Again, exactly what the Bureau expects from creditors is unclear. In a deep subprime auto finance portfolio, where address changes and dropped insurance are regular occurrences, it would be unreasonable to make creditors run down every change of address before adding CPI. They must make an effort though. If there was ever a question, there isn’t anymore.
The Bureau does offer one actionable finding that every bhph company should immediately adopt. In a situation requiring a refund of CPI charges, the Bureau’s position is that the creditor must pay the refund directly to the consumer rather than applying it to an outstanding credit balance. The Bureau now defines the latter as facially unfair.
Charging CPI After Repossession - Examiners report that some creditors have continued charging for CPI after taking possession of a vehicle in repossession. The consumer’s obligation to insure the vehicle expires at the moment the creditor assumes physical control, directly or through a third party. A creditor’s right to charge for CPI coverage ceases at the same time. Violation, in the form of actual or attempted collection by a creditor, is an unfair practice.
The latest on CPI from America’s apex regulator is decidedly not so bad. There is no critique of the product itself. Instead, the Bureau picks on the bad habits of sloppy administration. The findings amount to a mild rebuke, “Sit up straight and shine your damn shoes.” That it comes from a regulator that can turn your business inside out during an audit and levy massive penalties is good reason to take heed.
