On August 22, the CFPB filed a lawsuit against an installment lending company and several of its subsidiaries in South Carolina federal court, alleging that the company engaged in illegal "loan-churning" practices that generated hundreds of millions of dollars in loan costs and fees. The CFPB's complaint alleges that many of the installment lender's "loan-churning" practices constituted unfair, deceptive, and abusive acts or practices ("UDAAPs") in violation of the CFPA. Specifically, the CFPB alleges that the installment lender harmed consumers by:
- Coercing distressed customers into burdensome cycles of reborrowing. The CFPB alleges that the installment lender's business strategy centers on driving delinquent borrowers into fee-laden refinancing cycles.
- Incentivizing employees to push refinances. The CFPB alleges that the installment lender provides compensation-based incentives and rewards to employees who are the most successful in selling distressed borrowers on refinancings, while penalizing employees who fail to successfully sell refinancing products.
- Targeting customers for their likelihood to refinance. The CFPB alleges that, in evaluating refinancing applications, the installment lender weighs an applicant's prior history of refinancing in favor of approval. As a result, the company routinely lends to borrowers who have refinanced multiple times and will likely require additional refinancings in order to service their debt.
- Falsely marketing refinances as fresh starts. The CFPB alleges that the installment lender markets refinancing as the best option for customers who are struggling to repay. However, in many cases, refinancing causes prolonged indebtedness, increases total borrowing costs, and does not offer a long-term solution to financial distress.
In its complaint, the CFPB seeks to enjoin the auto lender from engaging in further conduct that violates the CFPA, to obtain redress for allegedly harmed consumers, and to impose civil monetary penalties against the installment lender and its co-defendant subsidiaries.
Putting It Into Practice: This latest enforcement action brought by the CFPB indicates that regulators remain honed in on identifying and sanctioning companies engaged in UDAAPs across the consumer finance sector (see previous blog posts here and here). In light of the CFPB's complaint (and the CFPB's recently issued supervisory highlights and a policy statement), consumer finance and debt management companies should review their business models and operational practices to ensure compliance with agency interpretations of the CFPA. Moreover, lenders that use targeted marketing aimed at profitable consumers should also consider reviewing their related credit criteria and marketing practices.
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