U.S. Agency Widens Review of Auto Lenders, ‘Add-On’ Products

U.S. Agency Widens Review of Auto Lenders, 'Add-On' ProductsAs auto financing continues to accelerate so are investigations into the practices of the industry’s lenders and the add-on products they offer on new and used vehicles to boost profits, such as extended warranties.

Offering add-ons is not illegal, but the U.S. Consumer Financial Protection Bureau wants to know if terms are clearly disclosed or if the products are being deceptively marketed.

The CFPB has issued subpoenas to U.S. auto lenders over the sale of extended warranties and other such products, The Wall Street Journal is reporting.

It is an expansion of a civil probe that lenders say could slow down or put the brakes on the zooming car and truck loan business. U.S. automakers saw double-digit annual sales growth for April.

The CFPB employed a similar strategy with credit-card companies, fining them millions over the use of deceptive marketing practices to sell add-ons such as credit monitoring or identity-theft protection.

In a bulletin issued in March, the CFPB warned “indirect auto lenders” that they can be sued for unlawful, discriminatory pricing. Indirect auto lenders often let dealers charge an interest rate that is costlier for the consumer than the rate the lender gave the dealer.

The U.S. agency s trying to get around restrictions in its authority. Auto loans for new and used cars are surging, but dealers won an exemption from the CFPB’s authority under the Dodd-Frank Wall Street reform in 2010, the law that created the agency.

The CFPB is targeting discriminatory markups in auto lending that can add up to tens of millions of dollars in consumer harm each year.

The Justice Department, meanwhile, is investigating auto dealerships that make their own loans to customers with poor credit and charge higher rates, said Jon Seward, deputy chief of the department’s housing and civil-enforcement section, at a panel

discussion at George Mason University on Thursday. The government plans action this year, said Mr. Seward, who declined further comment.

About three-quarters of all new-vehicle purchases are financed or include add-on products, according to the National Automobile Dealers Association.

Outstanding auto loans totaled $783 billion by the end of 2012, the highest amount in nearly four years and an increase of 10 percent from the end of 2010, according to the Federal Reserve Bank of New York.

Auto lenders and dealers dispute the allegations of discriminatory markups. They say limiting auto-lending now could adversely affect one of the banking industry’s strongest segments as lenders deal with historically low interest rates and weak overall loan demand.

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