Understanding State-Level Deregulation Threats to Auto Financing

The Consumer Financial Protection Bureau (CFPB) has previously targeted the automotive finance industry for dealer-arranged auto lending and abusive loan servicing practices. However, as federal regulation of this arena retreats, state regulation is actively patrolling the associated regulatory gaps.

The automotive finance industry may soon face increased legal threats from state regulators and attorney generals. With market conditions similar to those that followed the mortgage loan crisis, state regulation is even considering the creation of a multi-state taskforce to focus on auto lending and servicing, particularly in the subprime market.

In recent years, our government is increasingly concerned with protecting automotive consumers. The National Consumer Law Center (NCLC) recently issued a report on mark-ups of add-on products during auto sales, specifically GAP insurance. Previous CFPD examinations of auto loans and lenders revealed deceptive advertising for GAP coverage and the disclosure of payment deferral terms. The CFPB also enforced actions against auto lenders for UDAAP, ECOA, and FCRA violations, which included discriminatory auto loan pricing, misleading consumers about APR rates, and hiding finance charges.

With the increased involvement, state attorney generals have been conducting joint investigations and settlements, which will likely lead to increased class action litigation targeting the auto lending industry.


There have been many recent litigation cases in the auto finance industry. Investigations from the Department of Justice resulted in $907,000 redress against a major auto lender for illegal repossession of consumers’ vehicles without court order. A similar case resulted in a $760,000 settlement with two affiliated auto finance companies. Recently there was also a Toyota settlement for $29 million, as well as a Hyundai and Kia settlement for $41.2 million. Additionally, there was a $1 billion settlement made with a major financial institution that was forcing consumers to buy mandatory auto loan insurance coverage. Below are a few state-level examples from 2017.

  • In New York, there were multiple settlements with vehicle dealer groups that provided over $900,000 in restitution to about 6,400 consumers. Dealers paid $135,000 to the state for unlawfully selling “after sale” credit repair and identity theft protection services that considerably increased the purchase price of a vehicle—while leading consumers to believe these services were free.
  • In Florida, there was a settlement with a Jacksonville car dealership, its financing arm, and its president for engaging in misleading business and sales practices, which resulted in a $5 million consent agreement that provided debt forgiveness to the affected consumers.
  • In Massachusetts, used car dealership, D. Byrider, was hit with a lawsuit from the state attorney general for selling defective vehicles with high-cost loans under a custom program which bundled the vehicle sale, financing, and repairs into a single transaction. Failing to inform consumers that these vehicles were priced at more than double their retail value, they got buyers to finance at an APR of 19.95%, regardless of their credit qualifications.


To navigate this uncertain landscape, automotive dealerships and financing companies need to take preventative action in order to achieve compliance and mitigate risk of state investigations. Additionally, as financial technology gains popularity in the market, there is fair lending risk for new entrants who are unfamiliar with state lending laws and regulations. The best plans of action at this point include preparing for an inquiry, respecting state regulators, setting an aggressive complaint management program, and taking a closer look at compliance. It’s important to review all processes and documents for technical compliance, especially if they are consumer-facing. In addition, dealerships should ensure that all of their Auto Financing and F&I providers are fully compliant with industry regulations and licensing requirements.

By establishing clear lines of authority for decision making and upholding open communication among marketing, legal, and operations, automotive dealerships and finance companies should be able to respond confidently and knowingly in the face of an inquiry. By staying respectful and responsive to state regulators, organizations may resolve or reduce a possible acrimony through an educated, good faith explanation. Further, lawyers can help these organizations develop policies for an aggressive complaint management program to minimize unresolved regulatory and consumer complaints that could cause further issues and legal action.

As a payment plan provider to the automotive industry, Budco Financial is invested in staying on top of market trends and anticipating shifts. To keep up with Budco Financial, follow us on LinkedIn and Twitter.

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