Last week, the Consumer Financial Protection Bureau articulated four ways “unlawful junk fees” are happening in auto financing. The bureau shared the details in a special edition of its Supervisory Highlights.

The CFPB said during auto servicing examinations that bureau officials identified unfair, deceptive, or abusive acts and practices (UDAAPs) related to “junk fees” such as unauthorized late fees and estimated repossession fees.

Additionally, the bureau said its examiners found that servicers charged unfair and abusive payment fees.

“For years, junk fees have been creeping across the economy. Our report describes a host of illegal junk fee practices that the CFPB has uncovered across the financial services sector,” CFPB Director Rohit Chopra said in a news release about the regulator’s latest efforts that also covered bank accounts, mortgages and student loans.

The CFPB elaborated about each of its findings related to auto financing in the special edition of those Supervisory Highlights.

Overcharging late fees

The bureau said its examiners found that servicers engaged in unfair acts or practice by assessing late fees in excess of the amounts allowed by consumers’ contracts.

Officials acknowledged retail installment sales contracts often contain language that caps the maximum late fee amounts servicers are permitted to assess. However, the bureau said servicers coded their systems to assess a $25 late fee even though some contracts noted that late fees were to be capped at no more than 5% of the monthly payment amount.

As a result, the CFPB said the $25 late fee exceeded 5% of many consumers’ monthly payment amounts.

“Excessive late fees cost consumers money and thus constitute substantial injury. Consumers could not reasonably avoid the injury because they do not control how servicers calculate late fees, had no reason to anticipate that the servicers would impose excessive late fees, and could not practically avoid being charged a fee. And the injury to consumers was not outweighed by benefits to consumers or competition,” the bureau said.

In response to these findings, the CFPB said the servicers ceased the practice and refunded late fee overcharges to consumers.

Charging unauthorized late fees after repossession and acceleration

The CFPB said its Examiners discovered that servicers engaged in unfair acts or practices by assessing late fees not allowed by consumers’ contracts.

Specifically, the bureau indicated the contracts authorized the servicers to charge late fees if consumers’ periodic payments were more than 10 days delinquent.

But, under the terms of the relevant agreements, the bureau explained that after the servicers accelerated the outstanding balance, the entire remaining balance became immediately due and payable, thus terminating consumers’ contractual obligation to make further periodic payments and eliminating the servicers’ contractual right to charge late fees on such periodic payments.

“Despite this, the servicers continued to collect late fees even after they repossessed the vehicles on periodic payments scheduled to occur subsequent to the date on which the loan balances were accelerated,” the bureau said. “When consumers redeemed their vehicles by paying the full balance, they also paid these unauthorized late fees; these unauthorized fees caused substantial injury to consumers.

“Consumers could not reasonably avoid the late fees because they had no control over the servicers’ late fee practices. And the injury to consumers was not outweighed by benefits to consumers or competition,” the CFPB continued.

In response to these findings, officials said servicers stopped the practice and refunded late fees to consumers.

Charging estimated repossession fees significantly higher than average repossession costs

In this part of auto financing, bureau examiners said they found that, where servicers allowed consumers to recover their vehicles after repossession by paying off the outstanding balance or past due amounts, servicers charged a $1,000 estimated repossession fee as part of the amount owed.

The bureau calculated this estimated repossession fee was significantly higher than what the CFPB contends is the average repossession cost of $350.

By policy, the servicers returned the excess amounts to the consumer after they received the invoice for the actual cost from the repossession agent, according to the CFPB.

Examiners found that the servicers engaged in unfair acts or practices when they charged estimated repossession fees that were significantly higher than the costs they purported to cover.

“The relevant contracts permitted the servicers to charge consumers default-related fees based on actual cost, but here the fees significantly exceeded the actual cost. Charging the fees caused or was likely to cause substantial injury in the form of concrete monetary harm. For consumers who paid the amount demanded, deprivation of these funds for even a short period constituted substantial injury,” the CFPB said.

“Furthermore, some consumers may have been dissuaded from recovering their vehicles because the servicers represented that consumers must pay a $1,000 estimated repossession fee in addition to other amounts due. Some consumers may have been able to afford a $350 fee but not a $1,000 fee, and therefore did not pay and permanently lost access to their vehicles,” the bureau continued.

“Consumers could not reasonably avoid the injury because they did not control the servicers’ practice of charging unauthorized estimated repossession fees. And the injury was not outweighed by countervailing benefits to consumers or competition because the fee exceeded costs necessary to cover repossession,” the CFPB went on to say.

In response to these findings, officials said the servicers ceased the practice of charging estimated repossession fees that were significantly higher than the average amount and provided refunds to affected consumers.

Unfair and abusive payment fees

The bureau reiterated that an act or practice is abusive if it “takes unreasonable advantage of … the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service.”

The CFPB said its examiners found that servicers engaged in unfair and abusive acts or practices by charging and “profiting” from payment processing fees that far exceeded the servicers’ costs for processing payments, after the consumer was locked into a relationship with a servicer chosen by the dealer.

Examiners observed that the servicers only offered two free payment options — preauthorized recurring ACH and mailed checks — which are only available to consumers with bank accounts. Approximately 90% of payments made by consumers incurred a pay-to-pay fee, according to the bureau.

The CFPB said servicers received more than half the amount of these fees from the servicers’ third-party payment processor as incentive payments, “totaling millions of dollars.”

The bureau continued that “examiners concluded that these practices took unreasonable advantage of consumers’ inability to protect their interests by charging consumers fees to use the most common payment methods to pay their auto loans, after the consumer was locked into a relationship with a servicer, that far exceeded the servicers’ costs. Servicers leveraged their captive customer base and profited off payment fees through kickback incentive payments.

“These consumers were unable to protect their interests in selecting or using a consumer financial product or service because the dealer, not the consumer, selected the servicer. Consumers thus could not evaluate a servicer’s payment processing fees, bargain over these fees, or switch to a servicer with lower-cost or more no-fee payment options,” officials went on to say.

The CFPB added that it found another unfair practice.

“The payment processing fees constituted substantial injury,” officials said. “Because consumers did not choose their auto loan servicers, they could not reasonably avoid these costs by bargaining with the servicer over the fees or switching to another servicer; moreover, consumers without bank accounts, who were unaware of the payment structure, or who have other obstacles to ACH or check payments, could not use the free payment methods and thus could not reasonably avoid paying the fees.

“And the injury to consumers was not outweighed by benefits to consumers or competition,” they added.

In response to these findings, the CFPB said its supervision directed the servicers to cease the practice.