To GAP Products and UDAAP
Guaranteed asset protection (GAP) covers the difference,
or gap, between the amount a consumer owes on an auto
loan and the amount received from the auto insurer in the
event the vehicle is damaged, stolen or totaled. This gap
occurs much more frequently in auto loans with high loan-
to-value (LTV) ratios than loans with a low LTV. For loans
with a low LTV, it is much more likely the insurance payout
for a totaled vehicle would cover any outstanding debt.
Examiners found some auto lenders sold GAP insurance
to consumers with low LTVs, meaning these consumers
would not receive any benefit from the GAP insurance.
Examiners thought the fact the consumers with low
LTVs purchased GAP insurance proved they lacked
an understanding of a material aspect of the product.
Lenders in these cases took unreasonable advantage
of the consumers’ lack of understanding of the risks,
costs or conditions of the product. This constituted an
abusive act or practice, and violated 1031 and 1036 of
the Consumer Financial Protection Act, also known as
an unfair, deceptive or abusive acts or practices (UDAAP)
violation.
Your financial institution should test and monitor financial
products and services not only for traditional consumer
protection regulations (Regulation Z, E, CC, etc.), but
also for fairness. Consider if your institution adequately
explains products and services so consumers can make
fully informed decisions about whether the product or
service is appropriate for them. Disclosures complying
with the alphabet regulations alone cannot protect against
UDAAP. Compliance officers must consider whether
your institution is fully informing consumers of the
appropriateness of products and services, and verifying
the consumer understands the information provided. This
requires compliance officers utilizing “softer” skills rather
than purely technical knowledge of regulations.
Credit Card Advertising Trigger Terms
Compliance with Regulation Z when advertising credit
cards online also seemed to be an issue. Section 1026.16
(b) of Regulation Z requires credit card advertisements to
clearly and conspicuously provide required disclosures if
the advertisements contain certain terms, called triggering
terms. Triggering terms include any term required to be
disclosed initially when the credit card is established.
These terms include the annual percentage rate (APR),
annual credit card membership fee or statements such
as “no interest.” If a triggering term is included in the
advertisement, the following disclosures must also
appear:
• Any minimum, fixed, transaction, activity or similar
charge that is a finance charge.
• The APR.
• If the plan provides for a variable periodic rate, that
fact must be stated.
• Any membership or participation fee that could be
imposed.
Examiners found financial institutions did not clearly
and conspicuously provide required disclosures when
triggering terms were included in advertisements. Also,
there were instances when the required disclosures were
available via a link, but the link was a non-descriptive
hyperlink. In other cases, the required disclosures only
appeared after a consumer completed an eight-page
application. The commentary to Section 1026.16(c) of
Regulation Z permits a link to the required disclosures,
but the link must take consumers directly to the required
disclosures. Furthermore, examiners expect links to
be descriptive. Your financial institution should avoid
placing required disclosures at the end of applications,
as examiners expect the disclosures to best serve
consumers by appearing up front.
Given the fact the CFPB has highlighted online credit
card advertising as a key compliance finding, Doeren
Mayhew expects prudential regulators to spend more
time examining websites for this issue. In addition,
examiners are expected to dig deeper while examining
advertisements for triggered disclosures pertaining to
home equity lines of credit, as well as closed-end loans.
Credit Card Offset
The CFPB found financial institutions were violating
Regulation Z by offsetting consumer credit card debt
against deposited funds without sufficient indication
of the consumer’s awareness of, and intent to grant,
a security interest in those funds. Section 1026.12(d)
generally prohibits the offset of credit card debt with
deposited funds.
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