February 2016

CFPB Targets Used Car Dealer, Herbies, for Hiding Auto Finance Charges

3 min

The Consumer Financial Protection Bureau (CPFB) entered into a consent order with Y King S Corp., which does business as Herbies Auto Sales, to settle alleged violations of the Truth in Lending Act (TILA), Regulation Z, and the Consumer Financial Protection Act of 2010 (CFPA). As a subprime, buy-here, pay-here auto dealer, Herbies sells cars and originates auto loans without selling that loan to a third party. The order states Herbies engaged in abusive financing schemes and misled consumers about the true cost of financing a vehicle.

The Bureau found that Herbies misled consumers with inaccurate finance charges and APR disclosures, violating TILA and Regulation Z (Reg Z). Specifically, Herbies' misrepresentation of a 9.99 APR violated TILA because the consumer did not pay such an APR after adding the cost of a required warranty, GPS payment reminder device, and higher markups.

The order states that Herbies required consumers to purchase an auto repair warranty policy when financing their auto purchase but did not include the $1,650 cost in their finance charges disclosures, nor did Herbies include a $100 charge for a required GPS payment reminder device. Additionally, the order provides that Herbies would not negotiate prices with consumers who were financing their purchases but would negotiate with cash purchasers. The Bureau found that this practice violated TILA and Reg Z because it effectively served as a discount offered to cash customers but was not disclosed as a finance charge.

Similarly, according to the Bureau, Herbies' activities violated the CFPA. First, Herbies failed to disclose finance charges, such as the cost of the required repair warranty, the cost of the required payment reminder device, and the hidden finance charge associated with discounts received by cash customers. Second, Herbies misrepresented in advertisements the APR consumers would receive. Finally, Herbies' sales tactics and misrepresentations concerning finance charges violated the CFPA, including consumers' inability to distinguish the cost of cars from the cost of credit for the cars they were purchasing because no sticker prices were placed on the cars and prices were not disclosed until after the consumer was approved for credit.

The Consent Order prohibits Herbies from misrepresenting finance terms and requires Herbies to provide accurate financing information to consumers, post accurate vehicle prices, and pay restitution to injured consumers. Specifically, the order requires Herbies to:

  • Provide Accurate Financing Process Representations. The order prohibits Herbies from misrepresenting interest rates, finance charges, or amounts financed, or any other fact material to consumers concerning the financing of any motor vehicle.
  • Provide Financing Information. Similarly, the order requires Herbies to provide consumers with the actual APR, all financing charges, and the true price of the car.
  • Post Prices. The order requires that Herbies clearly and prominently post the purchase price on all automobiles for sale when offering auto financing.
  • Pay Restitution. The order requires Herbies to pay $700,000 in restitution for Herbies customers who financed their cars after January 1, 2012, other than accounts charged off due to default. Additionally, the order requires Herbies pay a $100,000 civil penalty, which is suspended if the $700,000 in redress is paid.