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Auto Add-Ons Add Up

How Dealer Discretion Drives Excessive, Inconsistent, and Discriminatory Pricing

This groundbreaking National Consumer Law Center analysis of a large national data set unlocks the door on what car dealers pay for auto add-on products and what they charge consumers. Pricing of these optional products involves large mark-ups and arbitrary and discriminatory pricing for consumers.
addon report coverPublished: October 11, 2017

Report (PDF)

Executive Summary

Key Findings

Key Recommendations 

Charts & Graphics (PDF) 

Consumer Tips 

Press Release (Leer en Español)

Executive Summary 

Add-on products sold by car dealers, such as service contracts, Guaranteed Asset Protection (GAP) insurance, and window etching, make up a large share of dealers’ profits. They also significantly increase car buyers’ costs. While many have questioned the value of these products for consumers, the pricing of these products has received less attention, largely because pricing is not transparent. Even regulators lack information about what car buyers pay for these products. Dealers decide what to charge each consumer and generally only the dealer, the finance company, and the third party provider of the add-on ever know what other consumers are paying. This National Consumer Law Center analysis of a large national data set is a revealing first look at what dealers pay for auto add-on products and what they charge consumers.

Key Findings

  • Add-on products are sold at prices far higher than dealer costs. Dealers mark up add-on products more than other similar products are marked up. They mark up add-on products by a far higher percentage than they mark up cars. One dealer sold over 1,000 window etching products, each with a dealer cost of $16 and a charge to the consumer of $189, for a markup of $173 or 1,081%. For Guaranteed Asset Protection (GAP) insurance products, 38 dealers had average markups of 300% or more, and 38 dealers marked up service contracts by an average of more than 300%.
  • Dealers are inconsistent in the pricing of add-on products. Individual dealerships charge some consumers many times more than other consumers for the same product with the same dealer cost.

Dealers and Window Etching Pricing
Dealer etching

  • This inconstant pricing for the same add-ons leads to pricing discrimination, with Hispanics charged higher markups than non-Hispanics.

Markup

  • Companies that provide car financing play an important role in allowing excessive and discriminatory markups of auto add-ons.

These abuses, damaging enough in themselves, set in place a chain of other consequences for consumers. The expensive add-ons increase the price of cars, putting them out of reach for some consumers.

They also increase the loan to value (LTV) ratio for cars, as they increase the amount that consumers finance without providing any real increase to the value of the car. These higher LTVs result in more negative equity, which hurts consumers and other players in the auto sales and finance market because a consumer who owes more than his or her existing car is worth will have a hard time trading it in and buying a new car. High LTVs have also been associated with higher default rates, again harming consumers and the industry as a whole.

Recommendations

  • Dealers should be required to post the available add-ons and their prices on each car in the lot, along with the price of the car. To prevent the dealer from reintroducing non-transparency by offering discounts to some customers but not others, the prices for the add-on products must be non-negotiable.
  • To root out pricing discrimination, the federal Equal Credit Opportunity Act regulations should be amended to require documentation of the customer’s race or national origin for non-mortgage credit transactions, as is currently required for home mortgage transactions. If discrimination remains hidden, it will not be possible to end it.
  • State and federal enforcement authorities should investigate discrimination in pricing of add-on products and bring enforcement actions against a dealer if discrimination is shown. The Consumer Financial Protection Bureau, the Federal Trade Commission, the Federal Reserve Board, and state attorneys general all have authority in this area.

Learn more about the National Consumer Law Center’s work on consumer auto sales and financing and NCLC’s Working Cars for Working Families project.

ConsumercreditregulationConsumer Credit Regulation ConsumerwarrantyConsumer Warranty Law udapUnfair and Deceptive
Acts and Practices
auto fraudAutomobile Fraud

Servicemembers, Veterans, and Forced Arbitration

How the New Consumer Protection Financial Bureau Rule 

Enhances the Military Lending Act 

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The Consumer Financial Protection Bureau’s (CFPB) new arbitration rule will promote accountability and transparency for a wide variety of consumer financial products and services offered to servicemembers and veterans. The rule allows people to band together in court and prevents companies from using fine print to take away access to the courts through forced arbitration clauses with class action bans.

The CFPB rule has the strong support of The Military Coalition, representing 5.5 million servicemembers, The American Legion, 29 military groups, and leading veterans.

The Military Lending Act (MLA) already bans forced arbitration of certain disputes. So what does the CFPB add to the arbitration ban in the MLA?

The CFPB rule provides essential protection for our military families and veterans (the MLA only applies to servicemembers) and covers a broader range of financial products. For example, unlike the MLA, the CFPB rule covers these areas:

  • Purchase money loans, such as auto loans;
  • Credit monitoring and other credit reporting services;
  • Bank accounts, prepaid cards, and other noncredit accounts
  • Loans before military service, such as a credit card that a servicemember still uses;
  • Debt collectors and debt buyers pursuing debt not covered by the MLA; and
  • Home equity lines of credit.

The MLA provides no protection in these situations that ARE covered by the CFPB rule:

  • Credit bureau giant Equifax’s initial effort to block victims of its massive data breach from access to the courts through a forced arbitration clause hidden on the website for the free credit monitoring it is offering.
  • Wells Fargo’s use of older bank account and credit card agreements to block lawsuits over the theft of consumers’ identity used to open fake accounts.
  • Banks’ rampant violation of the Servicemembers Civil Relief Act through illegal repossession of cars while servicemembers are away on active duty, as happened to Sergeant Charles Beard and Sergeant Jin Nakamura. Beard’s attempt to bring a class action was thrown out due to a fine-print arbitration clause.
  • Army soldier Prentice Martin-Bowen, who sued a buy-here-pay-here used car dealer that repossessed his car despite on-time payments, and kept two trade-in cars and the down payment. Martin-Bowen was forced into arbitration and won a small amount, but he couldn’t pay his lawyer a penny in fees and he couldn’t bring a class action to help the 100 others who suffered the same result. The arbitrator admitted that a jury would likely have awarded more.
  • Wells Fargo’s illegal padding of auto loan payments with duplicative car insurance, including for servicemembers on active duty. Some contracts had arbitration clauses.
  • TransUnion’s reckless mismatching of consumers, including active duty service-members serving abroad, to people with similar names on a government watch list of suspected terrorists and drug traffickers. TransUnion did not have an arbitration clause in that case, and a jury ordered it to pay $60 million ($7,337 to each class member), but the company has tried in the past to trick people into giving up their day in court.
  • Army veteran Joshua Hause, who was given “no choice” and was forced to convert his existing payday loan to a 279% open-end “flex” loan that “I’ll never get out of.” A class action lawsuit over these practices was thrown out of court due to a forced arbitration clause.
Four of the five top areas of servicemember complaints to the CFPB are not covered by the MLA. And credit cards are covered by the MLA only if they are opened by active duty servicemembers after October 3, 2017 and only while the member continues to serve.
servicemembers complaints

Our men and women in uniform fight to protect our constitutional rights, including our day in court guaranteed by the Seventh Amendment. Congress must not strip away the rights of our military by repealing the Consumer Financial Protection Bureau’s arbitration rule.

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U.S. House Bill Would Allow Lawyers to Abuse Consumers in Debt Collection Lawsuits

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A bill pending in the U.S. House of Representatives, H.R. 1849: Practice of Law Technical Clarification Act of 2017 (Trott), would exempt attorneys and law firms engaged in litigation from the Fair Debt Collection Practices Act (FDCPA) and eliminate Consumer Financial Protection Bureau (CFPB) authority over them.  Claiming that state courts and bar associations would adequately police bad-actor attorneys, supporters of the bill ignore the critical role that the FDCPA plays in providing relief for unsophisticated consumers abused by the sharp practices of sophisticated collection attorneys.

Congress1 and the courts2 have recognized for decades that consumers must be protected from false, deceptive, misleading, and unfair practices by lawyers collecting debts in courts. This bill attempts to turn back the clock, and would allow collection attorneys to engage in egregious practices such as:
  • Proceeding to trial without any witnesses or admissible evidence, relying on court rules to award them judgment if the consumer does not appear or asking the court to continue or dismiss the case if the consumer does appear.3
  • Routinely filing court documents without confirming the accuracy of that information,4 often resulting in default judgments based on inaccurate information.
  • Filing lawsuits in courts hundreds of miles away from the consumers’ homes,5 making it nearly impossible for most consumers to appear in court to defend themselves against the collection lawsuit.6
  • Filing lawsuits on time-barred debt after the statute of limitations has expired,7 such that consumers who have paid their debts are less likely to have critical records to be able to prove their payments.
  • Seeking fees or costs that are not legally allowable,8 adding to the amount of judgments against unsophisticated consumers who often do not have the means to challenge these additional and illegal charges.
  • Misusing state garnishment proceedings,9 such as by knowingly garnishing income or property that is exempt from collection.

State Consumer Protection Laws May Not Cover Attorneys.

Many states do not have laws that are equivalent to the FDCPA. In these states, exempting attorneys from coverage under the FDCPA would mean that no federal or state laws would protect consumers from abusive litigation practices by consumer attorneys.10

States Would Not Have the Capacity to Protect Consumers.

Even states with legal authority (see previous paragraph) would not have the resources to monitor the tens of thousands of debt collection lawsuits that are filed yearly in each state11 or to bring sufficient enforcement or disciplinary actions in response to abusive litigation activity.

Court and Ethical Rules Are No Substitute for the FDCPA.

To date, neither the courts nor bar associations have been effective in policing litigation abuses by collection attorneys.12 There is no reason to believe that these agencies will suddenly step up now if FDCPA sanctions against collection attorneys for litigation abuses are eliminated.

Collection Attorneys Would File More Lawsuits.

H.R. 1849 would exempt lawyers from the FDCPA for conduct in litigation that would be a violation outside of court. For example, misstating the amount owed in a lawsuit would be exempt from FDCPA liability but misstating the amount owed in a pre-litigation letter or phone call would be a violation. As a result, attorneys would be encouraged to file suit first rather than attempting to reach a resolution with consumers outside of court. This would drive a huge increase in collection lawsuits filed in state courts for amounts that exceed what is actually owed, further clogging the already overburdened trial courts.

H.R. 1849 Would Prohibit CFPB Supervision and Enforcement.

The CFPB has special insights into abusive collection practices through extensive national data from consumer complaints and information gleaned from industry supervision. H.R. 1849 would tie the CFPB's hands and prevent it from acting on abusive practices by attorneys or law firms when they are engaging in debt collection litigation. Previous CFPB enforcement actions against collection law firms have focused on law firms operating large debt collection “mills” churning through a high volume of lawsuits with minimal attorney oversite.13

H.R. 1849 would protect attorneys who engage in abusive litigation collection practices that hurt American consumers. We urge members of Congress to oppose this bill.

For more information, contact attorneys April Kuehnhoff (This email address is being protected from spambots. You need JavaScript enabled to view it. or 617.542.8010) or Margot Saunders (This email address is being protected from spambots. You need JavaScript enabled to view it. or 202.595.7844).

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Endnotes

1 In 1986, as the result of clear findings of abuses by debt collection attorneys, Congress amended the FDCPA to ensure that attorneys who meet the statutory definition of debt collector must comply with all of the provisions of the law. Pub. L. No. 99-361, 100 Stat. 768 (effective July 9, 1986). In the process of adopting the 1986 amendment, Congress considered but rejected “language designed to keep litigation activities outside the Act’s scope.” Heintz v. Jenkins, 514 U.S. 291, 298 (1995).

2 See, e.g., Heintz v. Jenkins, 514 U.S. 291 (1995).

3 Demarais v. Gurstel Chargo, P.A., __ F.3d __, 2017 WL 3707437, at *1 (8th Cir. Aug. 29, 2017).

4 Statements made without meaningful attorney review may be false or misleading in violation of 15 U.S.C. § 1692e. See, e.g., Consumer Fin. Prot. Bureau v. Frederick J. Hanna & Assocs., P.C., 114 F. Supp. 3d 1342 (N.D. Ga.) (denying motion to dismiss 1692e claims where “the few attorneys on staff were allegedly left to essentially skim and sign the prepared pleadings” taking “less than a minute to approve each suit”); Bock v. Pressler & Pressler, LLP, 30 F. Supp. 3d 283, 290 (D.N.J. 2014) (finding a violation of 1692e where “neither [reviewing attorney] nor any other member of Pressler's staff reviewed, or otherwise had knowledge of, the contract between Bock and the bank, including any choice of law, choice of venue, or dispute resolution clause governing disputes between Bock and his creditor . . . Nor did [reviewing attorney] or anyone else at Pressler review the agreement by which Bock's original creditor allegedly assigned this debt to Pressler's client, Midland.”).

5 The FDCPA limits where collection lawsuits can be filed. 15 U.S.C. § 1692i. See, e.g., Lyons v. Michael & Assocs., 824 F.3d 1169, 1171 (9th Cir. 2016) (“Lyons alleges that Michael & Associates violated the FDCPA by filing a collection lawsuit against her in Monterey County, a location where she neither lived nor ‘signed the contract sued upon.’”).

6 See, e.g., Harold v. Steel, 773 F.3d 884, 886 (7th Cir. 2014) (“If a debt collector violates [15 U.S.C. § 1692i], it inflicts an injury measured by the costs of travelling or sending a lawyer to the remote court and moving for a change of venue, no matter how the suit comes out.”); S.Rep. No. 95–382, at 5 (1977), 1977 U.S.C.C.A.N. 1695, 1969 (“This legislation also addresses the problem of ‘forum abuse,‘ an unfair practice in which debt collectors file suit against consumers in courts which are so distant or inconvenient that consumers are unable to appear. As a result, the debt collector obtains a default judgment and the consumer is denied his day in court.”).

7 Courts have held that filing lawsuits on time-barred debts violates 15 U.S.C. § 1692e (prohibiting a debt collector from using “any false, deceptive, or misleading representation or means in connection with the collection of any debt”) or 15 U.S.C. § 1692f (prohibiting a debt collector from using “unfair or unconscionable means to collect or attempt to collect any debt”). National Consumer Law Center, Fair Debt Collection, §§ 5.5.2.13.3.1, 5.6.2 (8th ed. 2014). See, e.g., McCollough v. Johnson, Rodenburg & Lauinger, LLC, 637 F.3d 939 (9th Cir. 2011) (lawyers filed lawsuit against consumer despite evidence that the debt was beyond the statute of limitations).

8 “The false representation of . . . the character, amount, or legal status of any debt,” 15 U.S.C. § 1692e(2)(A), and “[t]he collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law,” 15 U.S.C. § 1692f(1) both violate the FDCPA. See, e.g., Kaymark v. Bank of Am., N.A., 783 F.3d 168 (3d Cir. 2015) (listing fees not yet incurred in the foreclosure complaint stated a claim against law firm under the FDCPA); McDermott v. Marcus, Errico, Emmer & Brooks, P.C., 911 F. Supp. 2d 1, 60 (D. Mass. 2012) (law firm violated the FDCPA by overstating the amount of attorney’s fees owed in a collection letter).

9 Abusive garnishment practices may violate 15 U.S.C. §§ 1692e or 1692f. See, e.g., Waitkus v. Pressler & Pressler, L.L.P., 2012 WL 686025 (D.N.J. Mar. 2, 2012) (allegations that the collection attorneys obtained 100% of the consumer’s earnings violating state procedures to execute on wages and federal and state exemptions of 75% and 90% of earnings stated a claim for violation of § 1692f); Bray v. Cadle Co., 2010 WL 4053794 (S.D. Tex. Oct. 14, 2010) (plaintiff stated a claim that the defendants engaged in “unfair or unconscionable means to collect” the debt by alleging that: “1) his bank account was exempt by law from garnishment by the Social Security Act; and 2) the defendants garnished the bank account, despite knowing or having reason to know that it contained Social Security funds and despite having failed to conduct pre-garnishment discovery”).

10 See, National Consumer Law Center, Fair Debt Collection, at Appx. D (8th ed. 2014) (state-by-state discussion of debt collection statutes, including exemptions from coverage for attorneys); National Consumer Law Center, Unfair and Deceptive Acts and Practices, at § 2.3.9.2 (9th ed. 2016) (discussing explicit statutory exemptions for attorneys from state statutes prohibiting unfair and deceptive acts and practices); Mark D. Bauer, The Licensed Professional Exemption in Consumer Protection: At Odds with Antitrust History and Precedent, 73 Tenn. L. Rev. 131 (2006) (Table 3 contains a state-by-state list of licensed professionals, including attorneys, that are exempt from state “Little FTC” or unfair and deceptive acts and practices statutes).

11 See Annie Waldman & Paul Kiel, “Racial Disparity in Debt Collection Lawsuits: A Study of Three Metro Areas,” ProPublica (Oct. 8, 2015) (during a five year period there were 116,289 judgments in debt collection lawsuits in St. Louis City and County, Missouri; 278,566 in Cook County, Illinois; and 128,918 in Essex County, New Jersey); Jessica Mendoza, et al. “Collection claims abuses move up to higher courts,” Boston Globe (Mar. 28, 2015) (from 2004 to 2013 at least 1.2 million cases were filed in Massachusetts small claims and district court sessions by professional debt collectors); Peter A. Holland, “Junk Justice: A Statistical Analysis of 4,400 Lawsuits Filed By Debt Buyers”, 26 Loy. Consumer L. Rev. 179 (2014) (reporting that debt buyers filed 40,796 lawsuits in 2009; 43,581 in 2010; 37,202 in 2011; 22,566 in 2012; and 24,317 in 2013); Susan Shin and Claudia Wilner, New Economy Project, The Debt Collection Racket in New York (June 2013) (reporting that debt collectors filed 195,105 lawsuits against New Yorkers in 2011); Claudia Wilner and Nasoan Sheftel-Gomes, Neighborhood Economic Development Advocacy Project, Debt Deception: How Debt Buyers Abuse the Legal System to Prey on Low Income New Yorkers (2010) (“In New York City, debt collectors filed approximately 300,000 lawsuits per year between 2006 and 2008.”). See also Consumer Financial Protection Bureau, Consumer Experiences with Debt Collection: Findings from the CFPB’s Survey of Consumer Views on Debt (Jan. 2017) (“One in seven consumers (15 percent) with a debt collection experience reported that they were sued by a creditor or debt collector during the preceding year”).

12 See, e.g., Chris Albin-Lackey, Human Rights Watch, Rubber Stamp Justice: US Courts, Debt Buying Corporations, and the Poor (Jan. 2016); Paul Kiel, So Sue Them: What We’ve Learned About the Debt Collection Lawsuit Machine, ProPublica (May 5, 2016); Federal Trade Commission, Repairing a Broken System: Protecting Consumers in Debt Collection Litigation and Arbitration (July 2010).

13 Consent Order, In the Matter of Pressler & Pressler, LLP, Sheldon H. Pressler, and Gerald J. Felt ¶ 39 (Apr. 25, 2016); Consumer Fin. Protection Bureau v.Frederick J. Hanna & Assoc., Stipulated Final Judgment and Order, 14-cv-02211-AT, at ¶¶ 10-11 (D.Ga. 2015).