Think UDAAP Doesn’t Apply to Your CPI Program? Think Again

When I talk to people about collateral protection insurance (CPI), I often stress the benefit of using admitted insurance products like CPI or vendor single interest insurance, over non-insurance solutions like debt cancellation agreements, or those shape-shifting “loss damage waivers” that thrive in California.  The rationale is simple.  Insurance is a creature of state regulation, which means that insurance products must earn state insurance department approval before they hit the street.  This approval provides a shield – an imperfect one, I admit – against regulatory or consumer challenge.  Non-insurance products offer no similar protection.

There’s a second-level benefit that comes with state regulation.  The business of insurance exists outside the scope the federal government’s apex regulator, the Consumer Financial Protection Bureau (CFPB).  The CFPB has no authority to challenge the fundamental legality of an insurance product such as CPI, whereas it may do exactly that as respects non-insurance waivers.  Another point for insurance.

Now I’m going to drizzle on my own parade, but just for minute.   Although the CFPB does not regulate the business of insurance, the agency may still pursue UDAAP claims arising from the use of insurance products.  In other words, the CFPB may investigate an insurer, an insured creditor or both based on claims that an insurance product is being used in a way that is unfair, deceptive or abusive.

So it’s not enough merely to choose an admitted insurance product.  You have to use it in a way that avoids harm to consumers.

The good news is that most CPI programs will pass CFPB scrutiny if used as intended by the CPI provider.  If you want to doublecheck your own program, consider the following UDAAP standards:

Unfair – An act or practice is considered unfair if it is likely to cause substantial injury that is not reasonably avoidable by consumers, and that outweighs potential countervailing benefits.  The fundamental nature of CPI keeps it on the right side of the line.  It is an insurance coverage of “second resort,” added only in the absence of the customer’s own insurance.  This alone guarantees that the consumer exercises ultimate control.  Consumers have the power to remove undesired CPI simply by providing evidence of acceptable personal auto insurance.

A creditor can create unfairness by arbitrarily adding CPI or refusing to cancel it when presented with evidence of the consumer’s insurance.  The use of unreasonable or unlawful insurance demands, such as “whitelisting” or “blacklisting” auto insurers, or requiring zero-deductible policies, is inarguably unfair.   Refusing to submit a CPI claim despite having charged a customer for the cost of CPI is unfair on its face.  These are practices decried by every CPI provider.  Your own common sense should say the same.

Deceptive – A deceptive act or practice is a material representation, omission, act or practice likely to mislead a reasonable consumer.  There is literally – and I mean this in the Merriam-Websters  sense of the word – no chance of being deceptive about CPI unless you go deliberately off-script.  You can get in trouble by describing CPI as something other than what it is:  physical damage insurance purchased by you, the creditor, to insure your interest in a financed vehicle in the absence of insurance provided by your consumer.

Statements that imply that CPI is a “preferred” form of insurance, or that CPI is better than personal auto coverage bend toward deception.  While it is true that CPI may be the best physical damage insurance option for certain consumers  (and often it absolutely is) statements that elevate CPI above personal auto insurance are best avoided.

Keeping in mind that deception includes material omissions, adding CPI without adequate disclosures that include information on how to cancel the coverage, can be problematic as well.  CPI providers typically suggest, or even mandate, the use of specific disclosures.  Follow your provider’s guidance.  Fight the urge to freestyle, and you should be in good shape.

Abusive –  Abusive acts or practices cover behavior that materially interferes with the consumer’s ability to understand the transaction, or that takes unreasonable advantage of the consumer’s relative lack of knowledge and reliance on the creditor to protect his or her interests.

An abusive act may give off a whiff of deception or unfairness without being either.  At the risk drafting a CFPB examiner tutorial, the hypothetical that comes to mind is one in which a dealer allows a customer to infer that CPI is more cost competitive than auto insurance by asking how much the customer pays for insurance and then comparing that premium to a monthly CPI charge, without mentioning that the customer is still be obligated to purchase auto liability insurance.  In this situation the dealer isn’t lying, or even being deliberately misleading, but he certainly isn’t making a point of ensuring that the customer understands the nature and cost of the two types of insurance.

From a purely regulatory standpoint, admitted insurance products are superior to their non-insurance counterparts by virtue of the state insurance department process that brings them to market in the first place.  That said, they don’t make you bulletproof or invisible.  And they do not make you immune to the CFPB’s UDAAP authority.

Chris Kirwan – Berkshire Risk Services

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