“Our mission is to make markets for consumer financial products and services work for Americans,” the Consumer Financial Protection Bureau says on its about page. A laudable goal, financial markets should work for consumers. But now the bureau has stepped past overseeing financial products, to overseeing the goods purchased with financial products.
Following a bulletin on fair auto lending released March 21, the bureau issued subpoenas to U.S. auto lenders over the sale of extended warranties, according to the Wall Street Journal. The bureau shouldn’t be examining extended warranties at all.
As an add-on product commonly financed within an auto-loan, extended warranties would seem a fitting next candidate for the bureau’s attention. Recently the bureau has been on campaign against add-ons to financial products. Early this year the CFPB completed rules to govern force placed insurance on mortgage loans. It also collected a $25 million penalty from Capital One Bank last year; the fine was for deceptive marketing tactics used to sell a payment-protection add-on product to credit cards.
Extended warranties are not financial product themselves. They are a “vehicle service contract which covers the costs of some types of repairs in addition to or after the manufacturer’s warranty ends,” as the CFPB said on its website.
They can only be cast as a financial product if they are defined as an “add-on” to an auto-loan because they can increase amount, length, and payment amount of the loan. But, this definition will not stick. Certainly, extended warranties “can be very profitable for the dealer and expensive for [the consumer],” as the CFPB has said on its website. If the customer buys an extended warranty and finances it, it increases the amount the consumer pays. But so does the purchase of floor mats if they are rolled into the loan. Are these now an add-on to the auto-loan? How much does the dealer make on those? Is it an abusive amount?
Consider Capital One again. Could the consumer have purchased the payment protection product without the consumer already having purchased a credit card? No, he could not. That’s why the payment protection is an add-on to a financial product.
Could the consumer purchase an extended warranty on a car without taking out an auto-loan? Yes, he can. He can purchase the car and extended warranty with cash. The warranty can be purchased without the auto-loan, that’s why it isn’t an add-on to an auto-loan.
Of course, dealers can behave in underhanded ways, telling customers they must buy a warranty when really they do not. Dealers should be stopped from abusing consumers in this way. And the CFPB should use its financial education platform to educate consumers about these products. But that does not mean it is the job of the CFPB to stop it or investigate it.
Unless the Consumer Financial Protection Bureau is reconstituted as the “Consumer Protection Bureau” by Congress, probes into non-financial products should be left to other regulators like the state attorney general or Federal Trade Commission.