Consumer Finance Insights
July 9, 2015

Add-On Products Continue To Present Litigation Risks For Lenders

The Consumer Financial Protection Bureau’s recent action against two credit card vendors regarding credit monitoring and identity theft protection services is a reminder of the legal risks associated with certain add-on products.

The July 1 settlement, in which the CFPB found that the vendors misled customers about the benefits of the add-on services and failed to provide customers with the full services they had paid for, follows a string of recent settlements with the prudential banking regulators and state attorneys general concerning credit card add-on products.  Private plaintiffs are also in on the action.  A recent putative class action in the Eastern District of Pennsylvania alleges state-law violations by a store and bank that issued store-branded credit cards.  The plaintiffs’ amended complaint alleges that adds-ons for a payment protection plan and a credit monitoring service were essentially worthless because customers could not actually benefit from those services.

Companies in various sectors of the auto industry have also taken heat lately regarding add-on products.  The Federal Trade Commission in May approved a final consent order with a company accused of deceptively advertising an auto payment plan by failing to disclose its fees.

In June, the New York Attorney General reached a settlement with three jointly-owned car dealerships regarding their sale of credit repair, identity theft prevention services, and other “after-sale” items.  The dealers agreed to pay more than $13.5 million in restitution and $325,000 in penalties, fees, and costs to the State.  The Attorney General found that the dealers “used deceptive sales tactics, including charging consumers for credit repair services and other ‘after sale’ items without their knowledge or by misrepresenting that the services were free.”  The Attorney General also reached a $41,000 settlement with another auto dealer that “fraudulently sold” credit repair and identity theft services, and announced plans to sue 11 more dealerships that allegedly engaged in similar conduct.

Meanwhile, a car rental company faces a lawsuit by private plaintiffs challenging the allegedly deceptive sale of add-on insurance products.  The judge in that case denied class certification without prejudice in January 2015, and granted a new motion for class certification in April, before reconsidering and denying class certification on July 1.

Add-on products are not inherently unlawful and can provide substantial benefits to consumers.  But in the credit card industry and elsewhere, lenders should remain aware of the legal risks stemming from how they are marketed and what benefits they provide consumers.