Industry Voices | Understanding Junk Fees in Auto Financing: Trends and AI-Driven Solutions

Federal regulators have placed a bulls-eye  on “junk fees,” targeting auto finance and other industries with a constant drumbeat of enforcement actions, rules and supervisory actions.

Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra recently defined junk fees as “unavoidable, surprise, excessive, or unnecessary charges imposed for fake or even worthless services. Even when a service is legitimate, junk fees often far exceed the actual cost, because the company figures out how to sidestep meaningful competition.”

On its face, “junk fees” are an appealing target.  It’s hard to find a consumer who enjoys paying for airplane seat assignments or carry-on luggage or shelling out convenience fees for concert tickets (hence the Live Nation antitrust action). 

With high inflation, consumers are tracking their costs, and these fees add up. The U.S. government estimates that various junk fees amount to $90 billion per year in the US, or more than $650 per household each year. Given the public dislike of these fees, this regulatory initiative is not going away anytime soon.

Yet, for many auto lenders and dealers, the phrase “junk fees” reflects unwanted worry and risk. Dealers and lenders are trying to better understand how they can leverage advanced technologies to ensure they remain compliant.  In many instances, what constitutes a “junk fee” isn’t very clear.   One person’s junk fee is another’s value-added service.  Fortunately, with new technologies such as AI, dealers and lenders can help protect consumers from unnecessary costs and foster a more transparent and trustworthy environment.

What Are Junk Fees in Auto Finance?

Industry participants looking to identify “junk fees” should pay close attention to ancillary charges in contracts, independent of the cost of the loan. These fees include administrative costs, document preparation fees, dealer markups and other miscellaneous charges. Unlike interest rates, which are openly negotiated, junk fees often appear in the fine print of loan agreements, catching borrowers by surprise.

Additionally, the CFPB’s Supervisory Highlights has identified examples of “junk fees.”

Impact on Auto Loan Servicing

Here are a couple of examples of “junk fees” identified by the CFPB:

Impact on F&I Products

F&I products are another area the CFPB monitors for junk fees.  F&I products encompass added services such as extended warranties, insurance policies and GAP (Guaranteed Asset Protection) coverage that a consumer might purchase at the time they get a loan.

F&I products face particular scrutiny when their true cost is obscured, or consumers are charged for services that regulators don’t consider adding value.  An oft-cited example would be the sale of nitrogen tires where the amount of nitrogen in the tire is no greater than in ordinary air.  The CFPB has cited lenders for not adhering to the terms of the F&I contract by overcharging for the products after early termination or miscalculating consumer refunds.

AI’s Role in Ensuring Accuracy and Compliance

With this onslaught of regulatory scrutiny, dealers and lenders are increasingly turning to Artificial Intelligence (AI) to ensure accuracy and compliance.

AI algorithms can automate fee calculations, ensuring they are accurate and justified. By analyzing vast amounts of data, AI detects anomalies and prevents erroneous charges. Many jurisdictions impose caps on certain types of fees, such as GAP insurance. Also, AI systems can be programmed to automatically check that fees do not exceed these statutory limits, reducing the risk of non-compliance and associated penalties.

AI-driven platforms provide consumers with clear, detailed breakdowns of all charges included in their loan agreements. This transparency builds trust and ensures that borrowers fully understand what they are paying for. AI can also analyze transaction patterns and identify suspicious activities, such as unauthorized fees. By flagging these activities, lenders can take corrective action before they impact consumers.

As AI evolves, its role in enhancing transparency, accuracy and compliance will be crucial in addressing the challenges posed by junk fees. By leveraging AI, the auto finance industry can protect consumers from unnecessary costs and foster a more transparent and trustworthy market.