Why it matters

The Consumer Financial Protection Bureau (CFPB) released its final rule providing oversight of larger participants in the nonbank auto-financing ecosystem, along with examination procedures for covered entities, making the significant expansion of its supervision official. The final version largely mirrors the Bureau’s September 2014 proposal: the CFPB will supervise nonbank auto finance companies with at least 10,000 aggregate annual originations (including making, purchasing, acquiring, or refinancing extensions of credit for the purchase or lease of a car) to ensure compliance with the Equal Credit Opportunity Act (ECOA), the Truth in Lending Act, the Consumer Leasing Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibition on unfair, deceptive, or abusive acts or practices. This authority will reach roughly 34 entities and affiliates, the Bureau estimated, or about 90 percent of the nonbank automobile financing market. For those market participants now subject to the CFPB’s oversight, the agency indicated areas of focus for examiners, including the marketing and disclosure of terms in auto financings, credit reporting practices and accuracy, the treatment of consumers when collecting debts (both directly and using third-party vendors), and fair lending under the ECOA. Enforcement begins 60 days after publication in the Federal Register. Other large nonbank consumer financial service providers that have become subject to CFPB supervision (and, in particular, examination), including large credit bureaus and debt collectors, have found the CFPB examination process challenging, and nonbank auto lenders likely will have a similar experience.

Detailed discussion

The Dodd-Frank Wall Street Reform and Consumer Protection Act provided the Consumer Financial Protection Bureau (CFPB) with the power to regulate “larger participants” in consumer financial markets in addition to those directly covered by the Bureau’s mandate (such as mortgage lending).

In September 2014, the CFPB issued a proposed rule to implement this authority to supervise large nonbank auto lenders.

As finalized, the Bureau defined “larger participants” as those that originate 10,000 or more auto loans and leases in a year. To reach the 10,000 threshold of “annual originations,” an entity must include credit granted for the purpose of purchasing a covered automobile; refinancings of such credit obligations; purchases or acquisitions of such credit obligations or refinancings; and automobile leases and purchases or acquisitions of automobile leases.

Title loans and loan securitization purchases and related activities are not included in the calculus. Loans and leases on motor homes, recreational vehicles, golf carts, and motor scooters are exempt, as are loans and leases for business purposes.

Only minor changes were made from the September proposal, with a tweak to the definition of refinancing for the purpose of the 10,000 threshold and an expansion of the category of transactions involving asset-backed securities that are not counted toward the threshold.

The Bureau estimated that the rule will generate oversight of 90 percent of nonbank auto loans and leases through the regulation of about 34 finance companies that provide financing to 6.8 million consumers.

Why the need for supervision over such entities for the first time? According to the CFPB, by extending its oversight beyond auto loans at the largest banks and credit unions, it will “ensure that auto finance companies are following the law” in the $900 billion market. “Auto leases and loans are among the most significant and complex financial transactions in a typical consumer’s life,” CFPB Director Richard Cordray said in a statement about the final rule. “Today’s rule will help ensure that larger auto finance companies treat consumers fairly.”

Along with the new rule, the CFPB released an updated Supervisory and Examination Manual, noting specific areas of focus for examiners. Those auto finance companies that market directly to consumers will be scrutinized “to ensure that consumers understand the terms they are getting,” the Bureau said, and that the companies are not engaging in deceptive tactics to market loans or leases.

Citing an enforcement action brought last year against an auto financing company that allegedly knowingly provided inaccurate information to credit reporting agencies about consumers’ payment history and delinquency status, the Bureau cautioned that auto finance companies now under supervision must provide accurate data to credit bureaus.

Other areas of focus for CFPB enforcement: ensuring that covered entities are complying with the fair lending requirements found in the ECOA and other laws protecting consumers and assessing whether auto finance companies are using legal tactics to collect debts. Collections and repossession should be based on accurate information and legal processes, the Bureau said, regardless of whether the auto finance company itself or a third party is doing the collection and/or repossessing. And based on past enforcement history, the CFPB is likely to take a close look at add-on products offered and frequently financed through auto credit, including vehicle service agreements.

To read the CFPB’s final rule, click here.

To read the Examination Procedures for Auto Finance, click here.