The Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) recently announced its plans to subject many nonbank automobile financing companies to its supervisory authority. The CFPB’s proposal signals heightened scrutiny of the marketing, credit reporting, and debt collection practices of auto finance companies, in addition to the Bureau’s ongoing focus on pricing practices and equal access to credit.
Under the Dodd-Frank Act, the CFPB is able to define certain nonbank markets and the larger participants in those markets for purposes of defining the scope of the Bureau’s supervisory jurisdiction. The Bureau’s supervisory jurisdiction allows it to examine an entity—akin to an audit—for compliance with the consumer finance laws the Bureau is responsible for enforcing, including the Bureau’s prohibitions against unfair, deceptive, and abusive acts and practices (“UDAAP”), as well as the 18 enumerated consumer laws the Bureau enforces.
Below is a brief summary of the proposed rulemaking.
- Definition of Auto Finance Market - The proposed rulemaking defines the auto financing market to include companies engaged “in one or more of the following activities: granting credit for the purpose of purchasing an automobile; refinancing existing credit obligations or previously refinanced credit obligations that had been made for the purchase of an automobile; purchasing or acquiring such credit obligations (including refinancings); providing automobile leases; and purchasing or acquiring automobile lease agreements.”
- Scope of Auto Finance Market - The proposed rule sets forth a threshold test to determine if an auto finance company is a larger participant under the rule. Specifically, the test provides that “a nonbank covered person would be a larger participant if it has at least 10,000 aggregate annual originations” and is engaged in one of the activities listed above. The CFPB estimates this is approximately 38 companies.
- Nonbank Financing Targeted - Nonbank auto finance companies eligible for inclusion in the larger participant category under the proposed rule include (1) specialty finance companies, (2) captive nonbanks, and (3) buy here pay here (BHPH) finance companies. The Bureau’s proposed rulemaking explains, “…specialty financing companies serve consumers in specialized markets. Many of these companies focus on providing financing to subprime borrowers who tend to have past credit problems, lower income, or limited credit histories, which prevent them from being able to obtain financing elsewhere.”
In announcing this proposed rule, the Bureau also notes the following:
- The companies defined as larger participants in the proposed rulemaking originated approximately 90% of nonbank auto loans and leases. In 2013, these companies provided financing to an estimated 6.8 million consumers.
- The Bureau also warns that in the auto finance market, it is especially concerned with the marketing of auto loans, the furnishing of accurate consumer information to credit reporting agencies, and the fair collection of debts.
- The Bureau simultaneously released a summary of its Supervisory Highlights (Summer 2014) addressing its fair lending supervisory findings in the indirect auto lending market (supervised banks that finance auto loans). Specifically, the summary notes that the Bureau has found disparities in the pricing of loans based on race and/or the ethnic background of a consumer. The Supervisory Highlights report also notes the key components of a compliance system that effectively identifies and responds to the requirements of the fair lending laws.
There is a sixty-day notice and comment period for this rulemaking from the date of publication in Federal Register. The proposed rulemaking is available here.
For further information about this proposed larger participant rulemaking or other CFPB-related issues, contact the author of this article or other members of Venable's CFPB Task Force.