June 15, 2015

CFPB Issues Final Rule Extending Its Supervisory Authority over Larger Participants in the Auto Lending Market

4 min

The Consumer Financial Protection Bureau (CFPB) issued a final rule regarding its oversight of nonbank automobile finance companies. The rule defines larger participants of the automobile financing market, pursuant to the CFPB's authority under the Dodd-Frank Act to supervise such participants in consumer finance markets other than residential mortgage, private education lending, and payday lending markets. The rule is the fifth in a series of rules that the CFPB has issued defining "larger participants" in various markets (including consumer reporting and debt collection) and subjecting those participants to CFPB supervision.

When will the rule apply? The final rule will become effective 60 days after publication in the Federal Register.

Whom does the rule cover? The final rule will cover roughly 34 of the largest "Buy Here Pay Here" finance companies, finance subsidiaries owned by auto manufacturers, and specialty finance companies.

The CFPB identified a market for "automobile" lending (excluding motor homes, recreational vehicles (RVs), golf carts, and motor scooters) that includes over 500 nonbank automobile lenders. This market consists of:

  • Specialty finance companies: Specialty finance companies serve consumers in specialized markets and often focus on providing financing to subprime borrowers who struggle to obtain financing elsewhere.
  • "Captive" nonbanks (or "captives"): Captives are subsidiary finance companies owned by auto manufacturers that provide consumers with financing to help their parent companies and associated dealers facilitate auto sales.
  • "Buy Here Pay Here" (BHPH) finance companies: Most BHPH companies are independently owned entities that serve as the primary lender and receive payments directly from consumers.

Dealer exclusion: The rule excludes from the market definition auto dealers that (1) are identified as "motor vehicle dealers" under the Dodd-Frank Act and (2) predominantly engage in selling and servicing, or leasing and servicing, motor vehicles.

"Larger Participant" definition: A nonbank covered person that engages in automobile financing is a "larger participant" in the automobile financing market if it has at least 10,000 aggregate "annual originations." Of the 500 entities that the CFPB estimates are included in its defined market, 34 of these nonbank automobile lenders would meet the definition of a "larger participant."

The rule defines "annual originations" to mean the sum of the following transactions for the preceding calendar year:

  • Credit granted for the purchase of an automobile;
  • Refinancing of credit secured by an automobile;
  • Automobile leases; and
  • Purchases or acquisitions of any of the foregoing obligations (including retail installments contracts).

Purchases of obligations to facilitate asset-backed securities, as well as title loan originations, are excluded from the rule. The final rule states that title loans represent a market different from that of auto financing and "are best addressed through a future larger-participant rulemaking."

Further, larger participant status depends on an entity's aggregate annual originations. A nonbank covered person's annual originations must be aggregated with the annual originations of any company affiliated with it at any time during the preceding calendar year, except if the affiliate is a dealer excluded under the rule.

How Will the Rule Affect Covered Lenders? Under the final rule and updated examination manual, the CFPB will supervise and examine covered automobile finance companies to assess the potential risks to consumers and determine whether auto finance companies are complying with federal consumer protection laws and regulations. Areas that are subject to CFPB examination include, among others:

  • Fair Lending: The CFPB will review auto finance companies' practices to ensure that they comply with the Equal Credit Opportunity Act (ECOA) and other consumer protection laws.
  • Unfair, Deceptive, or Abusive Acts and Practices: The CFPB will examine whether auto finance companies engage in unfair, deceptive, or abusive acts or practices (UDAAPs). As the CFPB reminds readers of the final rule, "conduct that does not violate an express prohibition of another Federal consumer financial law may nonetheless constitute a UDAAP."
  • Truth in Lending Act: Examiners will determine whether lenders properly disclosed loan terms and annual percentage rates; properly credited payments and processed credit balance; and provided appropriate advertising and periodic payment disclosures.
  • Advertising and Marketing: The advertising and marketing practices of auto finance companies that market directly to consumers will be examined to ensure that the companies do not use deceptive tactics to market loans or leases. Further, the CFPB will review the disclosures provided to consumers to ensure that they understand the terms and conditions of the products offered.
  • Fair Credit Reporting: The CFPB will assess whether information auto finance companies provide to credit bureaus is accurate.
  • Service Providers: The Dodd-Frank Act authorizes the CFPB to supervise "service providers" to larger participants in the automotive lending market, regardless of the service provider's size.