On June 10, 2015, the CFPB published a rule that will allow the agency to supervise nonbank auto finance companies that make, acquire or refinance 10,000 or more loans or leases a year. This rule was originally proposed in September 2014 and is the fifth in a series of rulemakings to define larger participants of markets for other consumer financial products or services. It is expected to become effective in August 2015. The CFPB already supervises auto financing at the largest banks and credit unions. This rule puts companies that are now considered “larger participants” in the auto-financing market under the direct supervision of the CFPB. It is expected that 34 of the largest nonbank auto finance companies, comprising approximately 90 percent of nonbank auto loans and leases in the market, will be affected by the rule.
Examinations — What Can We Expect?
The CFPB also released its examination procedures that examiners will use to ensure that auto finance companies are following the law. Based on the CFPB’s Supervisory Highlights, the CFPB has found that “nonbanks are more likely to lack a robust compliance management system.” Examinations will focus on whether a nonbank has a robust compliance management system and whether the company is compliant with federal consumer financial law, including Title X of the Dodd-Frank Act, which prohibits unfair, deceptive, or abusive acts and practices in connection with consumer financial products and services. Examiners expect to (1) conduct on- and off-site examinations, (2) review policies, processes, and procedures, and (3) test transactions and accounts for compliance. It is also expected that the CFPB will scrutinize companies for fair-lending compliance and we encourage companies to review the CFPB’s indirect auto finance guidance that was issued in March 2013. As highlighted the CFPB’s recent fair lending enforcement action against a mortgage lender, discretion in pricing a financial product must not violate the disparate impact methodology that the CFPB uses in statistically analyzing fair lending compliance.
Exclusions From the Rule
The CFPB’s final rule does not currently include automobile title lending or the securitization of automobile loans and leases within the meaning of “automobile financing” as defined in the rule, although the CFPB reserves the right to change its mind, since it is seeking comments on this approach. The CFPB also excluded depository institutions and credit unions that are engaged in automobile financing from compliance with this rule because these entities are already subject to the CFPB’s supervisory authority. Section 1029 of the Dodd-Frank Act specifically states that the CFPB may not “exercise any rulemaking, supervisory, enforcement or any other authority over a motor vehicle dealer that is predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles or both.” As such, certain auto dealers, including those that extend retail credit or leases without routinely assigning them to unaffiliated third parties, will not be directly supervised by the CFPB.
Automobile Leases Broadly Covered
The CFPB also used its authority under the Dodd Frank Act to expand the types of automobile leases that will be included as a “financial product or service” that it is entitled to regulate. Dodd-Frank permits the CFPB to bring under its supervision any financial product or service that the agency believes is “conducted as a subterfuge or with a purpose to evade any Federal consumer financial law or permissible for a bank or for a financial holding company to offer or to provide which is likely to have a material impact on consumers.” This is a very powerful provision because it grants unconstrained discretion to the agency to identify the financial products and services that it should regulate. Dodd-Frank originally regulated only those leases that (1) were non-operating and (2) had an initial term of at least 90 days, so that the CFPB believes that only those leases that are the functional equivalent of purchase finance arrangements would have been covered. Because the agency believes that it’s “overall mission would be best served by covering automobile leasing more broadly,” the CFPB has expanded the definition of financial product or service to include an automobile lease that is not covered by the statutory definition but “qualifies as a full-payout lease and a net lease, as provided by 12 CFR 23.3(a),” and has an initial term of at least 90 days.
The broader definition of automobile leases is important because it could cause certain nonbank entities to qualify as “larger participants,” since their leases would be included in the entity’s annual origination calculation. In addition, the expanded definition of automobile leases makes those leases subject to Dodd-Frank’s prohibition of UDAAP and would mean that the CFPB has authority to conduct certain rulemaking with respect to those automobile leases. We expect that the CFPB will in the future prescribe disclosure requirements and rules concerning consumer rights to access information as it relates to these automobile leases.
Recent Auto Lenders Enforcement Actions
An examination of recent enforcement actions taken by both the CFPB and the FTC against auto finance companies provides some clues about the types of business practices that the regulators will scrutinize:
- Fair Credit Reporting Act: Enforcement action against an auto finance company for allegedly providing inaccurate information about borrowers to credit-reporting agencies, which was also a UDAAP violation because the company posted an FAQ on its website that stated that the company furnishes accurate information to the consumer reporting agencies.
- Truth in Lending Act: Enforcement action against a bank for improper loan disclosures and marketing practices regarding its add-on warranty program that it marketed to servicemembers.
- UDAAP: Enforcement action against auto dealers and auto lenders for deceptive print, Web, and video advertisements misrepresenting fees and amounts owed under auto loans, unfairly assessing fees and other amounts not allowed under the loans, and omissions in disclosures about the impact of an extension of the loan terms. Note that even if the CFPB does not have jurisdiction over an auto dealer under this new rule, the FTC does have jurisdiction to pursue UDAAP violations.