WASHINGTON, D.C. -
Among the seven specific objections the American Financial Services Association made known to the Consumer Financial Protection Bureau, the organization concluded the threshold to determine what regulators consider to be a larger participant in auto financing should be raised significantly.
To recap, if a finance company makes, acquires or refinances 10,000 or more vehicle loans or leases in a year, the CFPB is looking to become that operation’s primary regulator stemming from a proposal disclosed during a bureau event back in September. This week, which was the end of the CFPB’s period for accepting public comment, the Structured Finance Industry Group joined AFSA in declaring the participation level should be lifted to 50,000.
“In order to avoid creating further regulatory burdens, uncertainty and potential restriction of access to credit for auto loans, the CFPB should make several changes to the proposed rule,” AFSA executive vice president Bill Himpler said in the comment letter to the CFPB that also was signed by Structured Finance Industry Group executive director Richard Johns.
“AFSA agrees with the bureau regarding the important role that automobiles and auto-related financing play in consumers’ lives, and in the country as a whole,” Himpler continued. “With this in mind, it is crucial that the CFPB exercise great care in crafting the final rule defining larger participants in the automobile financing market to avoid creating further regulatory burdens, minimize uncertainty for covered persons in that market, and potentially restrict consumers’ access to credit for these loans.”
Himpler then articulated the seven specific rule modifications for the CFPB to consider, including:
— Use the Regulation Z definition of “refinancing” as opposed to the proposed expanded definition.
— Retain the exclusion for asset-backed securities from the definition of “annual originations” and modify the exclusion to clearly cover asset-backed securities.
— Refrain from overreach regarding leases.
— Modify the test used to determine larger participants to ensure that it truly captures the “larger” participants who actually occupy the vast majority of the market.
— Change certain other definitions, including what is an automobile, a title loan and an affiliate.
— Provide additional detail on Experian Automotive’s AutoCount database and specifically exclude loans not made for the purpose of financing the purchase of automobiles or the refinancing of such original obligations from the database.
— Revisit the cost likely to be incurred by a larger participant experiencing supervisory activities by the bureau.
When Himpler elaborated about each of those seven recommendations, the AFSA officials shared some examples that might be of particular interest to finance company leaders. First, Himpler pointed out how the CFPB’s current metrics and definitions could place certain entities into two very different categories simultaneously.
“A threshold of 10,000, coupled with the overly broad definition of refinancing, is so low that covered persons who qualify as small businesses under the Small Business Administration’s definition could also qualify as larger participants under the proposed rule. If the definition of refinancing is not changed, even more small businesses have the potential to meet the definition of larger participant,” Himpler said.
“It seems contradictory that a covered person could be a small business and a larger participant at the same time,” he continued. “A small business that has less than $38.5 million in average annual receipts without question does not have more than 1 percent of the $900 billion automobile financing market share.
“It stretches credulity to conclude that such a small business with less than 1 percent of the market share should be considered a ‘larger’ participant in the entire market,” Himpler went on to say.
Himpler also touched on the CFPB’s expectations for what maintaining compliance is going to cost finance companies. The CFPB estimated total labor cost for an examination is about $27,611, requiring only a low-level compliance officer and a small fraction of an attorney’s fees.
However, Himpler said he reviewed CFPB statements and exam manuals. AFSA now believes the bureau expects a compliance officer that is a corporate executive with direct access to the finance company’s board.
“The salary for such a person would be much higher,” Himpler said. “Additionally, from what members of the industry have learned from their counterparts in other industries, a CFPB examination requires ‘all hands on board’ plus substantial outside counsel costs.”
Himpler mentioned several other resources finance companies might need, such as a number of in-house attorneys, business persons, IT professionals, outside counsel and outside consultants who could be directly involved with CFPB examinations.
So bottom line — how much might an examination cost?
“We believe, based on exam costs from companies in other industries, that a more accurate estimate for the cost of an examination would be $750,000 to $1 million,” Himpler said. “Larger and lengthier examinations can cost over $1 million in staff time and outside counsel and consultants.
“To be clear, this is independent of costs associated with the conclusion of memos of understanding or consent orders,” he continued. "The estimate in the proposed rule also totally ignores other costs, such as e-discovery, costs which are often astronomical.
“For a small business with $38.5 million or less in average annual receipts — even a half-a-million-dollar exam is a huge cost,” Himpler went on to say.
AFSA’s complete commentary to the CFPB can be downloaded here.