What the Consumer Financial Protection Bureau officially will consider to be a “larger participant” in the auto finance market took another significant step forward today.
The CFPB published a rule that will allow the agency to supervise larger nonbank auto finance companies for the first time. The CFPB also released the examination procedures that regulators will use to ensure that auto finance companies are following the law.
“Auto loans and leases are among the most significant and complex financial transactions in a typical consumer’s life,” CFPB director Richard Cordray said. “Today’s rule will help ensure that larger auto finance companies treat consumers fairly.”
The CFPB estimated auto loans are the third largest category of household debt, behind mortgages and student loans. The bureau added American consumers had about $900 billion in auto loans outstanding in the fourth quarter of 2014.
Currently, the bureau supervises auto financing at the largest banks and credit unions. Today’s rule extends that supervision to any nonbank auto finance company that makes, acquires or refinances 10,000 or more loans or leases in a year.
Under the rule, those companies will be considered “larger participants,” and the bureau may oversee their activity to ensure they are complying with federal consumer financial laws, including the Equal Credit Opportunity Act, the Truth in Lending Act, the Consumer Leasing Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act’s (Dodd-Frank Act) prohibition on unfair, deceptive, or abusive acts or practices.
Under today’s final rule, which was proposed last September, the bureau estimates that it will have authority to supervise about 34 of the largest nonbank auto finance companies and their affiliated companies that engage in auto financing.
These companies together originate around 90 percent of nonbank auto loans and leases, and in 2013 provided financing to approximately 6.8 million consumers. The final rule also defines additional automobile leasing activities for coverage by certain consumer protections of the Dodd-Frank Act.
The bureau indicated it is finalizing the rule largely as proposed, with minor changes. The final rule broadens the category of transactions involving asset-backed securities that are not counted toward the 10,000 transaction threshold.
Bureau officials added the rule also makes a minor modification to the definition of refinancing for the purpose of the threshold.
To coincide with this new authority, the bureau updated its Supervisory and Examination Manual to provide guidance on how the CFPB will monitor the bank and nonbank auto finance companies that it supervises.
The regulator explained examiners will be assessing potential risks to consumers and whether auto finance companies are complying with requirements of federal consumer financial law. Among other things, examiners will be evaluating whether auto finance companies are:
• Fairly marketing and disclosing auto financing terms: The bureau will be examining auto finance companies that market directly to consumers to ensure they are not using deceptive tactics to market loans or leases. The Bureau would be concerned if consumers are being misled about the benefits or terms of financial products. The Bureau is also looking to ensure that consumers understand the terms they are getting.
• Providing accurate information to credit bureaus: The bureau will assess whether information auto finance companies provide to credit bureaus is accurate. The CFPB recently took an enforcement action against an auto finance company that distorted consumer credit records by inaccurately reporting information like the consumers’ payment history and delinquency status to credit bureaus. The CFPB is looking to prevent inaccurate information from being reported in the future.
• Treating consumers fairly when collecting debts: The bureau will assess whether auto finance companies are using illegal debt collection tactics. The Bureau will be looking to ensure that collectors are relying on accurate information and using legal processes when they collect on debts. The Bureau also will review the repossession process, including the practices of third-party service providers that are employed to repossess autos.
• Lending fairly: The bureau will assess whether auto finance companies’ practices comply with the Equal Credit Opportunity Act and other Bureau authorities protecting consumers.
Today’s rule will take effect 60 days after publication in the Federal Register.
A copy of the rule published today can be found here.
The examination procedures for auto finance can be found here.