If a finance company makes, acquires, or refinances 10,000 or more vehicle loans or leases in a year, the Consumer Financial Protection Bureau is looking to become that operation’s primary regulator stemming from a proposal released late on Wednesday.

The bureau said this proposed rule would generally allow the CFPB to supervise nonbank auto finance companies to ensure they are complying with federal consumer financial law. Bureau officials estimated that about 38 auto finance companies would be subject to this new oversight.

According to the CFPB, these companies originate around 90 percent of nonbank auto loans and leases, and in 2013 provided financing to approximately 6.8 million consumers. This group would include most if not all captive finance companies for domestic and foreign automakers such as Toyota Financial Services, Ford Motor Credit, American Honda Finance and Nissan Motor Acceptance Corp.

Furthermore, through announcements released only hours before its special field hearing set for today in Indianapolis, the CFPB also shared a supervision report that details the auto-lending discrimination that the bureau said it has uncovered at commercial banks.

Officials indicated the report highlights that the bureau’s supervisory actions against banks will result in about $56 million in redress for up to 190,000 consumers harmed by discriminatory practices.

“Many people depend on auto financing to pay for the car they need to get to work,” CFPB director Richard Cordray said. “Nonbank auto finance companies extend hundreds of billions of dollars in credit to American consumers, yet they have never been supervised at the federal level. We took action after we uncovered auto-lending discrimination at banks we supervise.

“(Wednesday’s) proposal would extend our oversight, allowing us to root out discrimination and ensure consumers are being treated fairly across this market,” Cordray continued.

Currently, the bureau supervises large banks making auto loans, but not nonbank auto finance companies. Now, the CFPB is proposing to extend its supervision authority to the larger participants of the nonbank auto finance market. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the CFPB says it has authority to supervise certain nonbanks the bureau defines through rulemaking as “larger participants” in a market.

The Consumer Bankers Association applauded the regulatory expansion the CFPB is seeking.

“(Wednesday’s) announcement by the CFPB will help to level the supervisory playing field between banks and other auto lenders,” CBA general counsel Steve Zeisel said. “This is good for consumers as they should expect to receive the same fair treatment at any lender they go to.”

Previously Non-Public Disciplinary Action

In March of last year, the CFPB issued a bulletin reminding indirect auto lenders that under the Equal Credit Opportunity Act (ECOA), it is illegal for a creditor to discriminate in any aspect of a credit transaction on prohibited bases including race, color, religion, national origin, sex, marital status and age.

In its latest report, CFPB examiners said they found that these indirect auto lenders had discretionary pricing policies that resulted in discrimination against African-American, Hispanic and Asian and Pacific Islander borrowers. As a result, they insisted these borrowers paid more for their auto loans than similarly situated non-Hispanic white borrowers.

“When lenders have not followed the law, the bureau has used both enforcement and supervisory actions to direct institutions to obtain remediation to harmed consumers,” bureau officials said in connection with what has been recent non-public CFPB supervisory actions at indirect auto financing institutions resulted in approximately $56 million in remediation for up to 190,000 consumers.

To prevent discrimination from reoccurring at these finance company, the CFPB noted that it identified at least three possible ways institutions can limit their fair lending risk:

— Conduct internal monitoring for discrimination: Auto finance companies should monitor and correct for potential discrimination that stems from discretionary pricing policies and address the effects of markup policies as part of a robust fair lending compliance program.

— Limit discretionary markups: Indirect auto finance companies can reduce the risk of potential discrimination by limiting the discretion dealers have to mark up the price of a loan financed by the lender.

— Eliminate dealer discretion for markups: Indirect auto lenders can also lower their fair lending risk by eliminating dealers’ ability to markup the price of a loan and fairly compensating dealers using a different mechanism.

“When consumers receive indirect financing, often the finance company or other indirect lender authorizes the dealer to mark up the interest rate,” CFPB officials said. “Markups lead to dealers and indirect lenders charging different rates to similarly situated consumers, which increases the risk of discrimination.

“Discriminatory markups on auto loans may result in tens of millions of dollars in consumer harm each year,” they added.

Editor’s Note: SubPrime Auto Finance News will have more analysis and reaction following today’s CFPB field hearing. For more, follow the publication on Twitter (@SubPrimeNews) or the website (www.subprimenews.com).