On June 10, the Consumer Financial Protection Bureau (“CFPB”) issued a rule bringing non-bank automobile finance companies under its supervisory authority. Auto finance companies were already subject to the enforcement and regulatory authority of the CFPB, but under the new rule, certain auto finance companies are also subject to routine and cause-based examinations by the CFPB. The rule goes into effect on August 31 of this year. Auto finance companies covered by the rule should take steps now to prepare.
Prior to the Dodd-Frank Act, the Federal Trade Commission (“FTC”) enforced federal consumer financial law against non-bank entities. The Dodd-Frank Act transferred enforcement authority from the FTC to the CFPB and granted the CFPB new supervisory powers over certain non-bank entities, including mortgage lenders, providers of private education loans, payday lenders, and any “larger participant of a market for other consumer financial products or services, as defined by rule[.]” [Emphasis added].
Under that authority, the recently issued rule defines “larger participant of a market for other consumer financial products or services” to include automobile finance companies with at least 10,000 in aggregate annual originations. “Aggregate annual originations” include automobile loans, leases, and refinances, or purchases of the same, but do not include any investment in asset-backed securities. The rule also expressly excludes motor vehicle dealers as defined in the Dodd-Frank Act from CFPB supervisory authority.
With the expanded supervisory authority, the CFPB can use its examination authority to conduct examinations of automobile finance companies for the purpose of: (1) assessing compliance with the requirements of federal consumer financial law; (2) obtaining information about activities and compliance systems or procedures; and (3) detecting and assessing risks to consumers and to markets for consumer financial products and services. As with any other examination, a CFPB examination team will begin the exam by requesting documents, customer disclosures, and other materials from the company. After reviewing those materials, the examination team may go onsite to observe operations, review and test compliance systems, and interview employees and management.
After completing the exam, the CFPB may direct the entity to take certain corrective actions. If the exam uncovers violations of federal consumer financial law, the CFPB may enter into an informal supervisory agreement with the company, which may include remediation payments for consumers. If the exam reveals serious violations, the CFPB may choose to bring a formal enforcement action. Importantly, examination teams consult with enforcement attorneys during the course of an examination for guidance on regulatory violations.
Non-bank auto finance companies previously have not been subject to CFPB regulatory supervision or examinations. Companies engaged in automobile financing should take steps to prepare, including:
Confirm status as a “larger participant.” The rule only gives supervisory authority to automobile finance companies with at least 10,000 aggregate annual originations. If the company has less than 10,000 aggregate annual originations, the rule does not apply.
Conduct a comprehensive review of disclosures to customers. To help determine exam exposure, a covered company should conduct a comprehensive review of disclosures to consumers with an emphasis on areas that have been the subject of recent enforcement actions, announcements and guidance from the CFPB. Specifically, covered auto finance companies should review all disclosures in marketing and other materials provided to consumers and ensure that those disclosures match internal documents and practices as well as the terms of agreements with third parties. Updates to and corrections of disclosures may keep the company from being identified for an otherwise unscheduled examination.
Institute internal compliance measures. To mitigate potential risks that may lead to CFPB enforcement, covered auto finance companies should self-assess their exposure to federal consumer financial laws and institute internal compliance and governance measures that minimize risk. Covered companies may also consider appointing a compliance officer to oversee the overall compliance program.
Proper preparation can ease the burden of a CFPB exam and improve exam outcomes. Internal compliance measures will also minimize the risk that a company becomes the subject of an informal supervisory agreement or formal enforcement action.