The Dodd-Frank Act grants the Consumer Financial Protection Bureau the authority to supervise any “larger participant of a market” for non-mortgage financial products or services. 12 U.S.C. § 5514(a)(1)(B). On June 10, 2015, the Consumer Financial Protection Bureau published a new rule granting the CFPB supervisory authority over any nonbank auto finance company that makes 10,000 or more annual originations. According to the Bureau, the purpose of the rule is to “ensure that larger auto finance companies treat consumers fairly.”
- When will the rule go into effect? The Rule will go into effect 60 days after it is published in the Federal Register. As of the date of this blog post, June 16, 2015, the rule has not yet been published.
- Who is subject to the new rule? The rule applies to all nonbank auto finance companies with 10,000 or more aggregate “annual originations.” The 10,000 number includes transactions by “affiliated companies.” Once a company qualifies as a larger participant, it remains subject to supervision until two years after the first day of the tax year in which that company and its affiliates last had 10,000 or more aggregate annual originations.
The CFPB estimates that there are around 500 nonbank automotive lenders, but only about 34 companies will qualify for supervision. The CFPB believes that “these entities account for 7 percent of all nonbank covered persons in the automobile financing market and are responsible for approximately 91 percent of the activity in the nonbank automotive financing market.”
- What is an “annual origination?” An annual origination includes: (1) credit granted for the purpose of purchasing an automobile; (2) automobile leases; (3) refinancings of any credit obligations that are secured by an automobile, and any subsequent refinancings of that obligation that are not secured by an automobile; and (4) the purchase or acquisition of any of the above. The term “automobile” includes motorcycles but does not include motor homes, RVs, golf carts, and motor scooters. Investments in asset-backed securities also do not qualify as annual originations.
- How will auto finance companies find out if they are subject to the rule? The CFPB will notify an entity when it intends to undertake supervisory activity. The entity will then have the opportunity to argue that it does not meet the definition of a larger participant.
- What are the consequences of being listed as a larger participant? Any company qualifying under the larger participant rule will be subject to the CFPB’s supervisory authority, and will have to comply with the CFPB’s rules and regulations implementing consumer-finance laws. Consequences of noncompliance can be severe, with the CFPB authorized to impose fines of up to $1 million per day for “knowing violations” of federal consumer finance laws.