State and federal law enforcement agencies are now taking aim, on both the consumer protection and fraudulent loan securitizations fronts, at what they consider to be questionable practices by automobile lenders.
On the consumer protection front, the Consumer Financial Protection Bureau (CFPB) initially dipped a toe into this area through a bulletin in May 2013, claiming that lenders that offer auto loans through dealerships are responsible for unlawful, discriminatory pricing. According to the CFPB, the main culprits are indirect auto lenders that allow the dealer to charge a higher interest rate than the rate the lender offers the dealer, with the result that the lender shares a portion of this markup with the dealer. Under the Dodd Frank Act, such a practice would be illegal if it involved payments to mortgage brokers that sell their customers into higher rate mortgage loans. The auto lending industry, however, was not similarly regulated by Dodd Frank. The CFPB suggests it will seek to attack such practices in the auto loan industry as illegal discrimination if it finds that protected minorities have been charged higher rates as a result.
In September 2014, the CFPB proposed rules that would extend its supervision authority to the larger participants of the nonbank auto finance market. The proposal would allow the CFPB to supervise finance companies with respect to federal consumer financial laws if those companies make, acquire, or refinance 10,000 or more loans or leases in a year. The CFPB estimates 38 auto finance companies, which originate about 90 percent of nonbank auto loans and leases, would be subject to this new jurisdiction.
On the securitization front, subprime auto lender Consumer Portfolio Services disclosed earlier this month that it had received a subpoena from the U.S. Department of Justice (DOJ) requesting documents relating to its auto lending and securitization activities. In December 2014, Ally Financial Inc. had received a similar request from the DOJ, and in October, the Securities and Exchange Commission (SEC) began an investigation into Ally’s lending and securitization practices. GM Financial announced in November that it had received document requests from the SEC relating to its securitization practices. Santander Consumer USA Holdings Inc. announced in August that it also was under DOJ investigation, and in November the New York Department of Consumer Affairs announced that it was looking into Santander’s lending practices.
It appears that these investigations, which include potential criminal enforcement, are looking into whether these lenders are securitizing and packaging loans for sale to investors without ensuring the quality of loans or fully disclosing their risks. If so, this would suggest that they may be engaging in some of the same practices that were alleged against the mortgage industry. Those ultimately led to numerous settlements between prosecutors and many of the large mortgage lenders.
Auto loan quality and risks could be impacted by lending discrimination, failure to comply with consumer protection regulations, or lax underwriting standards. If these risks are not being appropriately disclosed to investors, auto lenders could face the same enforcement liability as were a number of the mortgage lenders.
The risks to the global economy of risky auto loan securitizations may not be as high as they were for mortgage loan securitizations, given that it is easier to repossess a car than it is to foreclose on a mortgage, and given the generally smaller dollar amounts involved. This time, however, it appears that federal regulators will not be waiting until an economic crash before attempting to address the problems the problems they suspect, and costly criminal and civil actions may be more aggressive and occur more quickly.