On September 17, the CFPB released new information about its plans to supervise and enforce auto finance companies’ compliance with consumer financial laws, including fair lending laws. As it indicated it would earlier this year, the CFPB released a proposed rule that would allow it to supervise certain nonbank auto finance companies. Also as previously promised, the CFPB published a white paper on its method to proxy for race and national origin in auto finance transactions. Finally, the CFPB published its most recent Supervisory Highlights report, which is dedicated to its supervisory findings at depository institutions with auto finance operations.
The CFPB released the materials in connection with its September 18th field hearing on auto finance issues. These actions come roughly 18 months after the CFPB first provided guidance to auto finance companies regarding its expectations related to dealer “reserve” (or “participation”) and fair lending.
Larger Participant Rule
The Dodd-Frank Act grants the CFPB authority to supervise, regardless of size, nonbanks offering (i) certain mortgage-related products and services; (ii) private education loans; and (iii) payday loans. The CFPB also has the power to supervise “larger participants” in any other market for consumer financial products or services, provided that it first conducts a rulemaking to define “larger participants” within a particular market.
As proposed, the CFPB’s auto finance larger participant rule would allow the agency to supervise any nonbank finance company that has at least 10,000 aggregate annual originations. The rule would define “annual originations” as grants of credit for the purchase of an automobile, refinancings of such credit obligations and any subsequent refinancings thereof, and purchases or acquisitions of such credit obligations (including refinancings). It would also include “automobile leases” and purchases or acquisitions of automobile lease agreements. The rule would define “automobile” to include “any self-propelled vehicle primarily used for personal, family, or household purposes for on-road transportation” and to exclude “motor homes, recreational vehicles (RVs), golf carts, and motor scooters.”
The CFPB estimates the rule as proposed will allow it to oversee roughly 38 auto finance companies that the CFPB believes “originate around 90% of nonbank auto loans and leases.” As proposed the rule would not apply to title lending or the securitization of automobile loans and leases, but the CFPB requests comment on an approach that would include such activities. The rule also would not apply to auto dealers or to depository institutions.
Comments on the proposal are due 60 days after the proposed rule is published in the Federal Register.
Proxy Methodology White Paper
Since releasing its guidance on auto finance fair lending—which the CFPB has characterized as a restatement of existing law and which sought to establish publicly the CFPB’s grounds for asserting violations of ECOA against bank and nonbank auto finance companies for alleged “discretionary pricing policies”—the CFPB has faced pressure from industry stakeholders and lawmakers who have challenged the Bureau to provide additional information to support its approach to determining disparate impact.
The CFPB now provides additional information regarding one aspect of that approach—its method to proxy for race and national origin in the auto finance market, where such data is not collected as part of the financing process. The white paper reiterates that in conducting fair lending analysis of non-mortgage credit products in both supervisory and enforcement contexts, the CFPB’s Office of Research (OR) and Division of Supervision, Enforcement, and Fair Lending (SEFL) rely on a “Bayesian Improved Surname Geocoding (BISG)” proxy method. That method combines geography- and surname-based information into a single probability for race and ethnicity. The paper is intended to explain the construction of the BISG proxy currently employed by OR and SEFL and purports to assess the performance of the BISG method using a sample of mortgage applicants for whom race and ethnicity are reported. The CFPB asserts that “research has found that this approach produces proxies that correlate highly with self-reported race and national origin and is more accurate than relying only on demographic information associated with a borrower’s last name or place of residence alone.”
In its paper, the CFPB states that “it does not set forth a requirement for the way proxies should be constructed or used by institutions supervised and regulated by the CFPB” and that the BISG proxy methodology “is not static; it will evolve over time as enhancements are identified that improve accuracy and performance.”
The paper does not address other aspects of the CFPB’s processes or methods used to determine disparate impact, such as (i) the controls applied to ensure sure that the consumers who are being compared are “similarly situated”; or (ii) the basis point thresholds at which the Bureau determines a prohibited pricing disparity exists.
Concurrent with the release of the white paper, the CFPB provided its statistical software code and an example of publicly available census data used to build the race and ethnicity proxy. Of note in its introduction, the CFPB states that it “may alter this methodology in particular analyses, depending on the circumstances involved.”
Supervisory Highlights and CFPB Expectations
Finally, the CFPB released its latest Supervisory Highlights report, which details alleged discrimination in the auto finance market the CFPB has uncovered at banks over the past two years.
The CFPB states that, generally, its examiners found that bank indirect auto creditors “had discretionary pricing policies that resulted in discrimination against African-American, Hispanic, and Asian and Pacific Islander borrowers. As a result, these borrowers paid more for their auto loans than similarly situated non-Hispanic white borrowers.”
Although it has only publicly announced one enforcement action to resolve such allegations, the CFPB’s report states that non-public CFPB supervisory actions at indirect auto financing institutions resulted in approximately $56 million in remediation for up to 190,000 consumers.
The report again urges auto finance companies to consider three possible ways the CFPB believes institutions can mitigate their fair lending risk by: (i) “monitor[ing] and, if necessary, correct[ing] disparities through a strong compliance management system”; (ii) limiting “the maximum discretionary pricing adjustment to an amount that significantly reduces or eliminates disparities”; or (iii) “compensat[ing] dealers using a non-discretionary mechanism.”
In its press release accompanying the above materials, the CFPB further outlined its expectations for auto finance companies, stating that “given the significance of car ownership in the lives of consumers,” the CFPB expects auto finance companies to:
- Fairly market and disclose auto financing. Specifically the CFPB “would be concerned if consumers are being misled about the benefits or terms of financial products,” and the Bureau is “also looking to ensure that consumers are getting terms they understand and accept.”
- Provide accurate information to credit bureaus. Citing its recent enforcement action against an auto finance company alleged to have inaccurately reported information like the consumer’s payment history and delinquency status to credit bureaus, the CFPB states that it is “looking to prevent inaccurate information from being reported in the future.”
- Treat consumers fairly when collecting debts. The CFPB states that it has received complaints from consumers who claim their vehicles have been repossessed while they are current on the loan or have a payment arrangement in place, and that the CFPB will ensure that collectors are relying on accurate information and using legal processes when they collect on debts or repossess vehicles.