Large auto-lenders may soon have to contend with a new regulator. In its most recent semi-annual report, the Consumer Financial Protection Bureau (“CFPB”) highlighted its intent to promulgate a new rule which would subject larger participants in the auto-lending industry to the CFPB’s supervisory examination power. This is a move authorized by the Dodd-Frank Act, under which the CFPB may extend its nonbank supervision program to “larger participants” in other consumer lending markets through rulemaking.
The CFPB’s past rulemaking has broadly defined “larger participants” in other consumer lending markets with potentially far-reaching consequences. For example, in the consumer reporting market, “larger participants” was defined as all companies with annual receipts over $7 million. In the consumer debt collection market, the definition was applied to all companies with annual receipts over $10 million. Most recently, the CFPB extended its supervisory authority to the student loan servicing market and defined larger participants as those companies with a volume of over one million accounts. These prior rules demonstrate the CFPB’s flexibility and discretion in deciding which market participants it will seek to supervise.
The CFPB’s focus on auto-lending stems from its concern over certain finance charges that it has previously sought to regulate through regulatory bulletins. The CFPB wants to encourage fair lending at both the portfolio level and the dealer level as mandated by the Equal Credit Opportunity Act (“ECOA”). Specifically, the ECOA bars discrimination against credit applicants on the basis of race, ethnicity, religion, sex, and age, among other protected statuses. The CFPB believes that dealer finance charge participation – where auto dealers charge and retain a premium over the rate at which financial institutions are willing to purchase a finance contract from the dealer – lends itself to potential discrimination on the basis of protected statuses such as race and ethnicity. Using disparate impact analysis to establish such discrimination and considering indirect auto lenders as “creditors,” the CFPB has interpreted its grant of ECOA regulatory authority to extend to conduct at the dealer level. Commentators believe that the CFPB intends to affect the behavior of auto-dealers, who are otherwise explicitly excluded from the CFPB’s reach under the Dodd-Frank Act, through indirect regulation of auto-lenders.
If the CFPB’s proposed extension of its examination power to cover auto-dealer lenders goes into effect, regulated auto lenders should prepare themselves in advance for a CFPB examination. As a best practice, regulated entities should designate a team to collect information and documents in advance of the examination and to assist the CFPB examiners on-site. Auto lenders should also pay particular attention to two ECOA baseline review procedures published by the CFPB in June and July 2013 which are available on the Bureau’s website. The procedures outline the pertinent ECOA rules and detail the information and documents the CFPB intends to review under the ECOA as part of a supervisory examination.