On October 1, 2014, BuckleySandler hosted a webinar, The CFPB’s Expanding Oversight of Auto Finance, Part One. Through an examination of the Consumer Financial Protection Bureau’s (CFPB) authority, recent enforcement activities, and discussion of the exam process, Kirk JensenJohn ReddingMichelle RogersMarshall Bell and Lori Sommerfieldexplored the different areas of the auto finance industry coming into the CFPB’s focus.

BuckleySandler will present The CFPB’s Expanding Oversight of Auto Finance, Part Two on October 30, 2014.

Explaining the Larger Participant Rule

Since its creation, the CFPB has held statutory authority to supervise nonbank institutions who are “a larger participant of a market for other consumer financial products or services.” On September 17, 2014, the CFPB proposed a rule defining a market for “automobile financing” and “larger participants” within that market. Under this proposed rule:

  • A nonbank institution is a larger participant in the auto finance market if it “has at least 10,000 aggregate annual originations,” which includes:
    • Credit granted for the purpose of purchasing an automobile
    • Refinancings
    • Automobile leases
    • Purchases of extensions of credit and leases
  • An “automobile” includes any self-propelled vehicle used primarily for a consumer purpose for on-road transportation, except for certain identified vehicle types, including recreational vehicles, motor scooters and limited others
  • Affiliates are included in calculations but dealers are excluded

Supervisory & Enforcement Activities & Trends

Our attorneys noted that potential fair lending issues resulting from dealer “reserve” (also known as “participation”), which is the amount paid based on the difference between the buy rate and contract rate, remains the CFPB’s top area of focus in auto finance at this time, though the CFPB is expected to expand its focus beyond fair lending in the near future. They identified ancillary products, debt collection, and credit reporting as likely areas of CFPB expansion and noted that while the CFPB does not have authority to enforce the Sevicemembers’ Civil Relief Act (SCRA), the Bureau may rely on its Unfair, Deceptive, Abusive Acts and Practices (UDAAP) authority in seeking to extend its authority with respect to SCRA claims. The panelists went on to identify specific areas of CFPB interest under each area of enforcement.

Outlining the Exam Process

Each panelist is experienced in working with the CFPB, including in the examination context. They offered their insights on working with the CFPB to negotiate modifications of timing and scope of examination requests, educating examiners on business operations, and responding to Potential Action and Request for Response (PARR) and Notice and Opportunity to Respond and Advise (NORA) letters. Our panelists stated that ECOA exams of creditors are one of the most common CFPB examinations in the auto finance industry, reviewing the following three aspects of transactions:

  • Buy rates
  • Mark up
  • Underwriting decisions

The exam process may include:

  • Initial information request/ “first day letter”
  • Request for transactional data
  • Discussions to clarify exam scope, responsibilities, resources and document control
  • Presentations of key operational processes
  • Statistical testing to detect potential disparities on a prohibited basis in underwriting outcomes, buy rates or “mark up”
  • Notification of alleged violations or concerns may be communicated by:
    • “Soft exit” meeting or formal exit meeting
    • PARR/NORA letter
    • Written examination report
    • Informal discussion