The US Consumer Financial Protection Bureau (CFPB) continues its efforts to expand its supervisory authority. On September 17, 2014, the CFPB issued a proposal to supervise "larger participants" in the auto finance market. Under the proposal, the CFPB would examine nonbank auto finance companies that have at least 10,000 aggregate annual originations (including refinancings), as well as acquisitions or purchases, of auto loans and leases, in the previous calendar year. This threshold would also include refinancings, certain types of leases that would be permissible for banks and other non-operating leases, as well as acquisitions and purchases of these loans. The threshold would cover not only the originations or acquisitions of the nonbank company, but its affiliated companies as well. The CFPB states that it expects this would bring 38 nonbank auto finance companies under its supervision, representing 91% of the nonbank automobile financing market.
The CFPB seeks comment on lower and higher thresholds. The proposal identifies a lower threshold of 5,000 annual originations, under which the CFPB has calculated it would supervise 55 entities representing almost 93% of the market. The higher threshold under consideration is 50,000, under which the CFPB would supervise 17 entities, representing approximately 86% of the market. The proposal also states that it does not intend to cover automobile title lending, which it would address in a future larger participant rulemaking, but also seeks comment on this approach.
The proposal expressly exempts auto dealers from the definition of "larger participant." This exemption is grounded on the explicit carve-out for auto dealers from CFPB authority under the Dodd-Frank Act. But the proposal also exempts auto dealers that are predominantly engaged in the sale and servicing or leasing and servicing of motor vehicles that directly extend retail credit or leases they do not routinely assign to unaffiliated third party finance or leasing sources, which are not exempted by the Dodd-Frank Act. The CFPB explains that it considers these auto dealers a different market, because they use a different business model and are smaller in asset size and activity level. The CFPB states that it may address these auto dealers in a future rulemaking.
A key issue is the proposal's potential coverage of the entities that acquire and securitize auto loans so as to sell asset-backed securities. As noted, the proposal would cover nonbank entities that have acquired or purchased 10,000 or more auto loans in the previous calendar year. Thus, as drafted, the proposal potentially covers the special purpose entities that acquire pools of loans and issue asset-backed securities, depending on the size of the deal. Although the proposal would exclude from its coverage "investments in asset-backed securities," the proposal does not clearly exempt those entities that are acquiring the loans to issue the securities. And although the CFPB states in the proposal that it does not intend to cover the securitization of automobile loans and leases in the proposal, it also states that it is seeking comment on whether an exclusion for asset-backed securities is appropriate. It also seeks comment on whether the CFPB should define the term “asset-backed securities.” This indicates that the coverage of the auto ABS market under the rule is an open policy issue at the CFPB.
A key implication for companies that would be considered "larger participants" under the proposal is the prospect of federal examinations for fair lending and compliance with federal laws. For these entities, the most significant of these laws would likely be the Equal Credit Opportunity Act (ECOA). It is expected that this will be the first area in which the CFPB seeks an enforcement action. In 2013, the CFPB issued guidance to the indirect auto lending market regarding dealer mark-ups and the potential for that practice to result in higher charges to certain types of borrowers. The CFPB noted this may result in a violation of ECOA, even without intent to discriminate, because it could result in a "disparate impact" on a prohibited basis under ECOA. The CFPB has moreover praised at least one indirect auto lender for moving to a flat fee pricing structure, but other indirect lenders have not followed suit. Under this proposal, the CFPB could use its new supervisory authority over 90% of the non-bank auto finance market, as well as the largest bank auto lenders, to push the market towards a flat fee structure. Significantly, the CFPB issued the proposal with documents outlining its disparate impact methodology and proxy methods to determine race and ethnicity of borrowers, and its software code. These are accessible at http://files.consumerfinance.gov/f/201409_cfpb_report_proxy-methodology.pdf and https://github.com/cfpb/proxy-methodology.
The CFPB would also have the authority to examine the "larger participants" for compliance with other federal statutes, such as the Dodd-Frank's prohibition against unfair, deceptive, or abusive acts or practices (UDAAP), Fair Credit Reporting Act (FCRA), or the Truth in Lending Act (TILA). The CFPB has already engaged in a number of UDAAP enforcement actions against nonbank entities based on deceptive and unfair acts or practices. And because of the vague and broad definition of the term "abusive," the CFPB has significant discretion in defining whether an particular act or practice is considered abusive. A possible target of UDAAP enforcement actions is the marketing of add-on insurance products. Nonbank auto lenders that would be covered by the proposal should consider conducting analyses of their products, disclosures, and policies and procedures to prepare for CFPB examinations in these areas.
The CFPB provided 60 days from publication in the Federal Register to comment on the proposal. The proposal can be accessed here: http://files.consumerfinance.gov/f/201409_cfpb_proposed-rule_lp-v_auto-financing.pdf.