The Consumer Financial Protection Bureau’s (CFPB) recent proposal to exercise its authority under the Dodd-Frank Act to supervise large nonbank automobile lenders may have finance companies working to enforce nondiscrimination and fair lending standards at dealerships.
The proposal, issued in September, would implement a Dodd-Frank authority for the CFPB to define and then regulate “larger participants” in consumer financial markets other than those directly covered by the CFPB’s mandate (such as mortgage lending).
The proposed rule would define larger participants to be those providers of auto finance credit that originate 10,000 or more auto loans and leases in a year. Loans and leases on motor homes, recreational vehicles, golf carts, and motor scooters are excluded, as are loans and leases for business purposes.
The auto finance business is dominated by lenders that engage in indirect financing, by purchasing loans and leases that have been originated at the dealership. These include finance subsidiaries of all the major auto manufacturers. In this form of indirect financing, the consumer interacts directly with the dealership, and the dealer typically is afforded the ability to adjust the overall cost of the financing by adjusting the dealer’s own share of that cost. The CFPB was precluded by the Dodd-Frank Act from regulating the dealers in these transactions. Yet the CFPB has a concern that the pricing to consumers (inclusive of the dealer’s share) not be discriminatory or otherwise in violation of fair lending principles. By initiating a program to regulate the indirect lenders and lessors, the CFPB seeks to put itself in a position to gather information, evaluate and ultimately affect the behavior of the credit originators in the dealerships.
According to the CFPB’s estimate, the proposed rule will generate oversight of roughly 90 percent of nonbank auto loans and leases, through regulation of about 38 finance companies. The proposed rule has a 60-day comment period.
To read the CFPB’s proposed rule, click here.
To read the Bureau’s white paper, click here.
To read the latest edition of Supervisory Highlights, click here.
Why it matters: The proposed rule would bring the indirect auto finance companies into the general jurisdiction of the CFPB, subjecting them to more extensive examination and scrutiny. It could have the effect of making indirect auto finance companies do the bidding of the CFPB to narrow the range of choices a dealer can make when negotiating the financing for an auto purchase. The comment period is short, so if affected finance companies wish to have a say in the final form of this rule, they must act quickly.