On Wednesday, June 10, 2015, the Consumer Financial Protection Bureau (“CFPB”) announced a new rule that grants the CFPB the ability to monitor nonbank companies that qualify as “larger participants of a market for automobile financing.” The CFPB simultaneously adopted a separate rule defining certain automobile leases as a “financial product or service.” These rules will take effect 60 days after their publication in the Federal Register.
To enable its examiners to prepare immediately for examinations of qualifying entities, the CFPB also concurrently released its auto finance examination procedures, which will be used by the CFPB when examining both banks and non-banks.
In its announcement, the CFPB noted that auto loans are the “third largest category of household debt,” amounting to around $900 billion in loans during the last quarter of 2014. This segment of financing is only growing: “[M]ore than a quarter of new cars are acquired through leases.” Consumers acquire auto loans through direct financing from lenders, or indirect financing from an auto dealer, who in turn sells the contract to a third-party.
Before the issuance of this rule, the CFPB supervised auto financing only at major banks and credit unions. Still, through its enforcement authority, it has long made policing auto finance practices a priority. In particular, the CFPB has aggressively investigated indirect auto lenders for claims related to the practice of allowing auto dealers discretion to markup buy-rates, resulting in large settlements. In December of 2013, for instance, the CFPB and the Department of Justice (“DOJ”) ordered a bank to pay $98 million in damages and penalties for alleged violations of the Equal Credit Opportunity Act (“ECOA”) due to supposed disparities in the dealer mark-ups charged to certain protected classes and their non-Hispanic white counterparts. Supervisory and enforcement focus on such practices will likely only increase given the CFPB’s broader reach under the new rule.
The new rule allows the CFPB to monitor auto loans issued by nonbank auto finance companies that “make, acquire, or refinance 10,000 or more loans or leases in a year.” These companies, known as “larger participants,” must comply with federal consumer financial laws, including the Truth in Lending Act, the Consumer Leasing Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibition on unfair, deceptive, or abusive acts or practices.
The CFPB will also monitor whether auto finance companies are: (1) “fairly marketing and disclosing auto terms,” including whether companies are using “deceptive tactics to market loans or leases” that could mislead consumers; (2) “providing accurate information to credit bureaus,” or otherwise distorting consumer credit records; (3) “treating consumers fairly when collecting debts,” such as whether companies employ illegal debt collection tactics or unfair repossession processes; and (4) “lending fairly,” specifically whether companies are complying with the ECOA.
The announcement comes on the heels of a flurry of recent enforcement scrutiny against auto finance companies. In addition to the CFPB, the DOJ and the Federal Trade Commission (“FTC”) have been at the forefront of these enforcement actions. For example, in February, the DOJ settled a discriminatory auto-lending lawsuit against two North Carolina auto-dealerships. The auto dealers specifically targeted African Americans by providing credit with predatory terms without assessing creditworthiness in violation of both the ECOA and North Carolina’s Unfair and Deceptive Trade Practices Act. Also, in February, the DOJ entered a $9.35 million settlement with a national auto lender over allegations that the company repossessed over 1,1000 cars in violation of the Servicemembers Civil Relief Act.
And, on May 15, the FTC announced a settlement against a company for deceptive advertisements in violation of the Federal Trade Commission Act (“FTC Act”) for failing to disclose in its advertisements for add-on biweekly auto payment plans that customers would be required to pay $700 in fees over the course of a five-year loan. As part of that settlement, the company agreed to reimburse over $1.5 million in fees to past customers and to waive certain fees for current customers totaling almost $1 million.
The auto finance enforcement backdrop also includes active DOJ investigations into whether subprime auto lenders and securitizers violated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”).
Given the already strong enforcement interest in auto lending practices, the CFPB’s larger market participant auto finance rule will ultimately result in increased enforcement activity – particularly for those entities now subject to the CFPB’s supervisory oversight, including specialty finance companies, captive auto finance companies, and “Buy Here Pay Here” finance companies. For those entities and others newly subject to CFPB oversight, becoming ready for initial CFPB examinations, including a detailed analysis of the new examination procedures, is the critical and immediate next step.