On June 10, the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) published a final rule that will allow the agency to supervise certain larger nonbank auto finance companies for the first time[1] and released auto finance examination procedures applicable to both bank and nonbank auto finance lenders subject to Bureau supervision.[2]
Under the rule, the CFPB will have supervisory authority over nonbank auto finance companies with at least 10,000 aggregate annual originations.[3] For purposes of the rule, the term “originations” includes: granting credit for the purchase of an automobile; refinancing existing credit obligations or previously refinanced credit obligations made for the purchase of an automobile; purchasing or acquiring credit obligations made for the purpose of purchasing an automobile (including refinancing); providing automobile leases; and purchasing or acquiring automobile lease agreements.[4] The term “originations” does not include transactions involving asset-backed securities and automobile title lending, and thus those activities are not covered by the rule.[5] In addition, certain auto dealers, including those that the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) exclude from the CFPB’s jurisdiction, do not qualify as larger participants under the rule.[6]
The Bureau finalized the rule largely as proposed, with minor changes. First, the final rule clarifies that only refinancings secured by an automobile are included within the definition of annual originations.[7] Second, the final rule expands the proposed rule’s exclusion of “investments in asset-backed securities” from the definition of aggregate annual originations. In addition to excluding investments in asset-backed securities, the final rule also excludes purchases or acquisitions of obligations made by special purpose entities established for the purpose of facilitating asset-backed securities transactions.[8]
The rule will take effect 60 days after publication in the Federal Register. This client alert summarizes the rule and highlights key provisions of the Bureau’s new auto finance examination procedures manual.
Background
The CFPB issued its proposed rule to supervise larger nonbank auto lenders last fall. [9] The Bureau received approximately 30 comments to the proposed rulemaking. The final rule largely adopts the proposed rule, with minor changes that are discussed below.
The CFPB issued the rule pursuant to its authority under the Dodd-Frank Act to supervise nonbank larger participants of certain financial product and service markets.[10] The CFPB currently supervises certain bank indirect auto lenders and, in December 2013, notably reached a $98 million fair lending settlement with Ally Financial following an examination of its dealer mark-up practices.[11]
Although all nonbank auto lenders generally are subject to the CFPB’s enforcement authority, before now they have not been subject to direct CFPB oversight. The final rule will open up larger nonbank participants in the auto financing market to the Bureau’s supervisory scrutiny. Among other matters, this means that the institutions covered by the rule will be expected to establish and implement compliance management systems to ensure they comply with applicable federal consumer financial laws, including the Truth in Lending Act (“TILA”), the Electronic Fund Transfer Act, the Fair Debt Collection Practices Act (“FDCPA”), the Fair Credit Reporting Act (“FCRA”), the Gramm-Leach-Bliley Act, the Equal Credit Opportunity Act, the Consumer Leasing Act, and the Dodd-Frank Act’s prohibitions against unfair, deceptive, and abusive acts and practices. Further, they now will be subject to routine examination by the CFPB.
Entities Subject to the New Rule
The final rule defines a market for consumer financial products or services labeled “automobile financing” and establishes a test to determine which participants of the automobile financing market qualify as “larger participants.” The Bureau estimates that under the rule it will have authority to supervise about 34 of the largest nonbank auto finance companies and their affiliated companies that engage in auto financing.[12] According to the CFPB, these companies together originate approximately 90 percent of nonbank auto loans and leases and, in 2013, provided financing to approximately 6.8 million consumers.[13] The parameters of the automobile financing market and the larger participant test are discussed below.
Automobile Financing Market
The Bureau’s final rule adopts the proposed rule’s defined market for automobile financing with the minor changes discussed below. Under the rule, the following activities constitute automobile financing:
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Granting credit for the purchase of an automobile;[14]
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Refinancing existing credit obligations or previously refinanced credit obligations made for the purchase of an automobile and secured by an automobile;[15]
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Purchasing or acquiring credit obligations made for the purpose of purchasing an automobile (including refinancings);[16]
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Providing automobile leases; and
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Purchasing or acquiring automobile lease agreements.[17]
Under the new rule, nonbank automobile financing participants include (1) specialty finance companies, including those that serve subprime borrowers; (2) “captive” nonbanks;[18] and (3) “Buy Here Pay Here” finance companies.[19]
Expanded Definition of Leases
Like the proposed rule, the final rule expands the Bureau’s reach to encompass a broader range of auto leases. The Consumer Financial Protection Act (“CFPA”) already covers personal property leases that are the functional equivalent of purchase finance arrangements if the lease is on a nonoperating basis and has an initial term of not less than 90 days.[20] The rule’s preamble asserts that the Bureau believes that the phrase “functional equivalent of purchase finance arrangements” is reasonably interpreted to encompass most automobile leases. Still, the Bureau expressed concern that this definition may not capture all auto leases. Therefore, as was the case in the proposed rule, the final rule defines the term “financial product or service” to include automobile leases that (1) qualify as a full-payout lease and a net lease, and have an initial term of not less than 90 days; and (2) are not financial products or services already covered under the CFPA.[21]
The preamble to the final rule contains a lengthy response to numerous comments regarding both the CFPB’s interpretation of which leases fall under CFPA as well as its decision to broaden the category of leases that qualify as financial products or services.
Inclusion of Refinancings Secured by an Automobile
The final rule includes refinancings of credit granted for the purpose of purchasing an automobile and any subsequent refinancings thereof in the term “annual originations.”[22] Some commenters suggested that covered persons may not know whether the debt they are financing was originally incurred for the purpose of purchasing an automobile. In response, the Bureau amended the final rule to clarify that only refinancings secured by an automobile are included in the auto financing market.[23]
Exclusion of Asset-Backed Securities
The final rule expands the exclusion of asset-backed securities from the automobile financing market.[24] The proposed rule expressly excluded investments in asset-backed securities, but did not clearly exclude all securitization activities.[25] Some commenters asserted that the final rule should also exclude certain purchases or acquisitions of obligations by special purpose entities. The final rule excludes purchases or acquisitions of obligations made for the purpose of facilitating an asset-backed securities transaction by special purpose entities established for the purpose of facilitating asset-backed securities transactions.[26]
Other Exclusions
As in the proposed rule, the Bureau excludes automobile title lending (i.e., making loans to consumers secured by the titles to the automobiles consumers own) from the meaning of automobile financing.[27] The CFPB plans to address vehicle title loans in separate rulemaking.[28]
The final rule also expressly excludes from coverage those auto dealers that the Dodd-Frank Act excluded from the CFPB’s jurisdiction, as well as certain other dealers “that extend retail credit or leases without routinely assigning them to unaffiliated third parties.”[29]
Test to Determine Larger Participants
A nonbank covered person will be a covered larger participant if it has at least 10,000 aggregate annual originations in the prior calendar year.[30] The term “originations” includes the transactions under the definition of automobile financing listed above and includes originations of affiliates of the nonbank auto lender.
The Bureau received comments advocating for thresholds between 5,000 and 50,000 originations. The Bureau responded that it believes a threshold of 10,000 aggregate annual originations is appropriate for defining larger participants of the automobile financing markets. The CFPB estimates that this threshold will allow it to supervise approximately 90 percent of the activity in the nonbank automobile financing market. [31]
Nonbank automobile lenders would be subject to the Bureau’s existing rules applicable to already-defined larger participants (“Larger Participant Rule”).[32] Any nonbank that qualifies as a larger participant would remain a larger participant until two years after the first day of the tax year in which the institution last met the applicable test.[33]
Technical Corrections to the Larger Participant Rule
The final rule finalizes a technical correction to the existing Larger Participant Rule by inserting the word “financial” before the term “product or service” in the definition of “nonbank covered person.”[34]
The final rule also updates various provisions regarding “annual receipts” to clarify that when a company becomes affiliated or ceases to be affiliated during the applicable measurement period, the affiliated company’s receipts should still be aggregated with that of the covered person for the entire period of measurement.[35] The CFPB finalized these changes as proposed with minor edits for clarity.[36]
Automobile Finance Examination Procedures
The final rule enables the CFPB to supervise nonbank auto lenders that qualify as larger participants. This means that in addition to the bank auto lenders already under its supervisory authority, the Bureau may now examine the larger nonbank institutions’ compliance management systems and compliance with federal consumer financial laws. Along with the final rule, the CFPB released its examination procedures that will apply to supervised bank lenders and the newly supervised nonbank entities.
CFPB-supervised entities can look forward to the following examination topics:
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Compliance Management Systems. Supervised entities should be prepared for examinations evaluating the entities’ vendor management practices, including compliance with CFPB Bulletin 2012-03, monitoring and audit functions, and privacy practices.
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Marketing and Disclosing Auto Financing Terms. Among other matters, the CFPB will examine whether the entity’s marketing materials and advertisements contain appropriate disclosures and accurate statements (pursuant to TILA, FCRA, and the Consumer Leasing Act), whether consumers are misled about the benefits or terms of financial products, and whether consumers understand the terms of financial products.
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Application and Origination. The CFPB will evaluate entities’ compliance with consumer finance laws from application to origination, including disclosures, adverse action notices, and credit reporting.
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Payment Processing. The CFPB will examine supervised entities, including servicers, for appropriate payment processing practices (including assessment of fees, payment application, and periodic statements). The exam procedures also highlight Bureau concerns with appropriate servicing transfer practices and compliance with the Servicemembers Civil Relief Act.
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Optional Products. The CFPB will review how supervised entities market and authorize payments for optional products (such as payment plans, credit production, and extended warranties). In addition, the CFPB will scrutinize the terms and conditions associated with the products.
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Debt Collection. The CFPB will assess whether the treatment of consumers when collecting debts both directly and through vendors complies with the FDCPA. It will also examine how consumers in default receive debt restructuring and workout options. Examiners will also scrutinize repossession practices, including consumer complaints regarding GPS-enabled Starter Interrupt Devices.
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Consumer Complaints. The CFPB will evaluate consumer complaints and inquiries, including the entity’s process for capturing, responding to, and monitoring complaints.
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Credit Reporting. The CFPB will seek to determine whether covered persons maintain written policies and procedures regarding data accuracy and whether they have procedures in place to ensure that inquiries and complaints regarding reported data are appropriately monitored, escalated, and resolved.
Conclusion
The rule will take effect 60 days after publication in the Federal Register. Entities that will come under the CFPB’s new supervisory authority should consider beginning to prepare now for the CFPB’s expanded reach, and currently supervised entities should consider evaluating their practices against the new auto lending exam guidelines.
Notes:
[1] Consumer Fin. Protec. Bureau, Defining Larger Participants of the Automobile Financing Market and Defining Certain Automobile Leasing Activity as a Financial Product or Service, available at http://files.consumerfinance.gov/f/201506_cfpb_defining-larger-participants-of-the-automobile-financing-market-and-defining-certain-automobile-leasing-activity-as-a-financial-product-or-service.pdf (to be codified at 12 C.F.R. Parts 1001 and 1090).
[2] Consumer Fin. Prot. Bureau, Automobile Finance Examination Procedures (June 2015), available at http://files.consumerfinance.gov/f/201506_cfpb_automobile-finance-examination-procedures.pdf.
[3] 12 C.F.R. § 1090.108(a).
[4] Id.
[5] See 12 C.F.R. § 1090.108(a)(i)(B); Consumer Fin. Protec. Bureau, Defining Larger Participants of the Automobile Financing Market and Defining Certain Automobile Leasing Activity as a Financial Product or Service, available at http://files.consumerfinance.gov/f/201506_cfpb_defining-larger-participants-of-the-automobile-financing-market-and-defining-certain-automobile-leasing-activity-as-a-financial-product-or-service.pdf (to be codified at 12 C.F.R. Parts 1001 and 1090) (stating “the Bureau has decided not to include title lending in this larger-participant rulemaking”).
[6] See 12 C.F.R. § 1090.108(c).
[7] 12 C.F.R. § 1090.108(a)(i)(A)(3).
[8] 12 C.F.R. § 1090.108(a)(B)(2).
[9] See K&L Gates, Start Your Compliance Engines: CFPB Proposes Rule to Supervise Larger Nonbank Auto Finance Companies (Oct. 8, 2015), available at http://www.klgates.com/start-your-compliance-engines-cfpb-proposes-rule-to-supervise-larger-nonbank-auto-finance-companies-10-08-2014/. See also K&L Gates, Non-Direct Auto Lending: Is the CFPB Asserting Jurisdiction over the Capital Markets?, available at http://www.klgates.com/non-direct-auto-lending-is-the-cfpb-asserting-jurisdiction-over-the-capital-markets-11-18-2014/.
[10] The CFPB has authority to supervise nonbank “larger participants” in consumer financial products or services markets, as defined through rulemaking. 12 U.S.C. § 5514(a)(1)(B). This is the Bureau’s fifth larger participant rulemaking. The CFPB has also defined markets for consumer reporting, consumer debt collection, student loan servicing, and international money transfers. See 12 C.F.R. Part 1090.
[11] See K&L Gates, Ally Auto Lending Discrimination Settlement: What it Means for Indirect Auto and Other Lenders (Feb. 25, 2014), available at http://www.klgates.com/ally-auto-lending-discrimination-settlement-what-it-means-for-indirect-auto-and-other-lenders-02-25-2014/. See also Consumer Fin. Prot. Bureau, Supervisory Highlights: Summer 2014, available at http://files.consumerfinance.gov/f/201409_cfpb_supervisory-highlights_auto-lending_summer-2014.pdf (providing additional information regarding the CFPB’s auto lending activity).
[12] Consumer Fin. Prot. Bureau, CFPB to Oversee Nonbank Auto Finance Companies (June 10, 2015) available at http://www.consumerfinance.gov/newsroom/cfpb-to-oversee-nonbank-auto-finance-companies/.
[13] Id. Note that the Bureau originally estimated that the threshold would bring approximately 38 entities within its supervisory authority. The CFPB explained that its estimate has changed slightly due to the identification of affiliated entities and entities that should be excluded from the automobile financing market.
[14] As in the proposed rule, the final rule defines “automobile” as “any self-propelled vehicle primarily used for personal, family, or household purposes for on-road transportation.” 12 C.F.R. § 1090.108(a). Motor homes, recreational vehicles, golf carts, and motor scooters are expressly excluded. Id. The Bureau noted that it has limited data about the financing of the types of vehicles excluded from the final rule and stated that it may cover these types of vehicles in a future rulemaking. In addition, some commenters urged the Bureau to exclude motorcycles from the definition of automobiles because, among other reasons, motorcycles are similar to the types of recreational vehicles excluded from the definition. However, the Bureau stated in the preamble to the rule that it believes similarities in the financing process and compliance requirements dictate in favor of including motorcycles within the definition of automobiles.
[15] As in the proposed rule, the final rule uses the existing definition of “refinancing” in Regulation Z with the exception that the nonbank covered person need not be the original creditor or a holder or servicer of the original obligation. 12 C.F.R. § 1026.20(a). The proposed rule sought comments on whether the Regulation Z definition of refinancings as modified is appropriate for this rule. Some commenters suggested that the Bureau exclude refinancing activity conducted by third parties. The CFPB stated that refinancings by the original creditor and a third party are sufficiently similar as to be considered part of the same market for auto financing.
[16] In the rule’s preamble, the CFPB explained that purchase of retail installment contracts are considered “purchases or acquisitions” of “credit granted for the purpose of purchasing an automobile.”
[17] The CFPB edited the proposed rule to clarify that purchases or acquisitions of automobile leases are considered part of the automobile financing market. 12 C.F.R. § 1090.108(a)(i)(A)(4). According to the CFPB, this change has no substantive effect on the meaning of the rule.
[18] “Captive” nonbanks are subsidiary finance companies owned by automobile manufacturers.
[19] “Buy Here Pay Here” companies are similar to captives in that they typically are associated with specific “Buy Here Pay Here” automobile dealers, which traditionally have served the subprime market.
[20] 12 U.S.C. § 5481(15)(A)(ii). Note that the CFPB already has supervisory authority over existing covered persons that offer the leases described in Section 5481.
[21] The Bureau finalized the definition as proposed with one change it deems a “minor clarificatory addition” that has no substantive effect. The final rule clarifies that the term “automobile” is defined by 12 C.F.R. § 1090.108(a). 12 C.F.R. § 1001.2(a).
[22] 12 C.F.R. § 1090.108(a)(i)(A)(3).
[23] 12 C.F.R. § 1090.108(a)(i)(A)(3).
[24] 12 C.F.R. § 1090.108(a)(i)(B).
[25] See K&L Gates, Non-Direct Auto Lending: Is the CFPB Asserting Jurisdiction over the Capital Markets?, available at http://www.klgates.com/non-direct-auto-lending-is-the-cfpb-asserting-jurisdiction-over-the-capital-markets-11-18-2014/.
[26] 12 C.F.R. § 1090.108(a)(i)(B)(2). The Bureau noted that the types of purchases or acquisitions included in the market for automobile financing count as originations under the rule, even if they are made or received from an affiliated entity. Only transactions relating to asset-backed securitizations are excluded.
[27] Some commenters recommended that the final rule include title loans in the automobile financing market. The Bureau explained that title loans are better analyzed separately from the automobile financing market because they are substantially different from the automobile financing activities in the final rule.
[28] Consumer Fin. Prot. Bureau, CFPB Considers Proposal to End Payday Debt Traps (March 26, 2015), available at http://www.consumerfinance.gov/newsroom/cfpb-considers-proposal-to-end-payday-debt-traps/.
[29] 12 C.F.R. § 1090.108(c). The final rule clarifies that the term “motor vehicle” is used as that term is defined in Section 1029(f)(1) of the Dodd-Frank Act.
[30] 12 C.F.R. § 1090.108(a).
[31] The Bureau noted that a threshold of 5,000 would only result in a marginal increase in the percentage of overall market activity covered because of the relatively small market share of entities at the lower end. On the other hand, the Bureau estimated that a threshold of 50,000 originations would allow the Bureau to supervise only the 15 largest participants in the market.
[32] 12 C.F.R. Part 1090, Subpart A. Subpart A of the Larger Participant Rule contains basic definitions and generally applicable provisions. Subpart B outlines market-specific provisions based on the markets the CFPB already defined (consumer reporting, debt collection, student loan servicing, and international money transfer).
[33] 12 C.F.R. § 1090.102. The existing Larger Participant Rule also contains a process by which an institution would be able to dispute its qualification as a larger participant. See 12 C.F.R. § 1090.103.
[34] 12 C.F.R. § 1090.101.
[35] 12 C.F.R. §§ 1090.104, 1090.105.
[36] The CFPB clarified that the annual receipts of a formerly affiliated company are not included “in the annual receipts of a nonbank covered person for purposes of this section” if the affiliation ceased before the applicable period of measurement. See id.
