The Consumer Financial Protection Bureau has issued a proposal to supervise nonbank companies that qualify as “larger participants of a market for automobile financing.” Comments on the proposal will be due 60 days after the proposed rule’s publication in the Federal Register.
The proposal is based on the CFPB’s authority to supervise nonbank entities considered to be “a larger participant of a market for other consumer financial products or services.” While the CFPB already supervises auto financing by the large banks over which it has supervisory authority, and by their affiliates, the proposal would allow the CFPB to significantly expand this authority to reach nonbank entities that are unaffiliated with banks and engaged in the activities included within the CFPB’s proposed definition of “automobile financing.” Nonbank larger participants would include specialty finance companies, “captive” finance companies (i.e., generally companies owned by auto manufacturers), and “Buy Here Pay Here” (BHPH) finance companies.
Because Dodd-Frank allows the CFPB to supervise all service providers to entities it supervises, regardless of size, the proposal would also allow the CFPB to supervise all service providers to “larger participant” auto finance companies. In addition, under Dodd-Frank, the CFPB can supervise any nonbank auto finance company—regardless of its size—that the CFPB has reasonable cause to determine “is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services.”
The proposal defines as nonbank “larger participants” entities engaged in “automobile financing” that have at least 10,000 aggregate annual originations. (“Aggregate annual originations” encompass both a nonbank entity’s annual originations and those of its affiliates.) “Automobile financing” is defined as providing the transactions included in "annual originations." An entity’s “annual originations” are calculated by adding the following transactions for the preceding calendar year:
- Credit granted for the purpose of purchasing an automobile, refinancings of such credit obligations, and any subsequent refinancings
- Purchases or acquisitions of such credit obligations (including refinancings)
- Automobile leases and purchases or acquisitions of automobile leases
Auto finance companies that qualify as larger participants will be subject to CFPB examination for federal law compliance once a final rule becomes effective. When examining auto finance companies for fair credit compliance, the CFPB can be expected to use a disparate impact analysis in accordance with its indirect auto finance guidance issued in March 2013. The CFPB can also be expected to scrutinize larger participants’ practices under Dodd-Frank standards for unfair, deceptive, or abusive acts or practices (UDAAP), as well as to examine their compliance with federal consumer financial laws such as the Truth in Lending Act, the Consumer Leasing Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and the Gramm-Leach-Bliley Act.
Other highlights of the proposal include:
- The Dodd-Frank definition of a “financial product or service” covers only certain personal property leases that are “on a non-operating basis.” Despite this statutory definition, certain auto leases that are not the functional equivalent of a financed purchase arrangement, and therefore not included within the statutory definition of a “financial product or service” as it relates to a personal property lease, nevertheless would be defined as a “financial product or service” in a new regulatory provision purporting to implement the CFPB’s authority to expand this definition. Specifically, the proposed regulatory provision refers to an automobile lease that is not covered by the statutory definition but “qualifies as a full-payout lease and a net lease, as provided by 12 C.F.R. 23.3(a)” and has an initial term of not less than 90 days.
- The CFPB notes in the supplementary information that the proposed expanded definition could cause certain nonbank entities to qualify as larger participants because such leases would be included in an entity’s “annual originations.” Significantly, the CFPB also notes that the expanded definition would make such leases subject to the Dodd-Frank UDAAP prohibition and extend to such leases certain CFPB authority applicable to consumer financial products or services, such as its authority to prescribe disclosures, monitor associated risks, and prescribe rules concerning consumer rights to access information.
- Auto dealers that are excluded from the CFPB’s authority under Dodd-Frank Section 1029 could not qualify as “larger participants” in the automobile financing market. In addition, certain dealers that are not excluded from the CFPB’s authority under Section 1029 because they extend retail credit or leases without routinely assigning the obligations to unaffiliated third parties nevertheless also could not qualify as “larger participants.” Such dealers could not qualify if they are predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both. (However, it appears such a dealer’s affiliated finance company would be a BHPH finance company that could qualify as “larger participant.”)
- “Automobile” is defined as “any self-propelled vehicle primarily used for personal, family, or household purposes for on-road transportation” and does not include “motor homes, recreational vehicles (RVs), golf carts, and motor scooters.”
- In the supplementary information, the CFPB states that it has not proposed to include auto title loans in “annual originations” because it believes this product is substantially different from automobile financing activities. It suggests however that auto title loans might be better analyzed separately from automobile financing as part of a future larger participant rule. The CFPB seeks comments on whether it should expand the definition of “automobile financing” to include title loans and other types of auto-secured loans.
- Investments in asset-backed securities are expressly excluded from the proposed definition of “annual originations.”
Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.
If you have questions, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com, or Christopher J. Willis at 678.420.9436 or willisc@ballardspahr.com.
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