The Consumer Financial Protection Bureau has issued a final rule allowing it to supervise nonbank companies that qualify as “larger participants of a market for automobile financing.”  Relatedly, it adopted simultaneously a separate rule defining certain automobile leases as a "financial product or service." These rules will be effective 60 days after their publication in the Federal Register.

To enable its examiners to immediately begin to prepare for examinations of qualifying entities, the CFPB concurrently released its auto finance examination procedures. The CFPB will use these procedures to examine both banks and nonbanks.

The larger participant rule 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 and credit unions over which it has supervisory authority, and by their affiliates, the rule significantly expands its supervisory authority to encompass nonbank entities that are unaffiliated with banks and engaged in activities included within its proposed definition of “automobile financing.” Nonbank larger participants can include specialty finance companies, manufacturer “captive” finance companies, and “Buy Here Pay Here” (BHPH) finance companies.

Because Dodd-Frank allows the CFPB to supervise all service providers for supervised entities, regardless of size, the rule also allows the CFPB to supervise all service providers to “larger participant” auto finance companies. Under Dodd-Frank, the CFPB can also supervise any nonbank auto finance company—regardless of its size—that it has reasonable cause to believe “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 CFPB’s press release states that the larger participant rule was adopted largely as proposed, with only minor changes. The only two changes noted are: (1) a broadening of the category of transactions involving asset-based securities that are not counted toward the 10,000 aggregate annual originations threshold; and (2) a minor modification to the definition of “refinancing” used in calculating aggregate annual originations.

The rule defines a “larger participant” as a nonbank covered entity engaged in “automobile financing” that has at least 10,000 aggregate annual originations. (“Aggregate annual originations” includes both the annual originations of a nonbank entity and those of its affiliates.) “Automobile financing” is defined as providing, or engaging in, the transactions identified in the definition of "annual originations." The “annual originations” of an entity 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 thereof, that are secured by an automobile. (The final rule added the requirement that the refinancing be secured by an automobile.)

  • Purchases or acquisitions of such credit obligations and refinancings.

  • Automobile leases and purchases or acquisitions of automobile leases.

Once the final rule becomes effective, nonbank auto finance companies that qualify as larger participants will be subject to supervisory examination by the CFPB for compliance with federal consumer financial laws. 

The CFPB auto finance examination procedures identify the following federal consumer financial laws as potentially applicable to a bank’s or nonbank’s auto finance activities: the Truth in Lending Act, the Consumer Leasing Act, the Electronic Fund Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and the Gramm-Leach-Bliley Act. The procedures also direct CFPB examiners to scrutinize auto finance activities under Dodd-Frank standards for unfair, deceptive, or abusive acts or practices.

Other highlights of the final rule include:

  • The Dodd-Frank definition of a “financial product or service” covers only certain personal property leases that are “on a non-operating basis” and “the functional equivalent of purchase finance arrangements.” The supplementary information accompanying the final rule contains an extensive discussion of comments the CFPB received in response to its discussion of this subject in the proposal. 

The CFPB also adopted simultaneously a separate rule defining certain automobile leases that are not “the functional equivalent of purchase finance arrangements” as a “financial product or service.” As a result, the larger participant rule defines an “automobile lease” as a lease that qualifies as a “financial product or service” under either the existing Dodd-Frank statutory definition of a “financial product or service” or under the additional regulatory definition adopted by the CFPB. The additional definition includes an automobile lease that “qualifies as a full-payout lease and a net lease, as provided by 12 CFR 23.3(a),” has an initial term of not less than 90 days, and is not a “financial product or service” under Section 1002(15)(A)(ii) of Dodd-Frank. The supplementary information states that “the Bureau adopts §1001.2(a) essentially as proposed with one minor clarificatory addition” and a non-substantive clarifying change in wording.

  • The larger participant rule provides, as it must, that auto dealers that are excluded from the authorities of the CFPB under Dodd-Frank Section 1029 do not qualify as “larger participants” in the automobile financing market. Additionally, however, certain dealers that are not excluded statutorily from those authorities because they extend retail credit or leases without routinely assigning the resulting obligations to unaffiliated third parties do not qualify as “larger participants” under the rule. Specifically, such dealers do not qualify if they are predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both. Part of the stated rationale for this exclusion is that such dealers, typically BHPH dealers, employ a different business model “because they set the price of the automobile and other sale terms in addition to establishing the terms of the financing.” (However, such a dealer’s affiliated BHPH finance company apparently can qualify as “larger participant” since it is not predominately engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both.)

  • “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 its proposal, the CFPB sought comment on whether it should include auto title loans in “annual originations.” While the final rule excludes auto title lending from its scope, the CFPB stated in the supplementary information that it “believes that title loans are best addressed through a future larger-participant rulemaking.” (The CFPB’s Spring 2015 rulemaking agenda included a January 2016 date for prerule activities related to a larger participant rule for auto title loans.)

  • The definition of “annual originations” expressly excludes: (1) investments in asset-backed securities; and (2) purchases of obligations by a special purpose entity established to facilitate asset-backed securities transactions if the purchases are made for that purpose. The latter exclusion was added in response to comments received by the CFPB.

Ballard Spahr attorneys will hold a webinar, “Implications for Banks and Nonbanks from the CFPB's Auto Finance Larger Participant Rule and New Auto Finance Exam Procedures,” on June 18, 2015 from 12 p.m. to 1:30 p.m. ET.  In the webinar, we will discuss the rule in detail and what companies need to do now to prepare for the CFPB's new scrutiny of their auto finance and leasing activities. We will also discuss the new exam procedures. The webinar registration form is available here.

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 Consumer Financial Services Group 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, Christopher J. Willis at 678.420.9436 or willisc@ballardspahr.com, Scott M. Pearson at 424.204.4323 or pearsons@ballardspahr.com, or Heather S. Klein at 215.864.8732 or kleinh@ballardspahr.com. 


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