Yesterday the Consumer Financial Protection Bureau (CFPB) published a rule that will allow the agency to supervise larger nonbank auto finance companies for the first time.
Auto loans are the third largest category of household debt, behind mortgages and student loans. American consumers had about $900 billion in auto loans outstanding in the fourth quarter of 2014.
To understand the significance of this rule one needs to understand the automobile financing market, the players, and the terminology used in the market. The key terms are “banks,” “non-banks,” “direct lender/lending,” “indirect lender/lending,” and “captive” lenders.
When buying a car Consumers can, if able, pay cash for the vehicle. However, most consumers finance the purchase of the vehicle through some type of loan. Auto loans are financed by both banks (including Credit Unions) and nonbanks. The consumer can obtain a loan either through direct financing, where they seek credit directly from a lender, or through indirect financing, where an auto dealer typically enters into a retail installment sales contract that it then sells to a third-party.
Banks, credit unions, and nonbank auto finance companies provide credit to consumers both directly and indirectly. Some nonbank finance companies are “captive” nonbanks, meaning they are owned by auto manufacturers and generally do only indirect lending.
The CFPB already supervises auto financing at the largest banks and credit unions. Yesterday’s rule extends CFPB supervision to any nonbank auto finance company that makes, acquires, or refinances 10,000 or more loans or leases in a year.
Under this new rule these nonbanks would be considered “larger participants,” and the Bureau may oversee their activity to ensure they are complying with federal consumer financial laws, including the Equal Credit Opportunity Act, the Truth in Lending Act, the Consumer Leasing Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act’s (Dodd-Frank Act) prohibition on unfair, deceptive, or abusive acts or practices. (Editor’s Note: This is analogous to the 2012 CFPB Rule on “Larger Participants” in the debt collection space.)
Under the new rule, which was initially proposed in September 2014, the CFPB estimates that it will have authority to supervise about 34 of the largest nonbank auto finance companies and their affiliated companies that engage in auto financing. The CFPB believes these companies together originate around 90 percent of nonbank auto loans and leases, and in 2013 provided financing to approximately 6.8 million consumers.
The rule also defines additional automobile leasing activities for coverage by certain consumer protections of the Dodd-Frank Act. This part of the rule was necessary as the automobile leasing market continues to grow. The CFPB estimates that more than a quarter of new cars are acquired through leases.
In conjunction with the publication of the new rule the CFPB also updated its Supervisory Manual & Examination with examination procedures on how the Bureau would monitor the entities that it will be under its supervision.
What does this mean to the consumer? Quite simply the CFPB will now be supervising almost all auto lending activity, from direct lending to indirect lending originated at car dealerships. The rule will include supervision of many “sub-prime” loans that are most often made by non-banks. Historically those loans were not subject to CFPB supervision.
The new rule is going to allow the CFPB to supervise all types of activities of the non-bank lenders; from loan origination through credit reporting and collection efforts, through default scenarios including repossession and finally, recovery efforts.
The new rule will take effect 60 days after publication in the Federal Register.