United States

Final rule and exam procs for nonbank auto finance companies issued


On June 10, 2015, the Consumer Financial Protection Bureau (CFPB or Bureau) announced that it will begin to supervise large nonbank auto finance companies. It also published the final rule and exam procedures relating to the oversight of nonbank auto finance companies on its website. 

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the Bureau has the authority to supervise nonbank "larger participant(s)" of markets for consumer financial products or services, as the Bureau defines them. The Bureau's authority over the auto finance companies is a result of the expansion of this definition to add a new section which defines larger participants of a market for automobile financing. 

Under the rule, the Bureau's supervision will extend to any nonbank auto finance company that makes, acquires, or refinances 10,000 or more loans or leases in a year. According to the Bureau's estimation, it will now have authority over about 34 of the largest nonbank auto finance companies and their affiliated companies, which when combined, originate around 90 percent of nonbank auto loans and leases.  The Bureau will oversee these entities' activities for compliance with federal consumer financial laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Consumer Leasing Act, as well as the prohibition on unfair, deceptive, or abusive acts or practices under the Dodd-Frank Act. The rule also defines certain automobile leases as "a financial product or service" under the Dodd-Frank Act.

The new rule will become effective 60 days after it is published in the Federal Register.

The addition of the Automobile Finance Examination Procedures to the CFPB exam manual has an impact on bank and nonbank automobile lending alike. In the press release, the Bureau states it has "updated its Supervisory and Examination Manual to provide guidance on how the Bureau will monitor the bank and nonbank auto finance companies that it supervises." According to the release, some of the key areas that examiners will be evaluating include:

  • Fairly marketing and disclosing auto financing terms – The key is to make sure that consumers understand the terms they are getting, that deceptive tactics are not being used, and that consumers are not being misled about the benefits or terms of financial products.
  • Providing accurate information to credit bureaus.
  • Treating consumers fairly when collecting debts – This will focus on debt collection tactics (and make sure no illegal tactics are used) and ensure that collectors are relying on accurate information and legal processes in the collection of debts. This area will also look at repossession processes and will include a review of the activities of third-party service providers.
  • Lending fairly – This not only covers compliance with the Equal Credit Opportunity Act, but also "other Bureau authorities protecting consumers."

A quick review of the exam procedures uncovers several interesting areas on which examiners will focus, including:

  • Payment processing – prompt posting, allocation in accordance with the terms of the contract, treatment of partial payments and pre-payments
  • Optional products – marketing, monitoring and cancellation
  • Debt restructuring and workouts
  • Repossessions
  • Accounts in bankruptcy

The Bureau has said that it will apply these exam procedures to both bank and nonbank entities that it supervises. As we know, when the Bureau leads the way with creative supervisory activities, the other prudential regulators often follow. It will be interesting to watch this play out.