On October 8, the CFPB published a rule proposing oversight of larger nonbank auto finance companies for the first time at the federal level. The proposed rule will “amend the regulation defining larger participants of certain consumer financial product and service markets by adding a new section to define larger participants of a market for automobile financing.” Under the new section, a market would be defined to include: (i) grants of credit for the purchase of an automobile, refinancings of such credit obligations, and purchases or acquisitions of such credit obligations (including refinancings); and (ii) automobile leases and purchases or acquisitions of such automobile lease agreements. Previously, on September 17, the CFPB released information regarding its resolve to supervise and enforce auto finance companies’ compliance with consumer financial laws, including fair lending laws. Comments on the proposed rule must be received on or before December 8, 2014.
On October 1, 2014, BuckleySandler hosted a webinar, The CFPB’s Expanding Oversight of Auto Finance, Part One. Through an examination of the Consumer Financial Protection Bureau’s (CFPB) authority, recent enforcement activities, and discussion of the exam process, Kirk Jensen, John Redding, Michelle Rogers, Marshall Bell and Lori Sommerfield explored the different areas of the auto finance industry coming into the CFPB’s focus.
BuckleySandler will present The CFPB’s Expanding Oversight of Auto Finance, Part Two on October 30, 2014.
Explaining the Larger Participant Rule
Since its creation, the CFPB has held statutory authority to supervise nonbank institutions who are “a larger participant of a market for other consumer financial products or services.” On September 17, 2014, the CFPB proposed a rule defining a market for “automobile financing” and “larger participants” within that market. Under this proposed rule:
- A nonbank institution is a larger participant in the auto finance market if it “has at least 10,000 aggregate annual originations,” which includes:
- Credit granted for the purpose of purchasing an automobile
- Automobile leases
- Purchases of extensions of credit and leases
- An “automobile” includes any self-propelled vehicle used primarily for a consumer purpose for on-road transportation, except for certain identified vehicle types, including recreational vehicles, motor scooters and limited others
- Affiliates are included in calculations but dealers are excluded
On September 17, the CFPB released new information about its plans to supervise and enforce auto finance companies’ compliance with consumer financial laws, including fair lending laws. As it indicated it would earlier this year, the CFPB released a proposed rule that would allow it to supervise certain nonbank auto finance companies. Also as previously promised, the CFPB published a white paper on its method to proxy for race and national origin in auto finance transactions. Finally, the CFPB published its most recent Supervisory Highlights report, which is dedicated to its supervisory findings at depository institutions with auto finance operations.
The CFPB released the materials in connection with its September 18th field hearing on auto finance issues. These actions come roughly 18 months after the CFPB first provided guidance to auto finance companies regarding its expectations related to dealer “reserve” (or “participation”) and fair lending. Read more…
On August 28, the CFPB announced that it will hold a field hearing on vehicle finance on September 18, 2014 in Indianapolis. Consistent with its past field hearing announcements, the CFPB did not reveal the specific topics to be addressed. The hearing may relate to the CFPB’s planned larger participant rule for nonbank auto finance companies. In addition, earlier this year, Director Cordray stated in an appearance before the House Financial Services Committee that a white paper on the proxy methodology the CFPB uses to identify alleged discrimination in indirect auto finance was forthcoming.
On August 20, the CFPB announced a consent order with a Texas-based auto finance company to address alleged deficiencies in the finance company’s credit reporting practices. The company offers both direct and indirect financing of consumer auto purchases, and, according to the CFPB, specializes in lending to consumers with impaired credit profiles. In general, the CFPB took issue with the finance company’s alleged failure to implement policies and procedures regarding the accuracy and integrity of information furnished to consumer credit reporting agencies (CRAs) and alleged deceptive acts in the finance company’s representations regarding the accuracy of furnished information.
The CFPB’s action specifically alleged that the finance company violated the Fair Credit Reporting Act (FCRA) by providing inaccurate information to credit reporting agencies regarding how its borrowers were performing on their accounts, including by: (i) reporting inaccurate information about how much consumers were paying toward their debts; (ii) reporting inaccurate “dates of first delinquency,” which is the date on which a consumer first became late in paying back the loan; (iii) substantially inflating the number of delinquencies for some borrowers when it reported borrowers’ last 24 months of consecutive payment activity; (iv) informing CRAs that some of its borrowers had their vehicles repossessed, when in fact those individuals had voluntarily surrendered their vehicles back to the lienholder. The CFPB claims this activity took place over a three-year period, even after the company was made aware of the issue. The CFPB believes the company furnished incorrect information to the CRAs on as many as 118,855 accounts.
The consent order requires the company to pay a $2.75 million penalty to the CFPB. In addition, the finance company must: (i) review all previously reported accounts for inaccuracies and correct those accounts or delete the tradeline; (ii) arrange for consumers to obtain a free credit report; and (iii) inform all affected consumers of the inaccuracies, their right to a free consumer report, and how consumers may dispute inaccuracies. The order also directs the company to sufficiently provide the staffing, facilities, systems, and information necessary to timely and completely respond to consumer disputes in compliance with the FCRA.
On June 25, the OCC published its semiannual risk report, which provides an overview of the agency’s supervisory concerns for national banks and federal savings associations, including operational and compliance risks. As in prior reports and as Comptroller Curry has done in speeches over the past year, the report highlights cyber-threats and BSA/AML risks. The OCC believes cyber-threats continue to evolve and require heightened awareness and appropriate resources to identify and mitigate the associated risks. Specifically, the OCC is concerned that cyber-criminals will transition from disruptive attacks to attacks that are intended to cause destruction and corruption. Extending another recent OCC theme, the report notes that the number, nature, and complexity of both foreign and domestic third-party relationships continue to expand, resulting in increased system and process interconnectedness and additional vulnerability to cyber-threats. The report also states that BSA/AML risks “remain prevalent given changing methods of money laundering and growth in the volume and sophistication of electronic banking fraud.” The OCC adds that “BSA programs at some banks have failed to evolve or incorporate appropriate controls into new products and services,” and again cautions that a lack of resources and expertise devoted to BSA/AML risk management can compound these concerns. Finally, the OCC expressed concern that competitive pressures in the indirect auto market are leading to an erosion of underwriting standards. The OCC’s supervisory staff plans to review retail credit underwriting practices at banks, especially for indirect auto.
On June 13, Florida Governor Rick Scott signed HB 783, which prohibits an “affiliated finance company”—i.e. an auto manufacturer’s or wholesale distributor’s captive finance company, as defined by the law—from (i) refusing to purchase or accept an assignment of a vehicle contract from a dealer or (ii) charging a dealer an additional fee or surcharge for the contract, solely because the contract contains an automotive-related product from a third-party. The restrictions apply only if the third-party product is of “similar nature, scope, and quality” to the product provided by affiliated finance company, or its related manufacturer or wholesale distributor. The bill provides factors for determining whether a product is similar. The new restrictions take effect July 1, 2014.
CFPB Director Announces Indirect Auto Finance Proxy Methodology White Paper, Discusses Numerous Other Initiatives
On June 18, in an appearance before the House Financial Services Committee, CFPB Director Richard Cordray stated that later this summer the CFPB hopes to release a white paper on the proxy methodology it employs to identify alleged discrimination in indirect auto financing. The white paper follows repeated attempts by members of the Committee to force the CFPB to reveal more details about its approach to indirect auto finance enforcement. Director Cordray also revealed that the CFPB is working on a white paper regarding manufactured housing finance.
The hearing covered numerous additional topics, some of which overlapped with those addressed during Mr. Cordray’s recent appearance before the Senate Banking Committee. Among the new issues raised before the House Committee, Mr. Cordray expressed openness to developing a limited advisory opinion process for the CFPB. In response to a question from Rep. Ed Royce (R-CA), Mr. Cordray explained that the CFPB regularly provides informal advisory opinions. He acknowledged other agencies’ use of advisory opinions and their potential benefit, and indicated that advisory opinions could be a useful tool for the CFPB on certain specific issues. Nevertheless, he resisted committing to the implementation of a formal advisory opinion process. The Committee recently approved, along party lines, legislation that would require the CFPB to establish an advisory opinion process. Read more…
On June 9, the House passed by voice vote H.R. 3211, the Mortgage Choice Act of 2013. The bill would amend TILA’s definition of “points and fees” for purposes of the CFPB’s Ability to Repay and HOEPA rules to exclude from the definition insurance held in impound accounts and amounts received by affiliated companies as a result of their participation in an affiliated business arrangement. The bill now moves to the Senate where a similar bill was introduced last year by Senator Joe Manchin (D-WV) but has not yet been considered by the Senate Banking Committee. Later in the week, the House Financial Services Committee approved numerous additional bills related to the CFPB, including: (i) H.R. 4804, which would establish certain requirements for CFPB examinations, including prohibiting the use of enforcement attorneys; (ii) H.R. 4811, which would establish standards for CFPB guidance, including a notice and comment period, and would declare the CFPB’s fair lending auto finance guidance to have no force or effect; and (iii) H.R. 3770, which would create an independent inspector general for the CFPB.
Updated CFPB Rulemaking Agenda Adds Auto Finance Larger Participant Rule, Updates Timelines For Other Rules
The CFPB recently released its latest rulemaking agenda, which lists for the first time a larger participant rule that would define the size of nonbank auto finance companies subject to the CFPB’s supervisory authority. The CFPB anticipates proposing a rule no sooner than August 2014. Stakeholders will have an opportunity to comment, and a final rule likely would not be issued until sometime in 2015. The CFPB anticipates finalizing its rule for larger participants in the international money transfer market in September 2014. In addition, the agenda pushes back the timeline for the anticipated prepaid card proposed rule from May 2014 to June 2014. The CFPB has been testing potential prepaid card disclosures.
The agenda does not provide timelines for proposed rules related to payday lending, debt collection, or overdraft products, but the CFPB states that additional prerule activities for each of those topics will continue through September 2014, December 2014, and February 2015, respectively. The CFPB substantially extended the timeline for overdraft products; it previously anticipated continuing prerule activities through July 2014. While “prerule activities” is not a defined term, it could include conducting a small business review panel for some or all of those topics. Such panels focus on the impact of anticipated regulations on small entities, but the CFPB typically makes the small business panel materials public, which provides an advance look at the potential direction for a proposed rule.
The agenda does not include a rulemaking implementing the small business fair lending data reporting requirements in the Dodd-Frank Act, though the CFPB previously has indicated it could consider those issues in connection with its HMDA rulemaking. Prerule activities related to the HMDA rule are ongoing.
On May 22, the CFPB published its Spring 2014 Supervisory Highlights report, its fourth such report to date. In addition to reviewing recent guidance, rulemakings, and public enforcement actions, the report states that the CFPB’s nonpublic supervisory actions related to deposit products, consumer reporting, credit cards, and mortgage origination and servicing have yielded more than $70 million in remediation to over 775,000 consumers. The report also reiterates CFPB supervisory guidance with regard to oversight of third-party service providers and implementation of compliance management systems (CMS) to mitigate risk.
The report specifically highlights fair lending aspects of CMS, based on CFPB examiners’ observations that “financial institutions lack adequate policies and procedures for managing the fair lending risk that may arise when a lender makes exceptions to its established credit standards.” The CFPB acknowledges that credit exceptions are appropriate when based on a legitimate justification. In addition to reviewing fair lending aspects of CMS, the CFPB states lenders should also maintain adequate documentation and oversight to avoid increasing fair lending risk.
Nonbank Supervisory Findings
The majority of the report summarizes supervisory findings at nonbanks, particularly with regard to consumer reporting, debt collection, and short-term, small-dollar lending: Read more…
Over the past week, Virginia Governor Terry McAuliffe signed several bills impacting banks and certain consumer finance providers. The first bill, HB 358 repealed a state law that that barred out-of-state banks from opening de novo branches in Virginia unless the bank’s home state provided reciprocal access to Virginia banks. The change will allow out-of-state banks to establish branches in Virginia on the same basis as state-chartered banks. A second banking bill, HB 1062, provides that an existing statutory provision requiring the Virginia State Corporation Commission to ascertain that certain minimum capital stock requirements are met prior to issuing a certificate of authority to a bank does not apply to the Commission’s issuance of such a certificate to a bank holding company or to a resulting bank in connection with certain types of mergers involving the holding company and its subsidiary bank. A third bill, HB 69, amends state law to expand the types of services that may be provided under an extended motor vehicle service contract and to authorize the Board of Agriculture and Consumer Services to designate additional services that may be provided under an extended service contract. The bill also provides that extended service contracts are not insurance subject to state regulation as such. The above approved bills will take effect on July 1, 2014. Finally, the Governor has not yet approved a bill passed by the General Assembly, HB 954, which would permit the State Corporation Commission to issue transitional mortgage loan originator licenses.
On March 12, the CFPB announced several new senior officials, as described below. We also have learned that Peter Carroll, the CFPB’s Assistant Director for Mortgage Markets, will be leaving the Bureau later this month.
- Jeffrey Langer has joined the CFPB as the Assistant Director of Installment and Liquidity Lending Markets in the Bureau’s Research, Markets, and Regulations Division. Mr. Langer most recently served as senior counsel at Macy’s, Inc., prior to which he was a lawyer in private practice. Mr. Langer is a founding fellow and treasurer of the American College of Consumer Financial Services Lawyers and is a former chair of the Consumer Financial Services Committee of the American Bar Association Business Law Section.
Mr. Langer will fill a position vacated by Rick Hackett last year. At the time of Mr. Hackett’s departure, Corey Stone, Assistant Director, Credit Information, Collections, and Deposit Markets, took over smaller dollar loan markets on a permanent basis. Rohit Chopra, the CFPB’s Student Loan Ombudsman, took responsibility for auto and student loans on an acting basis. Although Mr. Stone will continue to oversee smaller dollar loan markets, including payday and auto title loans, the addition of Mr. Langer allows Mr. Chopra to focus only on his Ombudsman duties.
- Christopher D. Carroll has joined the CFPB as the Assistant Director and Chief Economist for the Office of Research in the Bureau’s Research, Markets, and Regulations Division, as the CFPB announced last year. Dr. Carroll is a professor of economics at Johns Hopkins University, from which he has taken a leave of absence to serve at the Bureau. He also is a member of the Board of Directors of the National Bureau of Economic Research, and the co-chair of the NBER Research Group on Consumption. Dr. Carroll has served as a senior economist for the Council of Economic Advisors on two separate occasions, and as an economist for the Board of Governors of the Federal Reserve System. Ron Borzekowski, who joined the CFPB at its inception from the Federal Reserve Board, has been serving as the acting head of the Office of Research.
- Daniel Dodd-Ramirez has joined the CFPB as the Assistant Director of Financial Empowerment in the Bureau’s Consumer Education and Engagement Division. Mr. Dodd-Ramirez previously served as the executive director of Step Up Savannah Inc. in Savannah, Ga., from 2005 to 2014. Prior to Step Up, he served as education project director and community organizer for People Acting for Community Together (PACT) in Miami, Florida, and before that was the human resources director for Families First, a social services agency in southern Vermont.
House Financial Services Committee Chairman Jeb Hensarling (R-TX) sent a letter today to CFPB Director Richard Cordray once again pressing the CFPB for information about its March 2013 auto finance guidance and its actions since that time to pursue allegedly discriminatory practices by auto finance companies. That guidance, which the CFPB has characterized as a restatement of existing law, sought to establish publicly the CFPB’s grounds for asserting violations of ECOA against bank and nonbank auto finance companies for the alleged effects of facially neutral pricing policies.
The letter recounts numerous exchanges between members of Congress—including both Democratic and Republican members of the Committee—and the CFPB on this issue to demonstrate what the Chairman characterizes as “a pattern of obfuscation” by the Bureau. Mr. Hensarling explains that through a series of written requests—see, e.g. here, here, and here—as well as in-person exchanges, lawmakers have sought detailed information about the CFPB’s application of the so-called disparate impact theory of discrimination to impose liability on auto finance companies. The letter states that the CFPB has repeatedly refused to provide certain key information used in applying that theory through compliance examinations and enforcement actions, including information about regression analyses, analytical controls, and numerical thresholds employed by the Bureau. Read more…
On January 28, Missouri Attorney General Chris Koster announced a settlement with the owners of a vehicle extended-service-contract seller alleged to have marketed limited-time extend warranty programs for vehicles. The AG alleged that the company attempted to sell vehicle breakdown coverage with a generalized and often misleading description of the coverage, and that many customers later discovered their contracts were actually provided by a third party and did not contain the coverage promised. The AG stated that consumers who asked for refunds faced numerous objections and delays. The settlement requires the owners to pay $60,000 to resolve claims of deception, unfair practices, and unlawful insurance practices, and also permanently prohibits them from selling “additive contracts” in Missouri. The AG stated that the settlement “highlights [his office’s] efforts to clean up the auto service contract industry in Missouri and protect consumers from future deceptive sales practices.”