On February 23, CFPB Director Richard Cordray delivered prepared remarks at the National Association of Attorneys General Winter Meeting in Washington, D.C. In his remarks, Cordray indicated that the CFPB is keeping a watchful eye on the auto lending market, stating that auto lending practices are currently being supervised at the largest banks. Cordray further revealed that the CFPB intends to move forward with a proposed rule to oversee the larger nonbank auto lenders as well. Cordray also lobbied the attorneys general to use the CFPB’s government portal to analyze consumer complaints to assist in investigations, stating, “[w]e now have 22 attorneys general and 28 state banking regulators who are already signed up and accessing this information through the secure portal. I strongly urge the rest of you to join us and do the same.”
On March 26, the FTC announced the results of Operation Ruse Control, “a nationwide and cross-border crackdown” on the auto industry with the intent to protect consumers who are purchasing or leasing a car. Efforts taken jointly by the FTC and its law enforcement partners resulted in over 250 enforcement actions, including the six most recent cases that involved (i) fraudulent add-ons; (ii) deceptive advertising; and (iii) auto loan modification. According to the press release, the FTC recently took its first actions against two auto dealers for its add-on practices, which allegedly violate the FTC Act by failing to disclose the significant fees associated with offered programs or services and misrepresenting to consumers that they would save money. Three auto dealers recently “agreed to settle charges that they ran deceptive ads that violated the FTC Act, and also violated the Truth in Lending Act (TILA) and/or Consumer Leasing Act (CLA).” Finally, at the FTC’s request, the U.S. District Court for the Southern District of Florida temporarily put an end to the practices of a company that charged consumers an upfront fee to “negotiate an auto loan modification on their behalf, but then often provided nothing in return.” The FTC’s recent actions are indicative of its ongoing efforts to prevent alleged fraud within the industry.
On February 10, the DOJ, along with the U.S. Attorney’s Office for the Western District of North Carolina and the North Carolina AG, announced the settlement of the federal government’s discrimination suit involving two “buy here, pay here” auto dealerships. According to the DOJ, this is the federal government’s first-ever settlement involving discrimination in auto lending. Filed in January 2014, the settlement resolves a lawsuit alleging that two North Carolina-based auto dealerships violated the federal Equal Credit Opportunity Act by “intentionally targeting African-American customers for unfair and predatory credit practices in the financing of used car purchases.” The North Carolina AG further alleges that the auto dealerships’ lending practices violated the state’s Unfair and Deceptive Trade Practices Act. The terms of the settlement require the two dealerships to revise the terms of their loans and repossession practices to ensure that “reverse redlining” ceases to exist; required amendments include: (i) setting the maximum projected monthly payments to 25% of the borrower’s income; (ii) omitting hidden fees from required down payment; (iii) prohibiting repossession until the borrower has missed at least two consecutive payments; and (iii) providing better-quality disclosure notices at the time of the sale. Also required by the settlement agreement, the two auto dealerships must establish a fund of $225,000 “to compensate victims of their past discriminatory and predatory lending.”
On December 19, the New York Department of Financial Services announced a recent settlement with a Long Island-based auto lender to resolve allegations of violations of several consumer protection laws including the DFA, TILA, NY Banking Law, and NY Financial Services Law. According to the consent judgment, the Defendants allegedly (i) failed to notify consumers who made overpayments on their accounts; (ii) miscalculated the interest charged to customers; and (iii) endangered the security of its customer information by leaving loan files openly around common areas. As part of the settlement, the auto dealer must (i) pay $3 million in penalties; (ii) pay full restitution plus nine percent interest to all affected customers; (iii) liquidate all remaining loans; and (iv) surrender its licenses in all states.
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 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 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…