CFPB Proposes New Oversight of Nonbank Auto Finance Companies
September 17, 2014
WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB) is proposing to oversee larger nonbank auto finance companies for the first time at the federal level. The bureau also released a supervision report that details the auto-lending discrimination that it has uncovered at banks.
Currently, the CFPB supervises large banks making auto loans, but not nonbank auto finance companies. The CFPB is now proposing to extend its supervision authority to the larger participants of the nonbank auto finance market. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the CFPB has authority to supervise certain nonbanks the bureau defines through rulemaking as “larger participants” in a market.
“Many people depend on auto financing to pay for the car they need to get to work,” said CFPB Director Richard Cordray. “Nonbank auto finance companies extend hundreds of billions of dollars in credit to American consumers, yet they have never been supervised at the federal level. We took action after we uncovered auto-lending discrimination at banks we supervise. Today’s proposal would extend our oversight, allowing us to root out discrimination and ensure consumers are being treated fairly across this market.”
The proposed rule would generally allow the CFPB to supervise nonbank auto finance companies that make, acquire, or refinance 10,000 or more loans or leases in a year. It would be supervising them to ensure they are complying with federal consumer financial law. The bureau estimates that about 38 auto finance companies would be subject to this new oversight. These companies originate around 90% of nonbank auto loans and leases, and in 2013 provided financing to approximately 6.8 million consumers.
The bureau noted in its report that it wants to make sure auto finance sources are not using deceptive tactics to market loans or leases. It also said in its report that it wants to make sure that information provided to credit bureaus by finance sources is accurate, noting its recent $2.75 million enforcement action against First Investors for providing inaccurate information to credit reporting agencies. Lastly, the bureau said it wants to make sure auto finance companies are not using illegal debt collection tactics.
The CFPB's proposed rule is open for comment for 60 days after the rule is published in the Federal Register.
In its “Supervisory Highlights” report, the CFPB detailed the auto-lending discrimination it has uncovered at banks under its supervision over the past two years. It noted that recent non-public CFPB supervisory actions at indirect auto financing institutions resulted in approximately $56 million in remediation for up to 190,000 consumers.
In order to evaluate a lender’s compliance with fair lending laws, CFPB examination teams use a proxy methodology just as other federal supervisory agencies and many private companies do. To proxy for race and national origin, exam teams rely on data associated with consumers’ last names and places of residence. Census Bureau data is first used to calculate the probability that an individual belongs to a specific race and ethnicity based on their last name. Exam teams then update that probability based on the demographics of the area in which the person resides again using Census Bureau data.
The CFPB also released a white paper which details the precise methodology the bureau uses to calculate these probabilities. Officials said the agency is also releasing computer code so that lenders can perform the same analysis that the CFPB’s examination teams perform. The white paper also reports on a study the bureau has conducted. It found that the integrated approach to building a proxy is more accurate than either surname or geographic data individually.
More details on the CFPB’s proxy methodology for race and national origin can be found here.
The supervisory highlights report is available here.