On June 10, the Consumer Financial Protection Bureau issued a final rule defining larger participants of the automobile financing market. The new rule will become effective 60 days after being published in the Federal Register. The final rule follows up the CFPB’s proposed rule, issued on September 17, 2014, on which we previously reported here.
The CFPB’s rule extends the CFPB’s supervisory authority to any nonbank auto finance company that makes, acquires, or refinances 10,000 or more loans or leases in a year. The CFPB estimates that the new rule will cover 34 of the largest nonbank auto finance companies and their affiliated companies that engage in auto financing. Taken together, these companies originate approximately 90 percent of nonbank auto loans and leases, and in 2013 financed auto transactions for approximately 6.8 million consumers. Under the final rule, the CFPB will directly regulate “larger participants” of the automobile financing market to ensure their compliance 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 (“Dodd-Frank Act”) that include prohibition on unfair, deceptive, or abusive acts or practices. The CFPB’s final rule also defines additional automobile leasing activities for coverage by certain consumer protections of the Dodd-Frank Act. In issuing the final rule, the CFPB made only minor changes to the rule as proposed, by broadening the category of transactions involving asset-backed securities that are not counted toward the 10,000 transaction threshold and by making a minor modification to the definition of refinancing for the purpose of the 10,000 transaction threshold.
In a related action, the CFPB has updated its Supervisory and Examination Manual to provide specific guidance to auto finance companies to prepare for review by the CFPB. According to the CFPB, “examiners will be assessing potential risks to consumers and whether auto finance companies are complying with requirements of federal consumer financial law.” The new Auto Finance Examination Procedures Manual is divided into nine specific “modules” as follows:
- Module 1: Company Business Model. Any review of a company by the CFPB will include examination of its the core business practices, including whether the company’s review, audit, and underwriting functions operate independently of its sales unit.
- Module 2: Compliance Management. A company’s compliance management system is a central element of the CFPB’s examination of any company. This module also includes review of a company’s oversight and audit procedures of third party service providers.
- Module 3: Advertising and Marketing. The Manual explains that any examination of an auto finance company will include a review of its marketing policies, procedures, and practices to ensure they are consistent with the requirements of applicable federal consumer financial law, including TILA, FCRA, and the Consumer Leasing Act.
- Module 4: Application and Origination. As part of this module, the CFPB will review a company’s processes in taking applications, evaluating applicants, and originating auto loans or leases. Examiners will review companies to identify any acts, practices, or materials that indicate potential violations of federal consumer financial laws and regulations, including TILA, EFTA, ECOA, FCRA, the Consumer Leasing Act, and the Gramm-Leach-Bliley Act.
- Module 5: Payment Processing, Account Maintenance, and Optional Products. The Manual explains that examiners will review a company’s payment posting and fee assessment practices, by reviewing its policies and procedures and a sample of servicing records for both loans and leases, if applicable. In addition, a review of a sample of records from the servicer’s primary record system will be conducted, and if any potential problems are found, a review may be conducted of relevant records outside the primary system, including copies of consumer payment records and invoices from vendors documenting any services related to a consumer’s loan or lease account.
- Module 6: Collections, Debt Restructuring, Repossessions, and Accounts in Bankruptcy. As part of this module, the CFPB explains that it will review compliance with the FDCPA and related laws by examining a sample of servicing records for customers in default to assess a company’s collection practices. In addition, a sample of servicing records for customers whose loans or leases are in default where their vehicles are in the process of being repossessed may also occur. The CFPB explains that examiners may also listen to a sample of collection call recordings to assess compliance with federal consumer financial laws, principally the FDCPA.
- Module 7: Customer Complaints and Inquiries. As part of a review, examiners will review consumer complaints to ensure that the complaints were resolved appropriately and in a timely manner, and to determine if underlying facts may indicate a systemic issue affecting other consumers.
- Module 8: Credit Reporting, Information Sharing, and Privacy. The Manual explains that the CFPB will examine a sample of a company’s servicing records and compare the information in the servicer’s system of record with the information reported to the credit reporting agencies. Examiners will also review consumer complaints and documents for potential violations of the FCRA and its implementing regulation, Regulation V.
- Module 9: Examiner Conclusions and Wrap-up. Any review will conclude with a summary of the examiner’s findings.
The CFPB’s actions reflect its heavy focus on the auto finance industry. The newly-released Supervisory and Examination Manual for auto finance companies provides a useful compliance roadmap for any company.