On June 10, the CFPB issued its final rule to oversee “larger participant” nonbank auto finance companies. Although the CFPB received significant feedback during the comment period, the final rule is nearly identical to that proposed in September 2014. Under the final rule, the CFPB will have supervisory authority over nonbank auto finance companies with at least 10,000 aggregate annual originations. These originations include making, purchasing, acquiring, or refinancing extensions of credit for the purchase or lease of an automobile. The CFPB estimates this threshold will bring about 34 entities and their affiliates under its supervisory authority, which represents roughly seven percent of all nonbank auto finance companies, and approximately 91% of the nonbank automobile financing market. In addition to the final rule, the CFPB also published updated automobile finance examination procedures to include industry specific guidance for covered persons.
The rule will take effect 60 days after publication in the Federal Register. Although the CFPB has not determined when and in what order examinations will begin, some industry insiders have predicted they could start in late 2015.
In the months since the CFPB released its proposed rule, auto finance industry trade associations and market participants submitted a number of comments to the CFPB addressing: (i) the threshold for defining “larger participant;” (ii) the definition of “lease” for purposes of the larger participant threshold; and (iii) exceptions for securitizations.
Number of Originations
With respect to the 10,000 originations threshold, although the CFPB received comments recommending the CFPB both increase and decrease the number, most appeared in favor of increasing the threshold. As industry commenters noted, the low threshold results in participants with less than one percent market share and small businesses being deemed larger participants. Commenters recommended an alternative threshold of 50,000 originations, which would capture approximately 86% of market participants. Ultimately, the CFPB adopted the original 10,000 originations threshold, noting it allowed the CFPB to “supervise market participants that represent a substantial portion of the automobile financing market and that have a significant impact on consumers.”
The final rule also extended the application of the term “lease” under Dodd-Frank to include automobile leasing. The Dodd-Frank Act includes certain leases that are, among other things, the “functional equivalent of purchase finance arrangements. 12 U.S.C. § 5481(15)(A)(ii). As detailed in the comments submitted to the CFPB, prudential regulators and other statutory schemes such as TILA have traditionally applied this idea of “functional equivalent” to leases where the monthly payments total a sum substantially equivalent to or in excess of the value of the property, resulting in the lessee becoming the owner of the property for little or no consideration at the end of the least term. Nonetheless, the CFPB noted that, in light of its purpose and objectives, “functional equivalent of purchase finance agreements” should be interpreted from the perspective of the consumer. In arriving at this conclusion, the CFPB noted that, from a customer’s point of view, lease transactions provide an identical experience to a purchase transactions because leasing requires an application process that involves providing basic financial information and credit history, an ongoing contractual obligation, and the option to purchase the vehicle at the end of the lease term for a pre-determined amount.
While the proposed rule excluded investments in asset-backed securities from the definition of “aggregate annual originations”, the CFPB expanded the securitization exception as part of the final rule. As a result, the exemption will also apply to purchases or acquisitions of obligations by securitization trusts and other special purpose entities created to facilitate securitization transactions.
The rule will become effective 60-days after publication in the Federal Register
In its press release announcing the final rule, the CFPB identified a number of areas its examiners will focus on when conducting examinations of auto finance companies. Those areas include (i) the marketing and disclosure of terms in auto finance, (ii) credit reporting practices and accuracy, (iii) treatment of consumers when collecting debts both directly by the finance company and through its vendors, and (iv) fair lending under the Equal Credit Opportunity Act. In light of the CFPB’s continued focus on these areas, all market participants would be well served to review policies, procedures and practices occurring within their business.
Questions regarding the matters discussed may be directed to the lawyers listed in this alert, or to any other Orrick attorney with whom you have consulted in the past.