On June 10, 2015, the Consumer Financial Protection Bureau
(CFPB) announced a final rule that will allow it to supervise
larger nonbank automobile finance companies. Accompanying the rule,
it also published the procedures that will be used by examiners in
their reviews of the regulated entities. These examination
procedures are an important new tool for covered auto lenders
preparing for CFPB supervision.
As expected, the final rule largely adopts the version proposed for
comment on September 17, 2014.1 Pursuant to its
authority under the Dodd-Frank Act, the CFPB has defined
"larger participants" to include 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 rule will cover about
34 nonbank auto finance companies and their affiliates, which
account for approximately 90 percent of the nonbank auto loan and
lease market. The final rule will go into effect 60 days after
publication in the Federal Register.
This final rule marks the fifth CFPB rulemaking to define what
constitutes a "larger participant" in markets for
consumer financial products or services. The bureau has previously
defined larger participants in the consumer reporting, consumer
debt collection, student loan servicing, and international money
transfer markets.
Highlights of the Rule
Larger Participants. Newly covered entities include
nonbank auto finance companies that make, acquire, or refinance
10,000 or more aggregate annual originations. Specialty finance
companies, captive nonbanks, and Buy Here Pay Here companies may
qualify as larger participants if they meet the requisite number of
annual originations. Motor vehicle dealers do not fall under the
definition of larger participants, as they are excluded from the
CFPB's authority under the Dodd-Frank Act.
Originations. Originations include grants of credit to
purchase an automobile, refinancings secured by an automobile,
automobile leases, and the purchases or acquisitions of those
obligations. Refinancings not secured by an automobile, certain
transactions by special purposes entities to facilitate asset-back
securitizations, and title loans are excluded from the definition
of originations. To determine if an entity meets the 10,000 annual
origination requirement, the originations from the previous
calendar year by the nonbank entity and its affiliated companies
are aggregated.
Automobiles. The definition of automobiles in the final
rule includes cars, sports utility vehicles, light-duty trucks, and
motorcycles. Heavy-duty trucks, buses, ambulances, motor homes,
RVs, golf carts, and motor scooters are excluded from the
definition.
Examination Procedures
Auto finance companies across the industry have been working to
prepare for CFPB supervision at least since the publication of the
bureau's proposed larger participant rule. The bureau's
publication of examination procedures along with the final larger
participant rule gives covered entities a new tool to evaluate
their readiness for a CFPB examination, and the opportunity to
begin any needed enhancements to their compliance risk management
system prior to examination.
Examination Process
The bureau will notify the entities that it intends to examine, and
those entities will then have the option of contesting whether they
qualify under the rule as a larger participant. If the examination
proceeds, the CFPB will generally conduct an initial conference
with entity's management, request records, and review the
entity's compliance management system. Based on the initial
review, the CFPB will then plan and conduct an on-site examination.
The CFPB estimates that a typical examination will require 11 weeks
of assistance from the larger participant's staff.
Key Areas of Focus
- Service Provider Oversight. As larger participants may
be responsible for the activities of service providers, the
examiners will review the relationship between larger participants
and their service providers to ensure a proper compliance
management system is in place. In particular, the examiners will
evaluate whether the larger participant: (1) has compliance
management controls for selecting and monitoring affiliates and
service providers; (2) takes steps to ensure that its service
providers are licensed and registered as required; (3) performs due
diligence concerning the service providers' regulatory
compliance history; (4) monitors the service providers' hiring
and training practices; (5) has a process for ensuring service
providers comply with the larger participant's privacy policy;
and (6) appropriately audits the service providers and reacts to
those audits.
- Fair Lending. Examiners will review larger
participants for compliance with the Equal Opportunity Credit Act
and Regulation B, and will contact the Office of Fair Lending and
Supervision Policy with any concerns. At a time of heightened fair
lending scrutiny in this sector, the fair lending portion of
upcoming examinations could prove particularly consequential for
regulated entities.
- Fair Credit Reporting. Examiners will assess larger
participants' compliance with the FCRA Furnisher Requirements.
The review will include determining the policies and procedures
used to ensure accuracy in data collection, storage, and reporting,
and for resolving consumer complaints. The examiners will also
independently review consumer complaints, and will compare samples
of the larger participants' servicing records with information
reported to credit reporting agencies. Examiners will also review
whether larger participants are complying with the FCRA when
denying loans, offering loans on materially less favorable terms
based on a consumer credit information, and providing credit scores
to consumers.
- Optional Products. In addition to how larger
participants manage accounts and payments generally, the examiners
will inquire into optional financial products or services that are
offered to consumers, including: (1) whether optional products are
offered; (2) whether debt cancellation, suspension, or similar
products are offered; (3) how optional products attached to loans
or leases are monitored; (4) what role service providers play in
connection with the optional products; (5) what marketing materials
are used for the optional products; (6) whether the optional
products are ever added without explicit authorization from the
consumers; (7) whether bi-weekly payment plan advertisements
clearly explain the terms and conditions, including when the
payments will be applied.
- Debt Collection and Repossession. Examiners will
review a sample of servicing records for customers in default, in
bankruptcy, and whose loans or leases have been repossessed, as
well as a sample of collection calls and any collections related
complaints. Examiners will review collections practices for FDCPA
and UDAAP compliance, including whether collections calls clearly
indicated the purposes of the call, as well as whether the calls
are repetitive, harassing, or misleading and whether proper
controls are present to ensure monitoring and compliance. Examiners
will also closely scrutinize repossessions (including the use of
starter interrupt devices) and how lenders identify and process
accounts in bankruptcy.
- Other Areas. The examination procedures address a number of other review areas, including consumer complaint monitoring, privacy and data security, and advertising, marketing, and truth in lending.
* * *
CFPB supervision and examinations will mean big changes for the nonbank auto finance market. Larger participants now have the opportunity to prepare for their first examination by carefully reviewing the published examination procedures against their policies and practices and to initiate any needed enhancements.
1 79 FR 60762 (Oct. 8, 2014)
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