Yesterday, the CFPB finalized its larger participant rule for nonbank auto finance companies, making them subject to supervision after the effective date of the rule. But the Bureau’s press release and newly-released auto finance examination procedures, to me, are even more significant, because they signal areas of future concentration for the Bureau in examinations of both banks and nonbanks in the auto finance space.
Below are a few key areas of focus that I gleaned from reading yesterday’s releases:
- Ancillary products, like GAP insurance and extended service contracts, are not mentioned in the press release, but receive heavy attention in the exam procedures. Given the history of regulatory attention to similar products in other market sectors over the past two decades, it’s no surprise that the CFPB is signaling lots of scrutiny of these products in the auto finance market.
- Leasing is clearly a headline issue, with the CFPB devoting a massive discussion in the Supplementary Information accompanying the final rule to explaining why it believes it has jurisdiction over most consumer vehicle leases under Section 1002(15)(A)(ii) of Dodd-Frank. Additionally, the CFPB simultaneously adopted a separate rule defining certain automobile leases that are not “the functional equivalent of purchase finance arrangements” as a “financial product or service.” The examination procedures pay special attention to the advertising and disclosure of lease terms, and the operation of termination-related fees (like excess wear and tear, excess mileage and early termination liability).
- Advertising of auto finance terms is prominently mentioned in the press release and exam procedures, and the exam procedures specifically discuss whether “affiliates” are advertising credit terms. To me, this seems like a clear reference to automobile manufacturers’ advertising of subvented financing and leasing promotions that are offered through their captive finance companies.
- The press release highlights a focus on whether “consumers understand the terms they are getting,” which makes me think about daily simple interest. Daily simple interest is ubiquitous in the auto finance industry. Examining the clarity of how daily simple interest is described in the retail installment contract, I believe, will be one of the CFPB’s priorities.
- Related to that point is payment allocation, which is specifically highlighted in the exam procedures. How payments are allocated between late fees, finance charge and principal, and how that allocation is disclosed to consumers, will be another likely CFPB focus area.
- Two areas of third-party monitoring and due diligence that the CFPB mentioned in the exam procedures are especially notable to me: auto dealers and repossession agents. Both pose significant operational challenges. Repossession also is mentioned in the press release.
- GLBA and information-sharing issues are heavily featured in the exam manual.
- There is an explicit reference in the exam manual to underwriting, default rates, which I believe refers to an ability to repay analysis, and this is likely to be a focus area for subprime auto finance.
I don’t regard many of these issues as a surprise, but they do serve as a valuable roadmap to any bank or nonbank auto finance operation to use in preparing for a future CFPB examination or enforcement investigation. We will be holding a webinar on June 18 for clients and industry participants to discuss the larger participant rule and the implications of these examination procedures for banks and nonbanks in greater detail. Hit this link to register.