CFPB Steps Up Efforts to Fundamentally Reform Indirect Auto Finance Industry
In a coordinated series of recent regulatory moves and pronouncements, the Consumer Financial Protection Bureau (CFPB) doubled down on its ongoing efforts to fundamentally reform basic business practices in the indirect auto finance industry.
The primary stated impetus for the continuing effort is the CFPB’s view that credit discrimination is a widespread and serious problem in the auto finance industry, which holds approximately $900 billion in consumer auto financings. The indirect lending industry purchases auto financings originated by auto dealers, almost always as part of a sale of a vehicle by the dealer. In indirect financing transactions, auto dealers have the power to set the interest rate, which, according to the CFPB, creates statistical pricing “disparities” between rates charged to different groups that prove discrimination against certain protected classes, such as Hispanic borrowers.
After an announcement in December 2012 that the CFPB would begin looking into the indirect auto industry’s fair lending practices, this reform effort truly began in earnest with a bulletin published by the CFPB in March 2013 warning that the industry’s “discretionary” loan pricing ran afoul of the Equal Credit Opportunity Act. We reported on this bulletin here. The CFPB initiated several investigations of top indirect auto lenders, some of which resulted in enforcement actions and/or substantial settlements. These efforts continued to gain steam into the latter half of 2013 and early 2014, as we reported here. But the CFPB also drew scrutiny from legislators and industry commentators, who decried the CFPB for not being transparent about its methodology for determining what constitutes disparate impact. We reported on the first series of these complaints, from groups of House Democrats and Republicans, here.
The CFPB now has taken four recent steps that convey the message that it intends to continue, and possibly even expand significantly, these reforms. These steps make clear that the CFPB’s initial wave of investigations and enforcement actions were not the last the industry would hear of significant fair lending review; rather, it was just the beginning. These steps are:
-
On September 17, 2014, announcing a “larger participant” rule, by which the CFPB will claim authority to supervise and bring enforcement actions against approximately 38 of the largest non-bank indirect lenders. The CFPB already has supervisory and enforcement powers over the indirect lending activities over large banks with assets of $10 billion or more. A more detailed discussion of this proposed rule appears on our Consumer Financial Services Law Monitor blog here.
-
Releasing a whitepaper stating the basis for the conclusion that credit discrimination is a problem in the industry. A more detailed discussion of this white paper appears on our Consumer Financial Services Law Monitor blog here.
-
Releasing a report describing the statistical methods by which the CFPB allegedly finds discrimination by the “disparities.” A more detailed discussion of this report appears on our Consumer Financial Services Law Monitor blog here.
-
Releasing public statements on September 18, 2014, by CFPB Director Richard Cordray making clear that all indirect lenders in its jurisdiction can expect a visit by the CFPB, and that the CFPB’s preferred resolution to the perceived problem is for indirect lenders to prohibit dealers from setting interest rates on loans. A more detailed discussion of these statements and of the CFPB field hearing at which they were made appears on our Consumer Financial Services Law Monitor blog here.
The effectiveness of the CFPB’s efforts to change industry practices is yet to be seen. So far, only one significant indirect lender has moved away altogether from allowing discretionary pricing by dealers.
Nevertheless, auto finance companies that do not meet the CFPB’s proposed definition of “larger participant” should not rest easy at this point, given that the CFPB could very well expand the definition in the final rule. Further, the CFPB’s broad enforcement powers may reach companies even in the absence of this latest rule-making, given the CFPB’s expansive powers under its authority to delineate what constitutes an unfair, deceptive, or abusive act or practice (UDAAP). And, companies that do business with companies subject to CFPB supervisory authority, such as car dealers, will feel the impact indirectly, but significantly, as companies react to CFPB pressure by changing business practices.
We are keeping a close eye on the CFPB’s and other regulators’ regulatory initiatives directed at the auto financing industry, and invite you to check our Consumer Financial Services Law Monitor blog here, which covers auto finance and other consumer financial services topics.
About Troutman Sanders
Troutman Sanders is an accomplished and experienced leader in providing litigation and regulatory advice to a broad spectrum of financial services institutions, including bank and non-bank indirect automobile mortgage finance companies, mortgage originators and servicers. Troutman Sanders also has extensive and nationwide experience in providing litigation representation and regulatory advice to automobile dealers. Troutman Sanders’ State Attorneys General practice group also has successfully represented companies responding to attorney general and federal regulatory investigations.
© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result. Follow Troutman Sanders on Twitter.