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CFPB Holds Auto Finance Hearing Following New Rule Proposal

September 18, 2014

INDIANAPOLIS — The Consumer Financial Protection Bureau held a field hearing this morning on auto finance in Indiana’s capital, a day after it proposed a new rule that would allow it to oversee about 38 nonbank auto finance companies. This was the second such hearing on the topic, which CFPB Director Richard Cordray said the bureau would continue to examine in order to protect car buyers against “the silent pickpocket of discrimination” in auto lending.

Yesterday, Sept. 17, the bureau announced it would seek to extend its supervision authority to the larger participants of the nonbank auto finance market, including companies that make, acquire, or refinance 10,000 or more loans or leases in a year — about 90% of nonbank auto finance market activity. The public will have 60 days to comment on the proposed rule.

“Nonbank auto finance companies extend hundreds of billions of dollars in credit to American consumers, yet they have never been subject to any supervisory oversight at the federal level,” Cordray told attendees of the hearing. “These companies have also played a significant role in the growth of subprime auto lending by making loans to consumers with lower credit scores. In this market, as in others, subprime borrowers may be more vulnerable to predatory practices, so direct oversight of their lending practices is essential.”

American Financial Services Association (AFSA) Executive Vice President Bill Himpler, a panelist at the Indianapolis event, was not as enamored with the bureau’s latest foray into auto finance.

“The AFSA remains concerned that the bureau continues to issue larger participant rules that capture market participants that, for lack of a better term, are not large by any stretch of the imagination,” Himpler told forum attendees. “Instead of capturing only the larger participants, the proposed criterion captures all the market participants that are not small businesses. Many of the market players that will be subject to the proposed rule have well below 1% market share.”

In addition to the proposed oversight of nonbank auto finance companies, the CFPB released a whitepaper on the proxy methodology it uses to determine the presence of discrimination in auto lending, as well as a “Supervisory Highlights” report on its activities in the indirect auto lending market over the past two years.

Industry groups like the AFSA and the National Automobile Dealers Association (NADA) have long requested the whitepaper, but officials with both groups said it fell short of their expectations.

In a statement released Wednesday, the NADA, the National Association of Minority Automobile Dealers (NAMAD) and the American International Automobile Dealers Association (AIADA), said that even with the release of the whitepaper, “Many of the questions that Congress and others have asked remain unanswered.”

Himpler called the whitepaper “a huge step in the right direction,” but he noted that it “defies reason why it has taken the CFPB 16 months” to reveal how it calculates BISG [Bayesian Improved Surname Geocoding].

“In addition, the CFPB did not describe how it estimates disparities — leaving more to be said,” Himpler said.

The NADA’s Paul Metrey, who also served as a panelist during this morning’s hearing, noted that the bureau is also falling short in its approach to addressing credit risks. The panel also included the Consumer Banker Association’s Steve Zeisel, the Indianapolis National Association for the Advancement of Colored People (NAACP) President Chrystal Ratcliffe, and Chris Kukla with the Center for Responsible Lending.

In January, the NADA released its Fair Credit Compliance Policy & Program based on a mitigation model developed in 2007 by the Department of Justice. The program was offered as a way to address some of the bureau’s requirements in its March 2013 bulletin on auto lending, which, among other recommendations, suggested that a flat fee compensation method for dealers would eliminate fair lending risk.

“… The NADA program … can only be effective if finance sources are encouraged — not discouraged — to incorporate such a program into their compliance management systems,” Metrey said. “However, regrettably, this is not happening today.”

The CBA’s Zeisel told attendees that while his association has long supported nonbank supervision, the CFPB’s March 2013 bulletin merited more industry input. “Given the complexity, that would have been warranted,” he said.

Currently, the bulletin is being challenged by House bill 5403, the Reforming CFPB Indirect Auto Financing Guidance Act. If passed, the legislation would not only rescind the bureau’s guidance, it would require that the CFPB provide a public comment period before reissuing any guidance on auto finance.

The “Supervisory Highlights” report noted that the bureau’s activities in the auto finance arena will result in about $56 million in redress for up to 190,000 consumers allegedly harmed by discriminatory practices. It also concludes that non-discretionary dealer compensation models or strict caps on dealer markups could mitigate fair lending risk.

“We know quite simply that flat fees would increase the cost of credit for consumers,” Himpler argued. “Those on the margins would be hurt the most, as they may be forced into higher cost financing or lower priced vehicles, or be priced out of the market altogether.”

Despite ongoing disputes about the validity of some of the CFPB’s proposed compliance options, panelists at today’s field hearing remained optimistic.

“… We remain hopeful that the bureau, in coordination with the federal agencies that Congress entrusted with oversight over dealers, will work with key stakeholders to identify an approach to fair credit compliance that is both meaningful and viable,” Metrey said, “and that preserves robust competition in the marketplace.”

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CFPB Proposes New Oversight of Nonbank Auto Finance Companies

The CFPB announced this week a proposed rule that would allow it to oversee about 38 nonbank auto finance companies. The bureau also plans to release a new whitepaper which details the methodology it uses to determine the presence of discrimination in auto lending.