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Lender Trade Group Urges CFPB to Reconsider Larger Participant Rule

December 11, 2014

WASHINGTON — In a memo submitted Dec. 8 to the Consumer Financial Protection Bureau (CFPB), the American Financial Services Association (AFSA) requested that the regulator “exercise great care” as it moves to redefine larger participants in the auto finance market.

In September, the CFPB announced a proposed rule that would give it supervisory authority over larger participants in the nonbank auto finance segment. If adopted, the rule would allow the CFPB to supervise an estimated 38 auto finance companies, which originate around 90% of nonbank auto loans and leases. The comment period on the rule ended this week.

“In order to avoid creating further regulatory burdens, uncertainty, and potential restriction of access to credit for auto loans, the CFPB should make several changes to the proposed rule,” the association’s memo read, in part.

The AFSA listed seven suggested changes in its memo it believes would help the bureau avoid creating regulatory burdens and potentially restricting consumers’ access to credit. Among those was a recommendation that the CFPB use the Equal Credit Opportunity Act’s Regulation Z definition of “refinancing” as opposed to its proposed expanded definition.

“The proposed definition of refinancing significantly increases the number of nonbank covered persons who may meet (and who have no way of knowing whether they meet) the proposed threshold for larger participants of the automobile financing market, but whose main business is not automobile financing,” the memo read. “Additionally, it is difficult, if not impossible, to determine whether a refinancing meets the proposed definition.”

The memo went on to recommend that the bureau:

  • Retain the exclusion for asset-backed securities from the definition of “annual originations” and modify the exclusion to clearly cover asset-backed securities — something the association said would prevent detrimental effects to the securitization process.
  • Refraining from overreach regarding leases.
  • Modify the test used to determine larger participants to ensure that it truly captures the “larger” participants who actually occupy the vast majority of the market.
  • Change other definitions in the proposed rule, such as “automobile,” “automobile financing market,” and “title loans.” The AFSA also recommended the bureau provide a definition of “affiliate.”
  • Provide additional detail on Experian Automotive’s AutoCount database and specifically exclude loans not made for the purpose of financing the purchase of automobiles or the refinancing of such original obligations from the database.
  • Revisit the cost likely to be incurred by a larger participant experiencing supervisory activities by the bureau. The AFSA believes the CFPB’s estimated total cost of an examination — $27,611 — is “unrealistically low.”

The association also noted that it believes the CFPB should increase the threshold to determine larger participants to 50,000 aggregate annual originations. The CFPB is currently proposing to oversee nonbank auto finance companies that make, acquire, or refinance 10,000 or more loans or leases in a year.

“A threshold of 10,000, coupled with the overly broad definition of refinancing, is so low that covered persons who qualify as small businesses under the Small Business Administration (SBA)’s definition could also qualify as larger participants under the proposed rule.

“It seems contradictory that a covered person could be a small business and a larger participant at the same time … It stretches credulity to conclude that such a small business with less than 1 percent of the market share should be considered a ‘larger’ participant in the entire market,” the memo read.

Under the AFSA’s recommendations, the CFPB would oversee the 17 very largest participants in the market, representing 86% of the market activity.

“The proposed low threshold of 10,000 aggregate annual originations would also hurt consumers,” the AFSA explained. “This is because some covered persons may exit a portion of the business. Covered persons may choose to base their lending decisions on the size of the loan in order to avoid engaging in a volume of transactions that would cause them to reach the threshold. As a result, the Proposed Rule could have the unintended result of making it more difficult for consumers to finance lower-priced cars.”

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