What the CFPB's Move to Oversee Nonbank Auto Financers Really Means
Banks, credit unions, lenders, lessors and servicers all need to pay attention to the CFPB's recently released rule on regulating auto financers. Why? Because it has an industry-wide reach and expansive scope - this means new procedures for everyone. We'll dig into the details here, and share how you can prepare for changes.
Earlier this month, the CFPB announced that they will start regulating some nonbank auto finance lenders. Their supervisory focus will be on the larger lenders, which they define as an organization that makes, acquires, or refinances 10,000 or more loans or leases per year.
The real story here is not that they're regulating nonbanks. It's that they've detailed new examination procedures for both banks and nonbanks.
“Examiners will use the Procedures in examinations of automobile lenders, lessors, and servicers," the recently released rule states. "Before using the Procedures, examiners should complete a risk assessment and examination scope memorandum in accordance with general CFPB procedures.”
If you haven't conducted a risk assessment that year, they may conduct one for you. As the bank leader or compliance officer, you're the best person to tell your institution's story because you have the most in-depth understanding of the business. After the risk assessment review and scoping, the Bureau will begin the exam.
What to Expect In the Exam
These exams will have four objectives:
- Assess the quality of the compliance management system;
- Identify acts or practices that increase risk of violations of Federal consumer financial law;
- Gather facts regarding acts and practices that may violate Federal law; and
- Determine whether a violation has occurred.
The exams will cover indirect lending channels (dealer provides access to financing), direct lending channels (consumer goes directly to finance company or bank), auto leasing, "buy here pay here" finance companies, and ancillary products and services (including GAP insurance, extended warranties, and vehicle add-ons).
In particular, the CFPB will be focused on Truth in Lending Act (TILA and Regulation Z), Electronic Fund Transfer Act (EFTA and Regulation E), Fair Debt Collection Practices Act (FDCPA), Fair Credit Reporting Act (FCRA), the Gramm-Leach-Bliley Act (GLBA), Consumer Leasing Act (and Regulation M) and Equal Credit Opportunity Act (ECOA and Regulation B). In addition, the examiner will also look for potentially unfair, deceptive or abusive acts or practices (UDAAPs).
9 Specific Exam Modules
Here are the modules you can expect the examiners to pursue:
Company Business Model: This will include a review of products, services, volumes, key managers, and the audit and underwriting processes.
Advertising and Marketing: This will determine relationships, determine marketing mediums, and examine compliance with consumer regulations.
Application and Origination: This will assess the use of proper front-end disclosures, compliance with EFTA (Electronic Fund Transfer Act), adverse action disclosures, FCRA (Fair Credit Reporting Act), risk-based pricing notices, credit score disclosure, privacy notices, and underwriting practices. Be prepared to know your numbers, especially for underwriting and pricing disparities between groups.
Payment Processing, Account Maintenance and Optional Products: This will review the process for crediting payments, compliance with Servicemembers Civil Relief Act, notification of fees/penalties, handling of of partial payments, management of prepayments, periodic statements, compliance with EFTA, management of payoffs, as well as review other products and services such as credit protection and extended warranties.
Collections, Debt Restructuring, Repressions and Accounts in Bankruptcy: This will assess compliance with Fair Debt Collection Practices Act, notifications, client contacts, representations regarding collection of debts, debt restructuring/workouts, repossession procedures, and bankruptcy procedures.
Customer Complaints and Inquiries: This will review institutions’ processes and procedures to manage complaints and inquiries.
Credit Reporting, Information Sharing and Privacy: This will focus on evaluating compliance with FCRA.
Examiner Conclusions and Wrap-Up: In this module, regulators will summarize findings, violations, weaknesses in controls/audit/reviews/training/management oversight, violations in a pattern or practice, and prepare memorandum.
TRUPOINT Viewpoint: Auto lending is viewed as an essential part of our national economy - in fact, it is the third largest consumer debt category, after mortgage and student loans. This release was not just about the larger participant rule, which makes nonbank auto finance companies subject to supervision, but about the updates to the examination procedures.
The industry knew this was coming. The examination procedures help all organizations understand the CFPB’s expectations. With these new examination procedures, the regulators have provided ample warning in regards to what they are looking for when it comes to auto lending, leasing and ancillary products (like extended service contracts).
The use of discretion in underwriting and pricing, including ability to repay, will gain additional scrutiny. We can also expect that there will be continued attention placed on fair business practices and advertising.
- CFPB Press Release
- CFPB Rule
- CFPB Examination Procedures
- Legal Perspective
- TRUPOINT Partner Blogs on Auto: