WASHINGTON The Consumer Financial Protection Bureau has taken a sweeping approach in using its authority to propose supervision of the largest nonbank auto lenders, unveiling a plan that would effectively cover 90% of the market.
The agency late Wednesday unveiled a proposal to regulate the top 38 nonbank auto lenders among the more than 500 in the market. While that is just 7% of the industry, they produce more than 90% of the loan transactions in the market. As a result, observers said the proposal will have a broader impact on the industry as a whole.
"The implications go beyond the top 38 nonbank auto lenders that are going to become subject to the larger participant rulemaking," said Alan Kaplinsky, who heads the consumer financial services group at Ballard Spahr. "It has a rippling effect that is going to impact the entire industry."
To a certain extent, the proposal makes formal what institutions had already come to expect. Sources said the CFPB has been privately questioning banks and nonbanks on their auto lending activities.
The proposal would give the CFPB oversight of any nonbank auto lender that produces, acquires or refinances at least 10,000 loans a year. That includes so-called "captive" auto finance companies owned by car manufacturers such as Toyota and GM.
In placing these nonbanks under the same rules and oversight as banks, the CFPB argues it would create a level playing field for consumers.
"Nonbank auto finance companies extend hundreds of billions of dollars in credit to American consumers, yet they have never been supervised at the federal level," said CFPB Director Richard Cordray in a press release. "We took action after we uncovered auto-lending discrimination at banks we supervise. Today's proposal would extend our oversight, allowing us to root out discrimination and ensure consumers are being treated fairly across this market."
The industry has anticipated that the CFPB would target non-bank auto lenders after it released a controversial bulletin in March 2013 that held banks accountable for any statistical discrimination the agency found with partnering dealerships, regardless of whether it was unintentional.
In connection to Wednesday's proposal, the CFPB also released a report showing evidence of auto loan discrimination at banks, further justifying its use of the "disparate impact" theory for enforcement actions since issuing the bulletin.
The agency estimates that its actions against banks will result in $56 million in redress for up to 190,000 affected consumers. It also released a supervisory report telling lenders that they are at less risk of being cited for a fair lending violation if they either stop or limit their partnering dealer from marking up the interest rate on a loan in order to be compensated. The industry has long argued that the CFPB is offering these suggestions to squeeze the industry into fixed pricing.
"The CFPB appears determined to eliminate variable auto loan pricing by creating a statistical analysis it can use to label virtually every auto lender as engaged in discrimination if it allows dealers any pricing discretion," said Andrew Sandler, chairman and executive partner of BuckleySandler LLP. "If the bureau believes it appropriate to eliminate variable pricing because it creates too great a risk of discrimination, it should just issue a rule and do that. That is a far better approach than labeling lenders as engaged in discrimination without any meaningful evidentiary basis."
Chris Kukla, senior vice president at the Center for Responsible Lending, said the CFPB proposal is "appropriately scoped" in light of the ongoing harm to consumers posed by dealer mark-ups.
"We're going to continue to argue that the dealer mark-up needs to go away," Kukla said. "And the CFPB's supervisory highlights underscores why it's better for consumers, regulators and the industry if we moved to a different system."
The CFPB is hosting a public field hearing Thursday in Indianapolis, Ind. about its proposal and white paper. The proposal is open for comment for 60 days after it's published in the Federal Register.