Car dealers have been dreading this day. The Consumer Financial Protection Bureau (CFPB) is asserting its authority to police what are called “nonbank” auto finance companies — the lenders who write many of the subprime loans for low-income car buyers.“Auto loans and leases are among the most significant and complex financial transactions in a typical consumer’s life,” said CFPB Director Richard Cordray. “Today’s rule will help ensure that larger auto finance companies treat consumers fairly.”
The bureau is thought to be particularly concerned with whether minority customers are being treated fairly by auto lenders.
Car dealers are not happy and have been gearing up to try to block the CFPB in Congress. The dealers argue that the extra oversight isn’t needed since they always treat customers fairly.
When the CFPB was established as part of the 2010 Dodd-Frank Act, auto loans were specifically exempted from its purview. But the CFPB said in its announcement today that it had found a way around the exemption.
Auto loans are the third largest category of household debt, behind mortgages and student loans. American consumers had about $900 billion in auto loans outstanding in the fourth quarter of 2014, CFPB said. The automobile leasing market also continues to grow as more than a quarter of new cars are acquired through leases.
Banks and nonbanks
Auto loans are financed by both banks and nonbanks. Consumers can either get a loan through direct financing, where they seek credit directly from a lender, or through indirect financing, where an auto dealer typically enters into a retail installment sales contract that it then sells to a third-party.
Banks, credit unions, and nonbank auto finance companies provide credit to consumers both directly and indirectly. Some nonbank finance companies are “captive” nonbanks, meaning they are owned by auto manufacturers and generally do only indirect lending.
Currently, the CFPB supervises auto financing at the largest banks and credit unions. The new rule enacted today extends that supervision to any nonbank auto finance company that makes, acquires, or refinances 10,000 or more loans or leases in a year.
The CFPB said it will be watching lenders and dealers to be sure they are:
Fairly marketing and disclosing auto financing terms: The Bureau will be examining auto finance companies that market directly to consumers to ensure they are not using deceptive tactics to market loans or leases.
Providing accurate information to credit bureaus: The CFPB recently took an enforcement action against an auto finance company that distorted consumer credit records by inaccurately reporting information like the consumers’ payment history and delinquency status to credit bureaus.
Treating consumers fairly when collecting debts: The Bureau will be looking to ensure that collectors are relying on accurate information and using legal processes when they collect on debts. The Bureau also will review the repossession process, including the practices of third-party service providers that are employed to repossess autos.
Lending fairly: The Bureau will assess whether auto finance companies’ practices comply with the Equal Credit Opportunity Act and other Bureau authorities protecting consumers.