The Consumer Financial Protection Bureau is expected to issue an important new rule on Thursday defining which nonbank lenders -- including captive finance companies -- will be considered “larger participants” and thus subject to CFPB regulation.
Rick Hackett, a former CFPB assistant director, said last week he expects the definition of “larger participants” to cover the top 50 to 100 auto lenders, including banks that are already subject to CFPB authority.
He made his remarks at the Industry Summit, an annual auto finance conference, in Las Vegas. Hackett left the CFPB about a year ago and joined the Portland, Maine, office of law firm Hudson Cook.
The CFPB is holding a public field hearing about auto finance in Indianapolis on Thursday, Sept. 18. The bureau’s agenda shows that Director Richard Cordray will start the hearing with prepared remarks, but the bureau did not disclose the topic.
A panel is next on the schedule, including representatives from the National Automobile Dealers Association, American Financial Services Association, the Indianapolis office of the NAACP and Indiana Legal Services, which provides legal representation for consumers.
NADA and AFSA would not say ahead of time what they expect to say at the hearing. Andrew Ault, a staff attorney for Indiana Legal Services, told Automotive News his specialty is representing consumers who sue lenders and dealerships over so-called yo-yo financing. That’s when dealerships allegedly put customers into contracts the dealership knows won’t be approved, so they can force the customer to come back and sign a new, more expensive deal. Ault said his remarks on Thursday would not necessarily be about yo-yo financing.
With regard to the “larger participants” rule, there’s no doubt that captive finance companies will fall under CFPB jurisdiction. The captives have said for years it was prudent to assume they would all be covered by the CFPB, no matter how the bureau decided to define “larger participants.”
Toyota Motor Credit Co. said in a filing with the Securities and Exchange Commission in June that it expected to be included in the CFPB’s jurisdiction:
“While TMCC is not currently subject to the CFPB’s supervisory authority, CFPB staff have recently stated that the CFPB plans, by rule, to expand the scope of its supervisory authority to include larger participants in the auto lending market, which would likely include TMCC,” the company said.
For that matter, Toyota Motor Credit, and another captive finance company, American Honda Finance Corp., disclosed in SEC filings last year the CFPB and the U.S. Department of Justice contacted them and asked for “information about whether discretionary pricing practices of dealers originating retail installment sale contracts raise fair lending issues for banks and finance companies that purchase the contracts from dealers.”
That probably refers to the CFPB’s “disparate impact” theory, which holds that by allowing dealers discretion over setting their own dealer reserve, lenders allow dealerships to charge minorities and other legally protected groups more. Dealer reserve is the share of the customer’s interest rate that dealerships earn for negotiating the finance contract.
In December 2013, the CFPB and the DOJ reached a $98 million consent order with Ally Financial Inc. for allegedly allowing dealerships to charge higher rates for dealer reserve for minority borrowers. Separately, Ally denied tolerating discrimination.
Hackett said last week the terms to be used to define “larger participants” are still unclear for nonbanks. The CFPB could define “larger participants” by origination volume or by portfolio size, by dollar amounts or by the number of contracts.
For banks and credit unions, the definition of “larger participants” is lenders with more than $10 billion in assets. The Federal Reserve supervises smaller banks and credit unions.
Hackett’s prediction that the top 50 to 100 auto lenders would fall under the CFPB’s jurisdiction would cover some pretty small auto lenders, at least in terms of auto loan market share, judging by data from Experian Automotive.
According to Experian Automotive, the 20 biggest-volume lenders by auto loan originations in the second quarter of 2014 accounted for 69.7 percent of all new-vehicle retail loans. The smallest of the top 20, Huntington Bank in Columbus, Ohio, had a market share for the quarter of only about 1.2 percent, so the rest of the top 50 banks by originations would presumably be even smaller.
Toyota Financial Services, Ford Motor Credit Co. and American Honda Finance were the top 3 new-vehicle lenders. Toyota Financial’s leading market share was 7.8 percent. Eight of the top 20 new-vehicle lenders were nonbank captive finance companies, owned by their affiliated manufacturer.
As of June 30, 2014, Toyota Motor Credit had assets of $104.7 billion, according to the lender’s quarterly report with the SEC.
Captive finance companies are less of a factor in used-vehicle financing. According to Experian Automotive, Toyota Financial Services was the biggest captive in used-car originations at No. 6, with a market share of about 1.9 percent.