Dealerships can expect more scrutiny from more lenders -- possibly including new attention aimed at leases -- when the “larger participants” rule proposed last month by the Consumer Financial Protection Bureau is enacted, possibly by year end.
The fallout may include higher operating costs.
“The cost of compliance obviously is going to be a big issue,” attorney John Culhane Jr. of Ballard Spahr law firm told Automotive News in a phone interview last week. “That’s typically been the big impact on institutions as the CFPB has rolled out these larger-participant rules.”
The CFPB has had a rule in place putting “larger” banks and credit unions, defined as those with total assets of more than $10 billion, under its jurisdiction since July 2011.
Last month, the CFPB proposed a rule to place nonbanks that originate 10,000 or more auto loans and leases annually -- including automakers’ captive finance arms and independent lenders -- under its jurisdiction, too.
The CFPB issued the proposed larger-participants rule on Sept. 17 and published it today in the Federal Register. A 61-day comment period now starts. That means the rule could go into effect at soon as Dec. 9, the day after the comment period ends.
Whether leases were under the CFPB’s jurisdiction was previously unclear. At a finance conference in Las Vegas last month, Rick Hackett, who was an assistant director at the CFPB until August 2013, said the larger-participants rule might have come out sooner but the CFPB was wrestling with how to address leases.
He said the legal language of the Dodd-Frank financial reform law, which created the CFPB in 2011, was “funky” when it came to defining leases. “That’s why [the larger-participants rule] didn’t come out in 2011,” Hackett said.
The CFPB hasn’t said exactly how it’s going to look at leases.
A CFPB spokesman said the proposed rule doesn't address whether any specific federal consumer financial law, such as the Equal Credit Opportunity Act, applies to any particular line of business, such as leases.
Ballard Spahr said the larger-participants rule could enable the CFPB to apply its authority to crack down on “unfair, deceptive or abusive acts or practices” -- commonly shortened to UDAAP -- in leasing.
With some restrictions, dealerships, as a means of compensation, can add up to a few percentage points to the interest rate on some leases, similar to the way they can add to the lender’s buy rate on an auto loan, according to legal experts. The CFPB could consider that type of lease markup another form of what it calls “discretionary” compensation for dealerships.
The CFPB says dealerships’ discretion in setting their own compensation creates pricing differences for customers with similar credit histories, which can result in discrimination against minorities or other protected classes.
The bureau already has lenders examining loans originated at dealerships for pricing differences that affect legally protected groups. A next step could be extending that scrutiny to leases.
Retail experts say flat fees, in which dealerships have no discretion over pricing, are more common in leases than in loans partly because many times automakers and their captive finance arms offer specific monthly payments supported by incentives. That could make CFPB scrutiny of leases less of a problem.