The CFPB and the Auto Industry
Aaron E. Lunt, JD, CPCU, ARe
Assistant General Counsel
Head of Regulatory Affairs
September 9, 2015
Presentation Overview
• Part I: CFPB creation, powers and
jurisdiction
• Part II: CFPB activity—related to the
automobile industry
• Part III: What does the future hold?
2
Part I
CFPB creation, powers and jurisdiction
3
CFPB Creation
• The Consumer Financial Protection Bureau
(CFPB) is an independent bureau in the
Federal Reserve System
• Authorized by the 2010 Dodd-Frank Wall
Street Reform and Consumer Protection Act
• Created with a mandate to supervise
consumer financial services companies
and large depository institutions and their
affiliates
• Originally proposed in 2007 by current
Senator Elizabeth Warren (former Harvard
Law Professor)
4
Key Features
• Bureau instead of a commission
 Contrast to the SEC and FDIC among many other federal
agencies which are led by a commission
• Funding comes from the Federal Reserve
system (% of budget) rather than
congressional appropriations
• Controversial recess appointment of current
Director Richard Cordray in January 2013
5
CFPB Powers – 3 Main Powers
1. Enforcement – Can enforce over 20
consumer financial laws and regulations,
including:
•
•
•
•
•
Consumer Financial Protection Act
Truth in Lending Act (TILA)
Fair Credit Reporting Act
Equal Credit Opportunity Act (ECOA)
Unfair Deceptive, or Abusive Acts or Practices
(UDAAP)
6
CFPB Powers cont.
2. Supervision – Broad authority to examine
and supervise “covered persons” engaging
in, offering, or providing consumer
financial products or services
 Focus on compliance with federal consumer financial
laws, risks to consumers and markets
3. Rulemaking – Authority to prescribe rules
and guidelines for many consumer
financial laws along with many laws
established under Dodd-Frank
7
CFPB Jurisdiction: “Covered Persons”
2 Types:
1. Depository institutions—banks
a. Large insured depository institutions and credit unions with
$10B+ in assets
b. Banks less than $10B in assets
2. Non-depository institutions—non-banks




Mortgage market
Payday lenders
Private education lenders
“Larger participant” of a market for other consumer
financial products or services
8
Service Providers
• CFPB has authority over certain service
providers to banks and non-banks
(“covered persons”)
• “Service provider” must provide a “material
service to a covered person in connection
with the offering or provision by such
covered person of a consumer financial
product or service”
 Includes designing, operating or maintaining consumer
financial products and processing transactions related
to consumer financial products
• Banks, non-banks and service providers
can fall within the CFPB’s jurisdiction
9
Exemptions From CFPB Jurisdiction:
Auto Dealers
• Section 1029 of Dodd-Frank states:
“The Bureau may not exercise any rulemaking,
supervisory, enforcement or any other authority,
including any authority to order assessments,
over a motor vehicle dealer that is
predominantly engaged in the sale and
servicing of motor vehicles, the leasing and
servicing of motor vehicles.”
10
Auto Dealer Exemption cont.
“Auto dealers got a specific exemption from
CFPB oversight, and it is no coincidence that
auto loans are now the most troubled consumer
financial product.”
— Sen. Elizabeth Warren, April 2015
11
Further Exemptions From CFPB
Jurisdiction: Insurance
• The “business of insurance” is excluded from
the list of financial products and services
subject to the CFPB’s jurisdiction
• The CFPB is prohibited from enforcing
provisions of Dodd-Frank against any person
regulated by a state insurance regulator
12
Part II
CFPB Activity Related to the
Automobile Industry
13
CFPB and the Auto Industry
“The consumer bureau has been waging a
proxy war against car dealers by shaking down
the banks that provide auto loans.”
The Wall Street Journal—August 2, 2015
14
CFPB Aim at Auto Industry
• March 2013 – CFPB Publishes bulletin
addressing indirect auto lending and ECOA
including guidance to eliminate dealer
discretion to mark up buy rates
• December 2013 – CFPB and large bank
agreed to a $98m settlement involving
alleged violations of ECOA for auto lending
practices
• September 2014 – CFPB publishes a
proposed rule defining “larger participants”
of the automobile financing market
15
CFPB Aim at Auto Industry cont.
• June 2015 – CFPB publishes final Auto
Finance Larger Participant Rule and Auto
Finance Exam Procedures, effective date
of August 31, 2015
• July 2015 – CFPB and large OEM captive
finance company reach $24m settlement
over alleged discriminatory lending
practices and OEM agrees to limit dealer
reserve
16
Defining a “Larger Participant”
• “A non-bank auto finance company that
makes, acquires, or refinances 10,000 or
more loans or leases in a year will be
considered a larger participant”
• Final rule did not include investments in asset-backed
securities which was part of the proposed Rule
17
Defining a “Larger Participant” cont.
• The CFPB estimates that it will have authority
to supervise 34 of the largest nonbank auto
finance companies and their affiliated
companies
• Captive sales finance companies, specialty finance
companies in markets such as subprime, and BHPH finance
companies
• Approximately 90% of activity in the non-bank
auto financing market will now fall under
CFPB supervision
18
What it Means – Impact to the Auto Industry
• Allows CFPB to have supervisory authority in
addition to their current enforcement authority
• Supervisory examinations will commence
around the effective date of the rule on
August 31, 2015
• Focus on three areas:
1) Compliance with federal consumer financial laws;
2) Compliance managements systems, and
3) Risk to consumers and markets
19
What it Means – Impact to the Auto Industry
cont.
• CFPB authority in examinations extends
to “Service Providers” and could lead to
onsite review(s)
• Use supervisory, enforcement and rule
making authority for auto lending to expand
closer to regulating auto dealers
20
CFPB Tools: Discriminatory Practices
• To date CFPB enforcement actions in the
auto industry have focused on perceived
discriminatory practices in connection
with auto lending using a disparate impact
legal theory
• Disparate Impact
• Legal theory that a policy or practice can be deemed
discriminatory and illegal if it has a disproportionate effect
on minorities or other protected classes, even if
unintentional
21
CFPB Tools: Discriminatory Practices cont.
• This year the Supreme Court upheld the
ability to bring disparate impact claims
under the Fair Housing Act
• CFPB can use the decision to support their
own use of disparate impact theory when
bringing actions against the industry
22
Disparate Impact Methodology
• The CFPB uses the Bayesian Improved
Surname Geocoding proxy methodology to
identify discrimination by a lender
 Estimates race and ethnicity based on the loan
applicants name and census data
• Federal law prohibits auto lenders from
collecting demographic data such as race
and ethnicity
23
Disparate Impact Methodology cont.
• Study on the proxy methodology
commissioned by the American Financial
Services Association and performed by
Charles River Associates found the
methodology conceptually flawed:
• Frequently misidentifies background of consumers
and dramatically overestimates markups paid by
different groups
• Methodology only correctly identifies African Americans
less than 25% of the time
• AFSA President and CEO Chris Stinebert added:
“Alleged pricing discrepancies between minorities and
non-minorities for auto finance rates are simply not
supported by data.”
24
Key Enforcement Actions in the Auto Industry
• A significant large bank lender of
Automotive F&I products and services:
 Agreed to a $98m settlement involving alleged violations
of ECOA for auto lending practices
 Settlement included an $18m civil penalty to
the CFPB
 Did not limit the dealer markup and agreed to monitoring
of lending practices
25
Enforcement Actions cont.
• A notable OEM finance division
 Agreed to a $24m settlement for alleged discrimination
in lending practices in violation of ECOA
 No civil penalty
 Cap on dealer markups at 1.25% above the
buy rate for auto loans of 5 years or less and
a cap of 1% for loans with longer terms
26
Enforcement Actions cont.
• Two other consequential OEM finance
divisions are currently being looked at by
the CFPB for allegedly allowing dealers
to charge higher interest rates on loans to
minority buyers
27
Impact of Enforcement Actions
• CFPB wants the notable OEM finance
division settlement to become a blueprint
for other auto lenders
• Pattern emerging of forcing a settlement
that includes a cap on dealer markup in
exchange for reduced monetary penalty
• Appears to be a systematic attempt by the
CFPB to eliminate dealer discretion to
mark up buy rates and impose a flat cap
on the mark up/dealer reserve
28
Impact of Enforcement Actions cont.
• NADA Fair Credit Compliance Policy
and Program
 Optional program designed to strengthen dealership’s
compliance with fair credit laws
 Recommends dealer establishes a pre-set dealer reserve
 Deviate only for documented business reasons
29
What About Add-on/Ancillary Products?
“I think the CFPB is going to look at auto dealer
aftermarket products.” – Gerald Sachs, former
CFPB enforcement attorney
Automotive News – August 12, 2015
30
What About Add-on/Ancillary Products? cont.
• Automobile Finance Examination
Procedures were issued in conjunction
with the final Auto Finance Larger
Participant Rule and specifically mention
“GAP Insurance,” “Extended Warranty,”
and “Vehicle Add-Ons”
• The Examination Procedures require
examiners to review the “Larger
Participants” relationship with third parties
offering add-on and ancillary products
including their contracts, disclosures, data
security and other areas that may pose
risks to consumers.
31
What about Add-on/Ancillary Products? cont.
• CFPB may attempt to exercise authority
over these types of products through unfair,
deceptive or abusive acts or practice
(UDAAP) violations
 Service Contract, GAP Waiver and ancillary products
(PDR, Tire and Wheel, Windshield) are being financed
through a loan or a lease offered by either a “larger
participant” or bank
 The provider of these products may be considered a
“service provider” to the “larger participant” or bank
32
What about Add-on/Ancillary Products? cont.
• The CFPB has already brought
enforcement actions against banks and
“service providers” in connection with credit
card ancillary products and identify theft
monitoring products, using UDAAP
33
Add-On/Ancillary Products Enforcement:
• CFPB brought action against both the
financial institution (“covered person”) and
the product provider (“service provider”)
 Alleged UDAAP and TILA violations focused on GAP and
service contracts that were part of a loan program for
service members
 Specific allegations related to disclosure practices and
marketing of the products
 $3.2m penalty for financial institution (“covered person”)
 $3.3m penalty for product provider (“service provider”)
34
Learnings, Potential Areas of Focus
• Based upon CFPB publications and prior
consent orders the CFPB is may focus
on a number of areas in connection with
add on/ancillary products
 Advertising and Marketing
• Disclosure of material terms and limitations
• Deceptive representations
 Compliance management systems
 Third party management
35
Learnings, Potential Areas of Focus cont.
• Sales practices and enrollment—clear
affirmative consent of purchase
• Payment plans and crediting of payments
• Cancellations
36
Part III
What does the future hold?
37
Political Environment
• CFPB is established and focused on
auto industry
• Currently a number of pieces of legislation
in Congress would make meaningful
changes to the CFPB
 Change from a bureau to a commission
(HR 1266 and HR 1263)
 Repeal 2013 guidance on indirect auto lending and
require a more transparent process (HR 1737)
 Eliminate the CFPB entirely (S 1804)
38
Political Environment cont.
• Some of the bills have bipartisan support,
others do not
• Legislation eroding the CFPB’s power would
likely be vetoed by President Obama
39
Thank You
This slide presentation is for educational purposes only and any opinions therein
do not represent the official position of the The Warranty Group, nor any of its
subsidiaries. These slides should not be disseminated without the prior written
consent of The Warranty Group.