The US Consumer Financial Protection Bureau (CFPB) said it plans to oversee larger nonbank auto finance companies for the first time at the federal level after claiming to have uncovered “auto-lending discrimination” at banks.
The bureau’s said its supervisory actions against banks would result in about US$56m in redress for up to 190,000 consumers harmed by discriminatory practices.
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“Many people depend on auto financing to pay for the car they need to get to work,” said CFPB director Richard Cordray.
“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. We took action after we uncovered auto-lending discrimination at banks we supervise. [Our] proposal would extend our oversight, allowing us to root out discrimination and ensure consumers are being treated fairly across this market.”
The bureau said nearly 90% of the US workforce commutes to work by car and auto loans are the third largest category of household debt, behind mortgage and student loans. With the average loan for a new car nearing $27,000, American consumers had 87.4m outstanding auto loans valued at nearly $900bn in the first quarter of 2014. The leasing market also continues to grow as more than a quarter of new cars are acquired through leases.
The bureau supervises large banks making auto loans but not nonbank auto finance companies. Not it wants to extend its supervision authority to the larger participants of the nonbank auto finance market. Under an act passed in 2010, the CFPB has authority to supervise certain nonbanks it defines through rulemaking as “larger participants” in a market.
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By GlobalDataIf approved, the proposed rule would generally allow the bureau to supervise nonbank auto finance companies that make, acquire, or refinance 10,000 or more loans or leases in a year to ensure they are complying with federal consumer financial law. The bureau estimates that about 38 auto finance companies would be subject to this new oversight. These companies originate around 90% of nonbank auto loans and leases, and in 2013 provided financing to approximately 6.8m consumers.
The proposed rule is open for comment for 60 days after the rule is published in the Federal Register.
The CFPB is also concerned about discriminatory pricing in the auto-lending market. When consumers receive indirect financing, often the finance company or other indirect lender authorizes the dealer to mark up the interest rate. Markups lead to dealers and indirect lenders charging different rates to similarly situated consumers, which increases the risk of discrimination. Discriminatory markups on auto loans may result in tens of millions of dollars in consumer harm each year.
In March 2013, the CFPB issued a bulletin reminding indirect auto lenders that under the Equal Credit Opportunity Act (ECOA), it is illegal for a creditor to discriminate in any aspect of a credit transaction on prohibited bases including race, colour, religion, national origin, sex, marital status, and age.
