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  • Special Alert: CFPB Finalizes Rule To Oversee Nonbank Auto Lenders

    Consumer Finance

    On June 10, the CFPB issued its final rule to oversee “larger participant” nonbank auto finance companies.  Although the CFPB received significant feedback during the comment period, the final rule is nearly identical to that proposed in September 2014.  Under the final rule, the CFPB will have supervisory authority over nonbank auto finance companies with at least 10,000 aggregate annual originations.  These originations include making, purchasing, acquiring, or refinancing extensions of credit for the purchase or lease of an automobile.  The CFPB estimates this threshold will bring about 34 entities and their affiliates under its supervisory authority, which represents roughly seven percent of all nonbank auto finance companies, and approximately 91% of the nonbank automobile financing market.  In addition to the final rule, the CFPB also published updated automobile finance examination procedures to include industry specific guidance for covered persons.

    The rule will take effect 60 days after publication in the Federal Register.  Although the CFPB has not determined when and in what order examinations will begin, some industry insiders have predicted they could start in late 2015.

    In the months since the CFPB released its proposed rule, auto finance industry trade associations and market participants submitted a number of comments to the CFPB addressing: (i) the threshold for defining “larger participant;” (ii) the definition of “lease” for purposes of the larger participant threshold; and (iii) exceptions for securitizations.

    Number of Originations

    With respect to the 10,000 originations threshold, although the CFPB received comments recommending the CFPB both increase and decrease the number, most appeared in favor of increasing the threshold.  As industry commenters noted, the low threshold results in participants with less than one percent market share and small businesses being deemed larger participants.  Commenters recommended an alternative threshold of 50,000 originations, which would capture approximately 86% of market participants. Ultimately, the CFPB adopted the original 10,000 originations threshold, noting it allowed the CFPB to “supervise market participants that represent a substantial portion of the automobile financing market and that have a significant impact on consumers.”

    Leases

    The final rule also extended the application of the term “lease” under Dodd-Frank to include automobile leasing.  The Dodd-Frank Act includes certain leases that are, among other things, the “functional equivalent of purchase finance arrangements.  12 U.S.C. § 5481(15)(A)(ii).  As detailed in the comments submitted to the CFPB, prudential regulators and other statutory schemes such as TILA have traditionally applied this idea of “functional equivalent” to leases where the monthly payments total a sum substantially equivalent to or in excess of the value of the property, resulting in the lessee becoming the owner of the property for little or no consideration at the end of the least term.  Nonetheless, the CFPB noted that, in light of its purpose and objectives, “functional equivalent of purchase finance agreements” should be interpreted from the perspective of the consumer.  In arriving at this conclusion, the CFPB noted that, from a customer’s point of view, lease transactions provide an identical experience to a purchase transactions because leasing requires an application process that involves providing basic financial information and credit history, an ongoing contractual obligation, and the option to purchase the vehicle at the end of the lease term for a pre-determined amount.

    Securitizations

    While the proposed rule excluded investments in asset-backed securities from the definition of “aggregate annual originations”, the CFPB expanded the securitization exception as part of the final rule. As a result, the exemption will also apply to purchases or acquisitions of obligations by securitization trusts and other special purpose entities created to facilitate securitization transactions.

     Timing

    The rule will become effective 60-days after publication in the Federal Register

    Examination Focus

    In its press release announcing the final rule, the CFPB identified a number of areas its examiners will focus on when conducting examinations of auto finance companies. Those areas include (i) the marketing and disclosure of terms in auto finance, (ii) credit reporting practices and accuracy, (iii) treatment of consumers when collecting debts both directly by the finance company and through its vendors, and (iv) fair lending under the Equal Credit Opportunity Act. In light of the CFPB’s continued focus on these areas, all market participants would be well served to review policies, procedures and practices occurring within their business.

     

    *              *              *

     

    Questions regarding the matters discussed in this Alert may be directed to the lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

     

     

    CFPB Auto Finance Agency Rule-Making & Guidance

  • FTC Provides Annual Financial Acts Enforcement Report to CFPB and Federal Reserve

    Consumer Finance

    On June 9, the FTC announced that it has provided to the CFPB its 2014 Annual Financial Acts Enforcement Report. The report highlights the FTC’s enforcement, research, rulemaking, and policy development activities with respect to the Truth in Lending Act (Regulation Z), the Consumer Leasing Act (Regulation M), and the Electronic Fund Transfer Act (Regulation E). Areas detailed within the report include enforcement actions related to non-mortgage credit, including auto finance and payday lending, mortgage loan advertising, and forensic audit scams; and consumer and business outreach related to truth in lending requirements.  The report, submitted on May 29, will be used to prepare the CFPB’s Annual Report to Congress. The FTC also submitted a copy of the report to the Federal Reserve Board.

    CFPB FTC Payday Lending TILA Auto Finance Electronic Fund Transfer U.S. Senate U.S. House Consumer Leasing Act

  • South Carolina Passes Legislation to Create the Guaranteed Asset Protection Act, Effective Immediately

    Consumer Finance

    On June 1, Governor Nikki Haley (R-SC) signed into law Senate Bill 441, enacting the Guaranteed Asset Protection Act and instituting a framework under which guaranteed asset protection (GAP) waivers may be offered in South Carolina.  As outlined in SB 441, a GAP waiver is “a contractual agreement in which a creditor agrees for a separate charge to cancel or waive all or part of amounts due on a borrower’s finance agreement in the event of a total physical damage loss or unrecovered theft of the motor vehicle.” Effective June 5, SB 441 prohibits the creditor from conditioning the terms of an extension of credit upon the borrower’s purchase of a GAP waiver and requires the creditor to disclose the terms of the GAP waiver “in easily understandable language,” including the purchase price, the procedures for obtaining GAP waiver benefits, and a statement that the purchase of a GAP waiver is optional.

    Auto Finance

  • FTC Lobbies Michigan Legislature to Repeal Ban On Direct-to-Consumer Sale of Motor Vehicles by Auto Manufacturers

    Consumer Finance

    On May 11, the FTC released a statement regarding the agency staff’s May 7 letter to Michigan Senator Booher, which concerns pending SB 268 – an act to regulate the sale and servicing of automobiles. The proposed legislation seeks to create an “exception to current law that prohibits automobile manufacturers from selling new vehicles directly to consumers.” While the letter states that the bill likely will encourage competition and benefit consumers, the staff’s view is that the legislation’s scope is too narrow and “would largely perpetuate the current law’s protectionism for independent franchised dealers, to the detriment of Michigan car buyers.” The focal point of the FTC staff’s letter is that, “absent some legitimate public purpose, consumers would be better served if the choice of distribution method were left to motor vehicle manufacturers and the consumers to whom they sell their products.”

    FTC Auto Finance

  • Oklahoma Enacts Law Establishing Penalty Amount for Liens on Auto Vehicles

    Consumer Finance

    On May 1, Governor Mary Fallin (R-OK) signed into law SB 465, which amends a current law imposing a $100 penalty on a secured party if it does not furnish a release of a lien after seven days. Under the new law, a $100 penalty will be imposed each day following the first seven days – the penalty can reach $1,500 or the value of the vehicle, whichever is less. The law is effective November 1, 2015.

    Auto Finance

  • Maryland Law to Require Notice to Purchaser of Vehicle Prior to Dealer-Arranged Financing Approval

    Consumer Finance

    On May 12, Governor Larry Hogan (R-MD) signed HB 313, which will require auto dealers to provide notice to the purchaser/lessee before the dealer-arranged third-party financing is approved. The law requires the dealer to “notify a buyer in writing if the terms of a certain financing or lease agreement are not approved by a third-party finance source within a certain period of time.” Specifically, the dealer has four days from the delivery of the vehicle to notify the purchase/lessee of the third-party rejection. If the sale of the vehicle is canceled, the purchaser/lessee must return the vehicle to the dealer within two days of receiving the written notice. The new law is effective October 1, 2015.

    Auto Finance Disclosures

  • FTC Announces Results of "Operation Ruse Control" on Auto Industry

    Consumer Finance

    On March 26, the FTC announced the results of Operation Ruse Control, “a nationwide and cross-border crackdown” on the auto industry with the intent to protect consumers who are purchasing or leasing a car. Efforts taken jointly by the FTC and its law enforcement partners resulted in over 250 enforcement actions, including the six most recent cases that involved (i) fraudulent add-ons; (ii) deceptive advertising; and (iii) auto loan modification. According to the press release, the FTC recently took its first actions against two auto dealers for its add-on practices, which allegedly violate the FTC Act by failing to disclose the significant fees associated with offered programs or services and misrepresenting to consumers that they would save money. Three auto dealers recently “agreed to settle charges that they ran deceptive ads that violated the FTC Act, and also violated the Truth in Lending Act (TILA) and/or Consumer Leasing Act (CLA).” Finally, at the FTC’s request, the U.S. District Court for the Southern District of Florida temporarily put an end to the practices of a company that charged consumers an upfront fee to “negotiate an auto loan modification on their behalf, but then often provided nothing in return.” The FTC’s recent actions are indicative of its ongoing efforts to prevent alleged fraud within the industry.

    FTC TILA Auto Finance Enforcement Ancillary Products UDAAP

  • CFPB "Keeping Watchful Eye on Auto Lending Market"

    Consumer Finance

    On February 23, CFPB Director Richard Cordray delivered prepared remarks at the National Association of Attorneys General Winter Meeting in Washington, D.C. In his remarks, Cordray indicated that the CFPB is keeping a watchful eye on the auto lending market, stating that auto lending practices are currently being supervised at the largest banks. Cordray further revealed that the CFPB intends to move forward with a proposed rule to oversee the larger nonbank auto lenders as well. Cordray also lobbied the attorneys general to use the CFPB’s government portal to analyze consumer complaints to assist in investigations, stating, “[w]e now have 22 attorneys general and 28 state banking regulators who are already signed up and accessing this information through the secure portal. I strongly urge the rest of you to join us and do the same.”

    CFPB Nonbank Supervision Auto Finance Bank Supervision

  • DOJ and North Carolina AG Settle First-Ever Federal Discrimination Suit Involving Auto Lending

    Consumer Finance

    On February 10, the DOJ, along with the U.S. Attorney’s Office for the Western District of North Carolina and the North Carolina AG, announced the settlement of the federal government’s discrimination suit involving two “buy here, pay here” auto dealerships. According to the DOJ, this is the federal government’s first-ever settlement involving discrimination in auto lending. Filed in January 2014, the settlement resolves a lawsuit alleging that two North Carolina-based auto dealerships violated the federal Equal Credit Opportunity Act by “intentionally targeting African-American customers for unfair and predatory credit practices in the financing of used car purchases.” The North Carolina AG further alleges that the auto dealerships’ lending practices violated the state’s Unfair and Deceptive Trade Practices Act. The terms of the settlement require the two dealerships to revise the terms of their loans and repossession practices to ensure that “reverse redlining” ceases to exist; required amendments include: (i) setting the maximum projected monthly payments to 25% of the borrower’s income; (ii) omitting hidden fees from required down payment; (iii) prohibiting repossession until the borrower has missed at least two consecutive payments; and (iii) providing better-quality disclosure notices at the time of the sale. Also required by the settlement agreement, the two auto dealerships must establish a fund of $225,000 “to compensate victims of their past discriminatory and predatory lending."

    Auto Finance Fair Lending ECOA DOJ Enforcement Discrimination Redlining Predatory Lending

  • NY Department of Financial Services Settles With Auto-Dealer

    Consumer Finance

    On December 19, the New York Department of Financial Services announced a recent settlement with a Long Island-based auto lender to resolve allegations of violations of several consumer protection laws including the DFA, TILA, NY Banking Law, and NY Financial Services Law. According to the consent judgment, the Defendants allegedly (i) failed to notify consumers who made overpayments on their accounts; (ii) miscalculated the interest charged to customers; and (iii) endangered the security of its customer information by leaving loan files openly around common areas. As part of the settlement, the auto dealer must (i) pay $3 million in penalties; (ii) pay full restitution plus nine percent interest to all affected customers; (iii) liquidate all remaining loans; and (iv) surrender its licenses in all states.

    Auto Finance Enforcement SDNY NYDFS

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