Financial services regulator to supervise captive auto lenders

US consumer finance regulator the Consumer Financial Protection Bureau (CFPB) has announced plans to extend its supervisory oversight to larger nonbank auto lenders, including “captive” lenders such as the finance arms of Honda and Toyota, which it says have never been subject to any supervisory oversight at the federal level.

The agency said it wants to supervise nonbank auto finance companies that enter into or otherwise acquire 10,000 or more loans, leases, and/or loan refinances per year. Its estimates suggest this would extend its authority to around 90% of the nonbank auto finance market activity, and would affect 38 lenders that provided financing to 6.8 million consumers last year.

In a statement CFPB director Richard Cordray said: “This proposal is needed to level the playing field for banks and nonbanks in the auto lending market. We already supervise the auto lending practices of banks with more than $10 billion in assets, and this step would extend our supervision to the larger nonbank companies as well. It should not matter whether you get a loan or lease from a company that has a banking charter versus one that does not – every auto lender should be following the law and be subject to the same level of oversight.”

The CFPB said it plans to scrutinize whether nonbank car-loan providers are discriminating against minorities, using deceptive tactics in marketing loans to consumers and following debt-collection laws.

The regulator plans to release the proposal for 60 days of public comment, giving lenders an opportunity to provide input, before moving ahead.

The American Financial Services Association, which represents auto lenders, says the CFPB should oversee fewer companies. “What they’re doing is taking small- and medium-size players and forcing them to incur legal costs that are on par with multinational global companies,” said Bill Himpler, executive vice president of the trade group.

The National Automobile Dealers Association and National Association of Minority Automobile Dealers said in a joint statement that the CFPB should provide more information about how it measures disparities, saying there are “legitimate, market-based reasons” for differences in interest rates.

The CFPB has also published a white paper that provides greater detail about the mechanics of its approach to assessing issues around discrimination in offering loans and providing research into the statistical validity of its methodology.

Set up three years ago, the CFPB has already led an investigation at Ally Financial which agreed to pay $98 million to settle accusations that minority customers were paying higher interest rates than white borrowers with similar credit profiles. More recently, the CFPB imposed a $2.75 million penalty on auto lender First Investors Financial Services Group paid over allegations that it consistently gave major credit reporting agencies flawed reports about thousands of car buyers.