Government Agency Wants to Oversee Nonbank Auto Finance Companies
The Consumer Financial Protection Bureau (CFPB) wants to have oversight over larger nonbank auto finance companies, one of the few types of lending agencies that are not currently under federal oversight.
If the rule is approved, the CFPB would supervised nonbank auto finance companies that make, acquire, or refinance 10,000 loans or leases per year. The Bureau estimates this would put about 40 companies under new oversight. These companies are responsible for about 90 percent pf nonbank auto loans and leases and in 2013 provided financing to about 6.8 million people.
Auto loans are financed by both banks and nonbanks and consumers can either get a loan through direct financing or indirect financing. Direct financing is when a consumer seeks a loan directly from a lender, whereas indirect financing is when an auto dealer typically facilitates a loan from a third party. Banks, credit unions, and nonbank auto finance companies provide credit to consumers both directly and indirectly. Some nonbank finance companies are captive nonbanks, which means they are finance companies owned by auto manufacturers and generally only provide indirect lending.
While the CFPB already supervises large banks that make auto loans, the Bureau doesn't supervise nonbank finance companies.
Under the new rules, the CFPB says it would be able to make sure that companies are not using deceptive tactics to market loans or leases, providing accurate information to credit bureaus and treating consumers fairly when collecting debts.
Discrimination in Auto-Lending
A report from the CFPB found that banks using discretionary pricing policies resulted in higher interest rates for blacks, Hispanics, Asian and Pacific Islander borrowers than for similarly-situated non-Hispanic white borrowers.
Discretionary pricing is when an indirect financing company authorizes the dealer to market up the interest rate, taking the difference as their cut for providing business for the financing company.
Under the Equal Credit Opportunity Act, it is illegal for a creditor to discriminate in as aspect of a credit transaction based on race, color, religion, national origin, sex, marital status and age. To curb this practice, the CFPB recommends that auto lenders should monitor for potential discrimination, limit discretionary mark ups or eliminating dealer discretion for markups all together and use a different method of compensating dealers.
The proposed rule is open for comment for 60 days after it is published in the Federal Register.