Regulatory Practice Letter #14-22 | December 31, 2014

Regulatory Practice Letter #14-22 | December 31, 2014

Automobile Supervision and Enforcement - Regulatory Actions and CFPB Proposed Rule

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Executive Summary

The automobile finance industry is under heightened regulatory scrutiny that is resulting in various enforcement actions against automobile lenders requiring significant payments of restitution and civil money penalties. Some regulators, including the Consumer Financial Protection Bureau ("CFPB" or "Bureau") and the Department of Justice ("DOJ"), have been particularly focused on fair lending risks associated with discretionary pricing policies. In 2013, the CFPB issued Bulletin 2013 - 02 – Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act - to provide guidance to those bank and nonbank indirect auto lenders within its jurisdiction regarding the risks associated with dealer mark-ups and discretionary pricing policies. More recently, the CFPB published a Supervisory Highlights report, in which it summarized the Bureau’s fair lending supervisory activity with respect to the indirect automobile lending market along with a White Paper detailing the proxy methodology it uses to analyze a lender’s application data for fair lending compliance. The CFPB guidance suggests eliminating or significantly limiting discretionary pricing practices may control fair lending risks related to pricing disparities.

The Office of the Comptroller of the Currency’s (OCC) Fall 2014 Semiannual Risk Perspectives report highlighted loosening underwriting standards and increased layering of risk related to direct and indirect auto lending as contributing to an overall increase in credit risk in the banking sector. The agency indicated that it will focus heightened supervisory attention on underwriting practices for indirect auto lending as part of its large bank as well as community and midsize bank supervision.

Other areas of regulatory attention include auto lenders’: compliance management systems, marketing practices, other pricing and fees (including Fair Lending Analytics), collections and servicing practices, service member protections, credit bureau reporting, and unfair, deceptive, or abusive acts or practices ("UDAAP"2) compliance.

In September 2014, the CFPB published a proposed rule that would expand the Bureau’s supervisory oversight of the automobile finance industry to include nonbank automobile finance companies that qualify as "larger participants" of an automobile financing market, as defined by the CFPB. 

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