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CFPB Proposes Rule To Oversee Automakers’ Financial Units, Stop Discriminatory Lending

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The lending arms for national car dealers, such as Ford and Toyota, may soon have to answer to federal regulators. The Consumer Financial Protection Bureau released a proposed rule that would give the agency oversight of automakers’ financing units in a step to prevent discrimination and other harmful practices.

Under the proposed rule [PDF] the Bureau would extend oversight to cover 38 auto finance companies providing financing for more than 10,000 loans and leases each year.


According to the CFPB, these entities originate about 90% of nonbank auto loans and leases, and in 2013 provided financing to nearly 6.8 million consumers.


While the CFPB currently oversees large banks making auto loans, it does not supervise nonbank auto finance companies; meaning indirect financing provided when a dealer facilitates a loan from a third-party.


In some case, the nonbank finance companies are “captive” nonbanks, meaning they are finance companies owned by auto manufacturers.


If the oversight rule goes into effect, the CFPB will have the authority to conduct on-site examinations that could result in enforcement actions.


Officials with the Bureau say the oversight rule was born out of concern that consumers are being misled about the loan in which they qualify for and about the terms and benefits of product add-ons.


Auto loans make up the third largest category for household debt in the United States, which currently has 87.4 million outstanding auto loans valued at about $900 billion.


Additionally, officials are troubled by what they call discriminatory pricing practices 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.”


When examining banks offering auto-loans that are currently under CFPB supervision, investigators found that indirect lenders had discretionary pricing policies that resulted in discrimination against African-American, Hispanic and Asian and Pacific Islander borrowers and these consumers paid more for their loans than similarly situated non-Hispanic white borrowers, the CFPB reports.


Under the proposed rule, the CFPB aimed to make sure auto lenders treat consumers fairly and discontinue discriminatory actions by:


Fairly marketing and disclosing auto financing: The Bureau wants to make sure that auto finance companies who market directly to consumers are not using deceptive tactics to market loans or leases. The Bureau would be concerned if consumers are being misled about the benefits or terms of financial products. The Bureau is also looking to ensure that consumers are getting terms they understand and accept.


Providing accurate information to credit bureaus: The Bureau wants to make sure that information provided to the credit bureaus is accurate. The CFPB recently took an enforcement action against an auto finance company that distorted consumer credit records by inaccurately reporting information like the consumer’s payment history and delinquency status to credit bureaus. The CFPB is looking to prevent inaccurate information from being reported in the future.


Treating consumers fairly when collecting debts: The Bureau wants to make sure that auto finance companies are not using illegal debt collection tactics. The Bureau has received complaints from consumers who say that their autos have been repossessed while they are current on the loan or have a payment arrangement in place. The Bureau also is looking to ensure that collectors are relying on accurate information and using legal processes when they collect on debts or repossess autos.


CFPB Proposes New Federal Oversight of Nonbank Auto Finance Companies [CFPB]




by Ashlee Kieler via Consumerist

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