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CBA Comment Letter on Automobile Financing Larger Participant Proposal
Office of the Executive Secretary
Consumer Financial Protection Bureau
1700 G St., NW
Washington, DC 20552
RE: Defining Larger Participants of the Automobile Financing Market and Defining Certain Automobile Leasing Activity as a Financial Product or Service (Docket No. CFPB‐2014‐0024)
Ladies and Gentlemen:
The Consumer Bankers Association (“CBA”) appreciates the opportunity to comment on the proposed rule defining larger participants of the automobile financing market and defining certain automobile leasing activity as a financial product or service (“Proposal”) issued by the Consumer Financial Protection Bureau (“CFPB” or “Bureau”). CBA fully supports the Bureau’s efforts to protect consumers in the automobile financing market. Implementing a consistent regulatory and supervisory system for depository and nondepository lending institutions is better for consumers and better for competition as it holds all actors in this market to the same level of accountability for similar products and services.
In this letter, we offer the Bureau our comments and recommendations in order to improve the final rule. In summary:
- The CFPB should issue a final larger participant rule for the automobile financing market;
- The supervisory threshold for larger nonbank participants should be set at 10,000 annual aggregate originations; and
- Securitization‐related transactions should be excluded from the definition of annual originations.
I. CBA Fully Supports the CFPB’s Efforts to Supervise Larger Nonbank Participants in the Automobile Financing Market
CBA believes that section 1024 is one of the most important innovations of the Dodd‐ Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd‐Frank Act”). This statutory provision grants the Bureau supervisory authority over nondepository participants in the consumer financial products and services markets (or “nonbank participants”) to, among others things, ensure that “Federal consumer financial law is enforced consistently, without regard to the status of a person as a depository institution, in order to promote fair competition….”
Although the Dodd‐Frank Act specifically requires the CFPB to supervise certain nonbank participants, including lenders in the mortgage, payday and private education loan markets, the Act also grants the Bureau the discretionary authority, with certain exceptions, to define by rulemaking “larger participants” in other consumer financial markets. Once defined, larger participants are subject to the Bureau’s supervisory authority based on the risk they pose to consumers.
In this Proposal, the CFPB seeks to define a consumer financial market for automobile financing, a discrete market worthy of individualized treatment. As the Bureau correctly references in the Proposal, automobiles play an important role in the lives of consumers as most working individuals – nearly 90 percent of the workforce – commute to work by car. Moreover, auto financing and leasing is the third largest category of outstanding household debt after mortgages and student loans. According to the most recent Federal Reserve Bank of New York quarterly report on household debt and credit, outstanding auto loans are valued at nearly $930 billion, and nonbank participants originate approximately half of the total amount.
Given the nearly equal role played by depository institutions and nonbank participants in the automobile financing market, subjecting only banks and credit unions to federal supervision is inconsistent with the Bureau’s mandate to promote fair competition and enhance consumer protection. While both depository institutions and nonbank participants are subject to state and federal laws related to auto lending, only depositories are subject to federal supervision by the prudential regulatory agencies and, for banks and credit unions with over $10 billion in assets, the CFPB. Thus, even the largest of nonbank participants in the automobile financing market, including specialty finance companies, captive auto finance companies, and Buy Here Pay Here finance companies, are generally only subject to the enforcement authority of the federal government.
CBA believes consumers are better served by a consistent regulatory and supervisory regime for all lenders in the automobile financing market. Consumers expect and deserve a similar level of protection from all auto lenders, whether they receive their auto financing or lease from a bank, a credit union or a nonbank participant. Therefore, we fully support the Bureau’s effort to supervise larger nonbank participants in the automobile financing market.
II. CFPB Should Harmonize the Supervisory Thresholds for Depository Institutions and Larger Nonbank Participants in the Automobile Financing Market
According to the Bureau’s analysis, setting the supervisory threshold for larger participants in the automobile financing market at 10,000 aggregate annual originations would bring approximately 38 nonbank participants within the agency’s supervisory scope, or about 91 percent of the nonbank activity in this market. In contrast, raising the threshold to 50,000 aggregate annual originations would only capture 17 nonbank participants and 86 percent of market activity, while lowering the threshold to 5,000 aggregate annual originations would cover 55 nonbank participants and 93 percent of market activity.
CBA supports setting the supervisory threshold at 10,000 aggregate annual originations for the Bureau’s larger participant rulemaking for the automobile financing market. We believe this threshold appropriately balances the CFPB’s need to focus its supervisory resources on the largest nonbank participants in the automobile financing market against the Bureau’s mandate to promote fair competition and enhance consumer protection.
In addition, we strongly oppose setting the supervisory threshold above 10,000 aggregate annual originations. CBA agrees with the CFPB that setting the threshold at a higher level would prevent the Bureau from supervising “as varied a mix of nonbank larger participants that have a substantial impact on the full spectrum of consumers in the market.” Moreover, establishing a higher threshold for larger participants is incongruent with section 1024 of the Dodd‐Frank Act, which directs the CFPB to promote fair competition between depository and nondepository institutions through the consistent enforcement of Federal consumer financial law. As referenced in the Proposal, setting the supervisory threshold at 50,000 aggregate annual originations would only capture approximately 86 percent of the nonbank activity in the automobile financing market. In comparison, recall that all depository institutions’ activities in the automobile financing market –100 percent – are subject to federal supervision. Although the CFPB may have supervisory jurisdiction for only banks and credit unions with over $10 billion in assets, institutions that fall under this threshold are supervised by the Bureau’s peer regulatory agencies, including the Federal Reserve, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and the National Credit Union Administration.
Placing depository institutions and nonbank participants on an unequal playing field ill‐ serves all stakeholders’ interests in the automobile financing market. Indeed, it harms consumers who expect similar levels of protection no matter where they receive their auto financing or lease. And, it harms competition in the automobile financing market, as only depository institutions would bear the costs associated with regulatory supervision. As a result, we ask the CFPB to harmonize the supervisory thresholds for depository institutions and larger nonbank participants in the automobile financing market by setting the threshold for larger nonbank participants at 10,000 aggregate annual originations.
III. CFPB Should Exclude Securitization‐Related Transactions from the Definition of Annual Originations
The proposed rule’s definition of annual originations would include “grants of credit for the purchase of an automobile, refinancings of such credit obligations and any subsequent refinancings thereof, and purchases or acquisitions of such credit obligations (including refinancings). It would also include automobile leases and purchases or acquisitions of automobile lease agreements.” However, investments in asset‐backed securities would be excluded.
CBA agrees with the CFPB’s exclusion for investments in asset‐backed securities (“ABS”). As the Bureau correctly notes in the Proposal, “[ABS] are investment vehicles in which the principal and interest payments from automobile loans serve as collateral for bonds sold to investors and do not generally alter the contractual obligation between the consumer and the entity that granted the credit or services the loan.” Therefore, it makes eminent sense to exclude ABS from the annual originations calculation, as these transactions are materially different from auto financing and leasing transactions, while consumers experience little to no change in their relationship with their servicers.
Although we agree with the Proposal’s exclusion for ABS transactions from the annual originations calculation, we ask for additional clarity in the final rule in order to effectuate the Bureau’s intent. As currently drafted, the exclusion for ABS transactions would be limited to ABS investments. Unfortunately, this would mean the transfer of auto financing agreements and leases from originators to investment vehicles may be construed as a “purchase or acquisition,” potentially capturing these investment vehicles as larger participants in the automobile financing market. We do not believe this was the Bureau’s intent; therefore we ask to CFPB to explicitly exclude ABS transactions in the final rule.
IV. Other Specific Recommendation
In the Proposal, the CFPB defines annual originations to include “[g]rants of credit for the purchase of an automobile ….” As a point of clarification, indirect auto lenders do not generally offer credit; they purchase a retail installment contract from the automobile dealer, and it is the dealer that offers credit to consumers. It is usually only in the direct lending context in which lenders offer credit to consumers. We ask the CFPB to redefine annual originations to accurately reflect the legal and business distinctions that exist between these different automobile‐financing transactions. V. Conclusion
Thank you for the opportunity to comment on the proposal to supervise larger participants in the automobile financing market. If you have any questions or wish to discuss these issues further, please feel free to contact me.
Vice President, Regulatory Counsel
Consumer Bankers Association