Defining Larger Participants of the Automobile Financing Market and Defining Certain Automobile Leasing Activity as a Financial Product or Service |
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Richard Cordray
Bureau of Consumer Financial Protection
October 8, 2014
[Federal Register Volume 79, Number 195 (Wednesday, October 8, 2014)]
[Proposed Rules]
[Pages 60762-60783]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-23115]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 79, No. 195 / Wednesday, October 8, 2014 /
Proposed Rules
[[Page 60762]]
BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Parts 1001 and 1090
[Docket No. CFPB-2014-0024]
RIN 3170-AA46
Defining Larger Participants of the Automobile Financing Market
and Defining Certain Automobile Leasing Activity as a Financial Product
or Service
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Proposed rule with request for public comment.
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SUMMARY: The Bureau of Consumer Financial Protection (Bureau or CFPB)
proposes to amend the regulation defining larger participants of
certain consumer financial product and service markets by adding a new
section to define larger participants of a market for automobile
financing. The new section would define a market that includes grants
of credit for the purchase of an automobile, refinancings of such
credit obligations, and purchases or acquisitions of such credit
obligations (including refinancings). It would also include automobile
leases and purchases or acquisitions of such automobile lease
agreements. The Bureau is proposing this rule pursuant to its
authority, under the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act), to supervise certain nonbank covered
persons for compliance with Federal consumer financial law and for
other purposes. The Bureau has the authority to supervise nonbank
covered persons of all sizes in the residential mortgage, private
education lending, and payday lending markets. In addition, the Bureau
has the authority to supervise nonbank ``larger participant[s]'' of
markets for other consumer financial products or services, as the
Bureau defines by rule. The proposal (Proposed Rule) would identify a
market for automobile financing and define as larger participants of
this market certain nonbank covered persons that would be subject to
the Bureau's supervisory authority. The Proposed Rule would also define
certain automobile leases as a ``financial product or service'' under
section 1002(15)(A)(xi)(II) of the Dodd-Frank Act. Finally, the
Proposed Rule would make certain technical corrections to existing
larger-participant rules.
DATES: Comments must be received on or before December 8, 2014.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2014-
0024 or RIN 3170-AA46, by any of the following methods:
Electronic: http://www.regulations.gov. Follow the
instructions for submitting comments.
Mail: Monica Jackson, Office of the Executive Secretary,
Consumer Financial Protection Bureau, 1700 G Street NW., Washington, DC
20552.
Hand Delivery/Courier: Monica Jackson, Office of the
Executive Secretary, Consumer Financial Protection Bureau, 1275 First
Street NE., Washington, DC 20002.
Instructions: All submissions should include the agency name and
docket number or Regulatory Information Number (RIN) for this
rulemaking. Because paper mail in the Washington, DC area and at the
Bureau is subject to delay, commenters are encouraged to submit
comments electronically. In general, all comments received will be
posted without change to http://www.regulations.gov. In addition,
comments will be available for public inspection and copying at 1275
First Street NE., Washington, DC 20002, on official business days
between the hours of 10 a.m. and 5 p.m. Eastern Time. You can make an
appointment to inspect the documents by telephoning (202) 435-7275.
All comments, including attachments and other supporting materials,
will become part of the public record and subject to public disclosure.
Sensitive personal information, such as account numbers or Social
Security numbers, should not be included. Comments will not be edited
to remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Jolina Cuaresma, Counsel, Andrea
Pruitt Edmonds and Amanda Quester, Senior Counsels, Office of
Regulations, at (202) 435-7700.
SUPPLEMENTARY INFORMATION:
I. Overview
Section 1024 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act), codified at 12 U.S.C. 5514,\1\ gives
the Bureau supervisory authority over all nonbank covered persons \2\
offering or providing three enumerated types of consumer financial
products or services: (1) Origination, brokerage, or servicing of
consumer loans secured by real estate, and related mortgage loan
modification or foreclosure relief services; (2) private education
loans; and (3) payday loans.\3\ The Bureau also has supervisory
authority over ``larger participant[s] of a market for other consumer
financial products or services,'' as the Bureau defines by rule.\4\
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\1\ Public Law 111-203, section 1024, 124 Stat. 1376, 1987
(2010) (codified at 12 U.S.C. 5514).
\2\ The provisions of 12 U.S.C. 5514 apply to certain categories
of nondepository (nonbank) covered persons, described in subsection
(a)(1), and expressly exclude from coverage persons described in 12
U.S.C. 5515(a) or 5516(a). ``Covered persons'' include: ``(A) any
person that engages in offering or providing a consumer financial
product or service; and (B) any affiliate of a person described [in
(A)] if such affiliate acts as a service provider to such person.''
12 U.S.C. 5481(6).
\3\ 12 U.S.C. 5514(a)(1)(A), (D), (E). The Bureau also has the
authority to supervise any nonbank covered person that it ``has
reasonable cause to determine, by order, after notice to the covered
person and a reasonable opportunity . . . to respond . . . is
engaging, or has engaged, in conduct that poses risks to consumers
with regard to the offering or provision of consumer financial
products or services.'' 12 U.S.C. 5514(a)(1)(C); see also 12 CFR
part 1091 (prescribing procedures for making determinations under 12
U.S.C. 5514(a)(1)(C)). In addition, the Bureau has supervisory
authority over very large depository institutions and credit unions
and their affiliates. 12 U.S.C. 5515(a). Furthermore, the Bureau has
certain authorities relating to the supervision of other depository
institutions and credit unions. 12 U.S.C. 5516(c)(1), (e). One of
the Bureau's mandates under the Dodd-Frank Act is to 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.'' 12 U.S.C. 5511(b)(4).
\4\ 12 U.S.C. 5514(a)(1)(B), (a)(2); see also 12 U.S.C. 5481(5)
(defining ``consumer financial product or service'').
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This Proposed Rule, if adopted, would (1) define certain nonbank
covered persons as larger participants of a market for automobile
financing that would include grants of credit for the purchase of an
automobile, refinancings of such credit obligations and any subsequent
refinancings thereof, purchases or acquisitions of such credit
obligations (including refinancings), automobile leases, and purchases
or
[[Page 60763]]
acquisitions of automobile lease agreements; (2) define, pursuant to
section 1002(15)(A)(xi)(II) of the Dodd-Frank Act, the term ``financial
product or service'' to include certain types of automobile leases that
banks are authorized to offer and that the Bureau finds have or likely
will have a material impact on consumers; and (3) make certain
technical corrections to revise a term used in subpart A of 12 CFR part
1090 and to clarify the affiliate aggregation requirements in two
earlier larger-participant rules.
This Proposed Rule would be the fifth in a series of rulemakings to
define larger participants of markets for other consumer financial
products or services for purposes of section 1024(a)(1)(B) of the Dodd-
Frank Act.\5\ The Proposed Rule would establish the Bureau's
supervisory authority over certain nonbank covered persons
participating in a market for automobile financing. The Proposed Rule
would describe this market for consumer financial products or services,
which the Proposed Rule labels ``automobile financing.'' The proposed
definition would not encompass all activities that could be considered
auto financing. Any reference herein to ``the automobile financing
market'' means only the particular market for automobile financing
identified by the Proposed Rule.
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\5\ The first three rules defined larger participants of markets
for consumer reporting, 77 FR 42874 (July 20, 2012) (Consumer
Reporting Rule), consumer debt collection, 77 FR 65775 (Oct. 31,
2012) (Consumer Debt Collection Rule), and student loan servicing,
78 FR 73383 (Dec. 6, 2013) (Student Loan Servicing Rule). The Bureau
also recently released a fourth rule, which defines larger
participants of a market for international money transfers and is
available at http://files.consumerfinance.gov/f/201409_cfpb_final-rule_larger-participant-rule-international-money-transfer-market.pdf
(International Money Transfer Rule).
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The Bureau is authorized to supervise nonbank covered persons
subject to section 1024 of the Dodd-Frank Act for purposes of: (1)
Assessing compliance with Federal consumer financial law; (2) obtaining
information about such persons' activities and compliance systems or
procedures; and (3) detecting and assessing risks to consumers and
consumer financial markets.\6\ The Bureau conducts examinations, of
various scopes, of supervised entities. In addition, the Bureau may, as
appropriate, request information from supervised entities without
conducting examinations.\7\
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\6\ 12 U.S.C. 5514(b)(1).
\7\ See 12 U.S.C. 5514(b) (authorizing the Bureau both to
conduct examinations and to require reports from entities subject to
supervision).
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The Bureau prioritizes supervisory activity among nonbank covered
persons on the basis of risk, taking into account, among other factors,
the size of each entity, the volume of its transactions involving
consumer financial products or services, the size and risk presented by
the market in which it is a participant, the extent of relevant State
oversight, and any field and market information that the Bureau has on
the entity. Such field and market information might include, for
example, information from complaints and any other information the
Bureau has about risks to consumers posed by a particular entity.
The specifics of how an examination takes place vary by market and
entity. However, the examination process generally proceeds as follows.
Bureau examiners contact the entity for an initial conference with
management and often request records and other information. Bureau
examiners will ordinarily also review the components of the supervised
entity's compliance management system. Based on these discussions and a
preliminary review of the information received, examiners determine the
scope of an on-site examination and then coordinate with the entity to
initiate the on-site portion of the examination. While on-site,
examiners spend a period of time discussing with management the
entity's policies, processes, and procedures; reviewing documents and
records; testing transactions and accounts for compliance; and
evaluating the entity's compliance management system. Examinations may
involve issuing confidential examination reports, supervisory letters,
and compliance ratings. In addition to the process described above, the
Bureau may also conduct off-site examinations.
The Bureau has published a general examination manual describing
the Bureau's supervisory approach and procedures.\8\ As explained in
the manual, the Bureau will structure examinations to address various
factors related to a supervised entity's compliance with Federal
consumer financial law and other relevant considerations.
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\8\ CFPB, CFPB Supervision and Examination Manual (Oct. 1,
2012), available at http://www.consumerfinance.gov/guidance/supervision/manual/.
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This Proposed Rule would establish a category of nonbank covered
persons that is subject to the Bureau's supervisory authority under
section 1024 by defining ``larger participants'' of a market for
automobile financing.\9\ The aspect of the Proposed Rule defining
larger participants of a market for automobile financing pertains only
to that purpose and would not impose new substantive consumer
protection requirements. Nonbank covered persons generally are subject
to the Bureau's regulatory and enforcement authority, and any
applicable Federal consumer financial law, regardless of whether they
are subject to the Bureau's supervisory authority.
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\9\ The Bureau's supervisory authority also extends to service
providers of those covered persons that are subject to supervision
under 12 U.S.C. 5514(a)(1). 12 U.S.C. 5514(e); see also 12 U.S.C.
5481(26) (defining ``service provider'').
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The Bureau proposes to add Sec. 1001.1 and Sec. 1001.2(a) in new
part 1001 to title 12 of the Code of Federal Regulations. Proposed
Sec. 1001.1 would state the authority and purpose of part 1001, which
is to implement the Bureau's authority, granted by section
1002(15)(A)(xi) of the Dodd-Frank Act, to define the term ``financial
product or service'' to include financial products or services in
addition to those defined in sections 1002(15)(A)(i)-(x). Proposed
Sec. 1001.2(a) would define the term ``financial product or service''
under that same authority to include certain automobile leases.
II. Summary of Proposed Rule
The Bureau is authorized to define larger participants in markets
for consumer financial products or services. Subpart A of the Bureau's
existing larger-participant rule, 12 CFR part 1090, prescribes various
procedures, definitions, standards, and protocols that apply with
respect to all markets in which the Bureau defines larger
participants.\10\ Those generally applicable provisions would also
apply to the automobile financing market described by this Proposed
Rule. The definitions in Sec. 1090.101 should be used, unless
otherwise specified, when interpreting terms in this Proposed Rule.
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\10\ 12 CFR 1090.100-.103.
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The Bureau includes relevant market descriptions and larger-
participant tests, as it develops them, in subpart B.\11\ Accordingly,
the Proposed Rule defining larger participants of the automobile
financing market would become Sec. 1090.108 in subpart B.
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\11\ 77 FR 42874, 42875 (Consumer Reporting Rule), 12 CFR
1090.104; 77 FR 65775, 65777 (Consumer Debt Collection Rule), 12 CFR
1090.105; 78 FR 73383, 73384 (Student Loan Servicing Rule), 12 CFR
1090.106. As noted above, the Bureau also recently released the
International Money Transfer Rule, which is available at http://files.consumerfinance.gov/f/201409_cfpb_final-rule_larger-participant-rule-international-money-transfer-market.pdf.
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The Proposed Rule would define a market for automobile financing
that
[[Page 60764]]
would cover specific activities and would set forth a test to determine
whether a nonbank covered person is a larger participant of that
market. Nonbanks that are the subject of this Proposed Rule provide
automobile financing by engaging in one or more of the following
activities: Granting credit for the purpose of purchasing an
automobile; refinancing existing credit obligations or previously
refinanced credit obligations that had been made for the purchase of an
automobile; purchasing or acquiring such credit obligations (including
refinancings); providing automobile leases; and purchasing or acquiring
automobile lease agreements.
The Bureau is not proposing to include automobile title lending or
the securitization of automobile loans and leases within the meaning of
the term ``automobile financing'' in this Proposed Rule, although as
discussed below the Bureau is seeking comment on this approach.
Moreover, the Proposed Rule excludes certain auto dealers.\12\ The
Proposed Rule also would not apply to depository institutions and
credit unions that engage in automobile financing, including those
already subject to the Bureau's supervisory authority.
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\12\ Under section 1029 of the Dodd-Frank Act, the Bureau may
not exercise its authority over certain auto dealers, as outlined in
that section. As explained below, the proposed larger-participant
rule would also exclude certain dealers that extend retail credit or
leases without routinely assigning them to unaffiliated third
parties, even though such dealers are not subject to the statutory
exclusion.
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The Proposed Rule would define ``automobile'' to mean any self-
propelled vehicle primarily used for personal, family, or household
purposes for on-road transportation.\13\ The Proposed Rule would define
``annual originations'' as 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. Under the Proposed Rule, the term ``automobile lease''
would mean leases that fall within the meaning of section
1002(15)(A)(ii) of the Dodd-Frank Act or meet the requirements of
proposed Sec. 1001.2(a), which is discussed below.
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\13\ Any reference to the term ``automobile'' means only the
particular vehicles identified by the Proposed Rule. The term
``auto'' as used in this Proposed Rule is intended to include a
broader category of vehicles. Similarly, the term ``auto financing''
is used generically and more broadly than the proposed defined term
``automobile financing.''
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The Proposed Rule would set forth a test to determine whether a
nonbank covered person is a larger participant of the automobile
financing market. A nonbank covered person would be a larger
participant if it has at least 10,000 aggregate annual originations. As
prescribed by existing Sec. 1090.102, any nonbank covered person that
qualifies as a larger participant would remain a larger participant
until two years after the first day of the tax year in which the person
last met the applicable test.\14\
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\14\ 12 CFR 1090.102.
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Pursuant to existing Sec. 1090.103, a person would be able to
dispute whether it qualifies as a larger participant in the automobile
financing market. The Bureau would notify an entity when the Bureau
intended to undertake supervisory activity; the entity would then have
an opportunity to submit documentary evidence and written arguments in
support of its claim that it was not a larger participant.\15\ Section
1090.103(d) provides that the Bureau may require submission of certain
records, documents, and other information for purposes of assessing
whether a person is a larger participant of a covered market;\16\ this
authority would be available to the Bureau to facilitate its
identification of larger participants of the automobile financing
market, just as in other markets.
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\15\ 12 CFR 1090.103(a).
\16\ 12 CFR 1090.103(d).
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As noted above, the Bureau is proposing to include automobile
leases in the criterion it would use to define larger participants in
the market for automobile financing. Certain consumer leases are
identified as a financial product or service under section
1002(15)(A)(ii) and, thus, the Bureau would have authority over such
leases and those leases would count toward the threshold for the
larger-participant test in this Proposed Rule. While most consumer
leases fall within section 1002(15)(A)(ii), some likely will not
because section 1002(15)(A)(ii) requires that leases be, among other
things, the functional equivalent of purchase finance arrangements.\17\
As discussed further below, the Bureau believes that the purpose of the
Proposed Rule and the Bureau's overall mission would be best served by
covering automobile leasing more broadly. Accordingly, the Bureau also
proposes in Sec. 1001.2(a) to define the term ``financial product or
service'' under its authority granted by section 1002(15)(A)(xi)(II) of
the Dodd-Frank Act to include automobile leases that do not fall under
the definition in section 1002(15)(A)(ii).
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\17\ As discussed in greater detail below, section
1002(15)(A)(ii) also requires that leases be non-operating and have
an initial term of at least 90 days. The Bureau believes that
automobile leases in the current consumer leasing market meet these
two criteria.
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Finally, the Proposed Rule would amend the Bureau's existing
larger-participant rule. Specifically, the Bureau is proposing to make
a technical correction to existing Sec. 1090.101, by inserting the
word ``financial'' before the term ``product or service'' in the
definition of ``nonbank covered person.'' The Proposed Rule would also
amend paragraph (iii)(D) of the definition of ``annual receipts'' in
existing Sec. 1090.104(a) and Sec. 1090.105(a), which governs how the
affiliate aggregation rules apply to formerly affiliated companies for
purposes of the consumer reporting and consumer debt collection larger-
participant rules. The proposal would clarify that if a company ceases
to be an affiliated company of a nonbank covered person during the
relevant measurement period, its annual receipts must be aggregated for
the entire period of measurement.
III. Legal Authority and Procedural Matters
A. Rulemaking Authority
The Bureau is issuing this Proposed Rule pursuant to its authority
under the Dodd-Frank Act: (1) Sections 1024(a)(1)(B) and (a)(2), which
authorize the Bureau to supervise nonbanks that are larger participants
of markets for consumer financial products or services, as defined by
rule; \18\ (2) section 1024(b)(7), which, among other things,
authorizes the Bureau to prescribe rules to facilitate the supervision
of covered persons under section 1024; \19\ (3) section 1022(b)(1),
which grants the Bureau the authority to prescribe rules as may be
necessary or appropriate to enable the Bureau to administer and carry
out the purposes and objectives of Federal consumer financial law, and
to prevent evasions of such law; \20\ and (4) section 1002(15)(A)(xi),
which authorizes the Bureau to prescribe rules to define ``other
financial product[s] or service[s],'' if the Bureau finds that such
financial products or services are: (i) Entered into or conducted as a
subterfuge or with a purpose to evade any Federal consumer financial
law; or (ii) permissible for a bank or a financial holding company to
offer or provide under any applicable Federal law or regulation, and
have, or likely will have, a material impact on consumers.\21\
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\18\ 12 U.S.C. 5514(a)(1)(B), (a)(2).
\19\ 12 U.S.C. 5514(b)(7).
\20\ 12 U.S.C. 5512(b)(1).
\21\ 12 U.S.C. 5481(15)(A)(xi).
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[[Page 60765]]
B. Proposed Effective Date of Final Rule
The Administrative Procedure Act generally requires that rules be
published not less than 30 days before their effective dates.\22\ The
Bureau is proposing that the final rule arising from this Proposed Rule
would be effective 60 days after publication.
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\22\ 5 U.S.C. 553(d).
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IV. Section-by-Section Analysis
A. 12 CFR Part 1001 Financial Product or Service
Section 1001.1 Authority and Purpose
Proposed Sec. 1001.1 states the authority and purpose for new part
1001. It explains that under section 1002(15)(A)(xi) of the Dodd-Frank
Act, the Bureau is authorized to define certain financial products or
services for purposes of title X of the Dodd-Frank Act, in addition to
those defined in sections 1002(15)(A)(i)-(x). As proposed Sec. 1001.1
explains, the purpose of part 1001 is to implement that authority.
Section 1001.2 Definitions
2(a)
Proposed Sec. 1001.2(a) would define the term ``financial product
or service'' under section 1002(15)(A)(xi)(II) of the Dodd-Frank Act,
to include certain automobile leases that (1) meet the requirements of
section 108 of the Competitive Equality Banking Act of 1987 (CEBA),\23\
as implemented by 12 CFR part 23, and are thus permissible for banks to
offer or provide; and (2) are not currently defined as a financial
product or service under section 1002(15)(A)(ii) of the Dodd-Frank Act.
Under section 1002(15)(A)(xi)(II), for purposes of title X of the Act,
the Bureau may define as a covered financial product or service, by
regulation: ``such other financial product or service . . . if the
Bureau finds that such financial product or service is-- . . . (II)
permissible for a bank or for a financial holding company to offer or
to provide under any provision of a Federal law or regulation
applicable to a bank or a financial holding company, and has, or likely
will have, a material impact on consumers.'' The Bureau is proposing
Sec. 1001.2(a) pursuant to this authority.
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\23\ Public Law 100-86, 101 Stat. 519 (1987) (codified at 12
U.S.C. 24(Tenth)).
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Depository institutions have long engaged in auto leasing
activities, and nonbank entities are a major player in the leasing
sector.\24\ It is an important and growing part of the auto financing
market for consumers. While the auto financing market is largely
comprised of purchase loans, in recent years consumers have begun to
migrate more towards leasing agreements.\25\ As of the first quarter of
2014, leases comprise approximately 30 percent of new vehicle
automotive financing transactions, which is up from about 20 percent
five years ago.\26\ Furthermore, of all new and used auto financing
transactions recorded in the first quarter of 2014, approximately 14
percent occurred through leasing arrangements, while the remainder used
purchase financing.\27\
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\24\ DBRS, Methodology: Rating U.S. Auto Lease Securitizations 4
(Jan. 2010), available at http://www.dbrs.com/research/231458.
\25\ Melinda Zabritski, Experian Automotive, State of the
Automotive Finance Market First Quarter 2014 (June 5, 2014),
available at http://www.experian.com/assets/automotive/brochures/experian-auto-2014-q1-credit-webinar-presentation-6-5-2014.pdf?WT.srch=Auto_Q12014FinanceTrends_PDF.
\26\ See id. at 21.
\27\ See id. at 20.
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The Bureau is proposing to include automobile leasing in the
consumer financial product or service market for automobile financing
for purposes of a rule defining larger participants in that market.
Section 1002(15)(A)(ii) defines the term ``financial product or
service'' to include certain leases that, among other things, are the
functional equivalent of purchase finance arrangements.\28\ As
discussed below, the Bureau believes that most consumer automobile
leases meet this requirement; however, some may not. The Dodd-Frank Act
accounts for the possibility that the enumerated list of financial
products and services in sections 1002(15)(A)(i)-(x) may not completely
capture the markets for financial products or services available to
consumers. Specifically, section 1002(15)(A)(xi)(II) grants the Bureau
the authority to define additional financial products or services by
regulation as described above. Pursuant to this authority, the Bureau
is proposing Sec. 1001.2(a) to define automobile leases that (1) meet
the requirements of section 108 of CEBA, as implemented by 12 CFR part
23, and are thus permissible for banks to offer or provide; and (2) are
not currently defined as a financial product or service under section
1002(15)(A)(ii) of the Dodd-Frank Act.
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\28\ Section 1002(15)(A)(ii) also requires that leases be non-
operating and have an initial term of at least 90 days. The Bureau
believes that automobile leases in the current consumer leasing
market meet these two criteria.
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Section 1002(15)(A)(ii) defines the term ``financial product or
service,'' in relevant part, as: ``extending or brokering leases of
personal . . . property that are the functional equivalent of purchase
finance arrangements, if--(I) the lease is on a non-operating basis;
[and] (II) the initial term of the lease is at least 90 days.'' \29\
For ease of reference, the Bureau refers to these types of leasing
arrangements herein as ``category (ii)'' leases. As explained below, in
the Bureau's view, the features of a category (ii) lease are found in
most consumer automobile leases.
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\29\ Section 1002(5) of the Dodd-Frank Act defines ``Consumer
financial product or service'' as ``any financial product or service
that is described in one or more categories under--(A) paragraph
(15) and is offered or provided for use by consumers primarily for
personal, family, or household purposes; or (B) clause (i), (iii),
(ix), or (x) of paragraph (15)(A), and is delivered, offered, or
provided in connection with a consumer financial product or service
referred to in subparagraph (A).''
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The Bureau believes the phrase ``functional equivalent of purchase
finance arrangements''--which is not defined in the Dodd-Frank Act
\30\--is reasonably interpreted to encompass most automobile leases.
Under section 1021 of the Dodd-Frank Act, the Bureau is charged with
``implement[ing], and, where applicable, enforc[ing] Federal consumer
financial law consistently for the purpose of ensuring that all
consumers have access to markets for consumer financial products and
services and that markets for consumer financial products and services
are fair, transparent, and competitive.'' \31\ In light of this purpose
and mandate, the Bureau believes the term ``functional equivalent of
purchase finance arrangements'' is best interpreted from the
perspective of the consumer.
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\30\ The Bureau is not aware of any Federal or State statute or
regulation that defines the term.
\31\ 12 U.S.C. 5511(a).
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For consumers, leasing a vehicle requires an application process
and an ongoing contractual obligation that are both financial in nature
and similar to entering into a financial arrangement to purchase a
vehicle. Like a consumer seeking to qualify for a loan to purchase a
vehicle, a consumer seeking to lease a vehicle must provide basic
financial information such as income and credit history.\32\ Though a
consumer who leases an automobile need not finance the entire cost of
the vehicle, the consumer still undertakes a major financial obligation
in the form of a commitment to make a stream of payments over a
significant period of time.\33\ The consumer must consider
[[Page 60766]]
how much cash to use, if any, for a down payment, the preferred lease
term, and the affordability of monthly payments and other costs
including maintenance, insurance, and state registration fees.
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\32\ See Fed. Trade Comm'n, Consumer Information: Understanding
Vehicle Financing (Jan. 2014), available at http://www.consumer.ftc.gov/articles/0056-understanding-vehicle-financing.
\33\ Like consumers who borrow money to purchase a vehicle,
consumers who lease are contractually obligated to make monthly
lease payments during the lease term. See Fed. Res. Sys., Key to
Vehicle Leasing Consumer Guide (Mar. 13, 2013), available at http://www.federalreserve.gov/pubs/leasing/.
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Auto leasing also shares many other features with auto lending. A
consumer must demonstrate an ability to pay the monthly payments in
order to qualify for a lease and a consumer's creditworthiness impacts
the terms of the lease. An auto finance company may furnish information
about a lessee, such as payment history, to credit bureaus in the same
manner that the company does for a borrower. Also, similar to a
consumer who finances an auto with a loan, a consumer who leases an
auto bears the responsibility for the vehicle's upkeep and must
maintain, repair, and service the vehicle during the lease term.\34\
The consumer must also insure the vehicle and bears the risk should the
vehicle become damaged or totaled.\35\ Similarly, if a consumer fails
to make loan or lease payments, the vehicle must be returned to the
auto finance company, and fees or penalties may apply.\36\ Most
importantly, regardless of whether consumers seek to purchase or lease
a vehicle, they must negotiate the price and terms. For all the
foregoing reasons, automobile leases carry similar obligations and
risks that vehicle loans present to consumers. In addition, in an auto
leasing arrangement, the consumer can typically purchase the vehicle at
the end of the lease term for a pre-determined amount, which is
generally based on the residual value of the vehicle.\37\ Accordingly,
from the perspective of a consumer, leasing presents an alternative
method to a loan for acquiring a vehicle through a series of
installment payments, and is therefore reasonably understood to be the
functional equivalent of purchase finance arrangements.
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\34\ See id.
\35\ See id.
\36\ See id. Also, if a consumer terminates a lease early, early
termination fees may apply.
\37\ CFPB, Ask CFPB: What is residual value? (June 24, 2012),
available at http://www.consumerfinance.gov/askcfpb/737/what-residual-value.html. The residual value is the projected market
value of the vehicle at the end of the lease, which is usually the
amount the consumer would have to pay to purchase the vehicle at the
end of the lease term. Additionally, the consumer may be responsible
for any applicable taxes or fees.
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Moreover, autos are important to the financial well-being of
consumers regardless of whether the consumer obtains the use of a
vehicle through a lease or a loan. Consumers rely on autos for their
transportation needs, including to and from the workplace. From a
consumer's standpoint, whether a vehicle is leased or financed through
a loan, any consumer financial law violation that impedes access to a
vehicle or otherwise creates problems related to the loan or leasing
arrangement can have a critical impact on the consumer. Thus, as
interpreted by the Bureau, most automobile leases are the functional
equivalent of purchase finance arrangements.
The Bureau believes that typical auto leases also meet the
remaining two requirements of section 1002(15)(A)(ii) of the Dodd-Frank
Act. First, auto leases are generally ``non-operating.'' Consistent
with the definition in Regulation Y, which governs bank holding
companies and changes in bank control, the Bureau interprets ``non-
operating'' to mean that the lease provider is not, directly or
indirectly, engaged in operating, servicing, maintaining, or repairing
the leased property during the lease term.\38\ Under most auto leases,
the consumer, rather than the lessor, is responsible for ensuring the
care and maintenance of the vehicle.\39\ Second, most leases have terms
well beyond 90 days. Lease terms for autos typically range from 12 to
60 months, with the majority of leases ranging from 24 to 48
months.\40\ Thus, the Bureau believes that most automobile leases
readily fall under section 1002(15)(A)(ii) as financial products or
services.
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\38\ 12 CFR 225.28(b)(3)(i) n.6 (``The requirement that the
lease be on a nonoperating basis means that the bank holding company
may not, directly or indirectly, engage in operating, servicing,
maintaining, or repairing leased property during the lease term. For
purposes of the leasing of automobiles, the requirement that the
lease be on a nonoperating basis means that the bank holding company
may not, directly or indirectly: (1) Provide servicing, repair, or
maintenance of the leased vehicle during the lease term; (2)
purchase parts and accessories in bulk or for an individual vehicle
after the lessee has taken delivery of the vehicle; (3) provide the
loan of an automobile during servicing of the leased vehicle; (4)
purchase insurance for the lessee; or (5) provide for the renewal of
the vehicle's license merely as a service to the lessee where the
lessee could renew the license without authorization from the
lessor.'').
\39\ See supra note 33.
\40\ See Zabritski, supra note 25, at 25; see also supra note
33.
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However, as discussed above, the requirement that category (ii)
leases be the functional equivalent of purchase finance arrangements
means that coverage of leases under section 1002(15)(A)(ii) will
necessarily depend on a number of factors and circumstances that may
vary between particular leases and institutions. Given the potential
variance in the terms of lease agreements, the Bureau is concerned that
not all automobile leases that materially impact consumers will
necessarily qualify for coverage under section 1002(15)(A)(ii) and that
market participants may have a difficult time discerning which leases
meet the definition and which do not. Such a result would make the
automobile financing larger-participant rule difficult to administer
with respect to leasing and would not provide optimal protection to
consumers. To further the mandate of protecting consumers and for ease
of administering the automobile financing larger-participant rule, the
Bureau is proposing to exercise its authority under section
1002(15)(A)(xi)(II) of the Dodd-Frank Act to define certain automobile
leases not covered under section 1002(15)(A)(ii) as financial products
or services within the meaning of section 1002(15)(A) of the Dodd-Frank
Act.
Under section 1002(15)(A)(xi)(II), for purposes of title X of the
Dodd-Frank Act, the Bureau may define as a covered financial product or
service, by regulation: ``such other financial product or service . . .
if the Bureau finds that such financial product or service is-- . . .
(II) permissible for a bank or for a financial holding company to offer
or to provide under any provision of a Federal law or regulation
applicable to a bank or a financial holding company, and has, or will
have, a material impact on consumers.'' In this proposal, the Bureau
would define the term ``financial product or service'' under section
1002(15)(A)(xi)(II) to include certain automobile leases that: (1) meet
the requirements of section 108 of CEBA, as implemented by 12 CFR part
23, and therefore are permissible for banks to offer or provide; and
(2) are not the functional equivalent of purchase finance arrangements
under section 1002(15)(A)(ii) of the Dodd-Frank Act.
Banks and financial holding companies are broadly authorized to
engage in automobile leasing. With respect to national banks, CEBA
amended the National Bank Act, to add, among other things, 12 U.S.C.
24(Tenth), which authorizes national banks to ``invest in tangible
personal property, including, without limitation, vehicles,
manufactured homes, machinery, equipment, or furniture, for lease
financing transactions on a net lease basis.'' \41\ Neither CEBA nor
its
[[Page 60767]]
implementing regulations require that such leases be the functional
equivalent of loans, credit, or purchase finance arrangements.\42\
Similarly, under Regulation Y, bank and financial holding companies may
engage in leasing of personal property irrespective of whether the
leases are the functional equivalent of loans, credit, or purchase
finance arrangements.\43\
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\41\ Under the implementing regulations, net lease is defined as
``a lease under which the national bank will not, directly or
indirectly, provide or be obligated to provide for:
(1) Servicing, repair, or maintenance of the leased property
during the lease term;
(2) Parts or accessories for the leased property;
(3) Loan of replacement or substitute property while the leased
property is being serviced;
(4) Payment of insurance for the lessee, except where the lessee
has failed in its contractual obligation to purchase or maintain
required insurance; or
(5) Renewal of any license or registration for the property
unless renewal by the bank is necessary to protect its interest as
owner or financier of the property.''
12 CFR 23.2(f).
\42\ See 12 U.S.C. 24(Tenth); 12 CFR 23.2, 23.3.
\43\ 12 CFR 225.28(b)(3). Bank holding companies are limited to
leases that are non-operating, as described above, and have a term
of at least 90 days. Id.
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Additionally, the Bureau believes that, whether or not a particular
automobile lease qualifies as a category (ii) lease, all consumer
automobile leasing, including leasing covered by the proposed
definition, has a material impact on consumers. As discussed below,
access to a vehicle is critical for consumers. Auto leasing is a
significant financial obligation, and consumers are increasingly
turning to leasing as a means to obtain a vehicle. The impact of
automobile leasing on consumers and their financial well-being does not
turn on whether a lease is the functional equivalent of a purchase
finance arrangement.
Accordingly, as authorized under section 1002(15)(A)(xi)(II) of the
Dodd-Frank Act, the Bureau is proposing to define the term ``financial
product or service'' to include extending or brokering leases for
automobiles, where the lease: (1) qualifies as a full-payout lease \44\
and a net lease, as provided by 12 CFR 23.3(a), and has an initial term
of not less than 90 days, as provided by 12 CFR 23.11; and (2) is not a
financial product or service under section 1002(15)(A)(ii).\45\ The
proposed definition meets the requirements of section
1002(15)(A)(xi)(II). As discussed above, banks and financial holding
companies are permitted to engage in automobile leasing described under
this definition, and such automobile leasing has a material impact on
consumers.
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\44\ Under the implementing regulations, ``full-payout lease''
is defined as ``a lease in which the national bank reasonably
expects to realize the return of its full investment in the leased
property, plus the estimated cost of financing the property over the
term of the lease, from:
(1) Rentals;
(2) Estimated tax benefits; and
(3) The estimated residual value of the property at the
expiration of the lease term.''
12 CFR 23.2(e).
\45\ For purposes of this definition, ``automobile'' would be
defined as proposed in 12 CFR 1090.108(a).
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This proposed definition would ensure that such leases are subject
to the same range of protections applicable to ``financial product[s]
or service[s]'' under the Dodd-Frank Act. For example, it would ensure
that the offering or providing of the defined leases is subject to the
prohibition against unfair, deceptive, or abusive acts or practices in
section 1031 of the Dodd-Frank Act.\46\ Because leases that are not the
functional equivalent of purchase finance arrangements can raise the
same consumer protection concerns as category (ii) leases, the Bureau
believes that it is appropriate to subject these additional leases to
the Dodd-Frank Act provisions that apply to ``financial product[s] or
service[s].'' Comprehensive coverage of automobile leasing will also
make the Proposed Rule defining larger participants of the automobile
financing market more accurately reflect the structure of that market
and easier to administer by eliminating uncertainty about which types
of leasing activities are counted.
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\46\ The proposed definition would also expand the scope of
certain other Bureau authorities under title X of the Dodd-Frank
Act. Perhaps most significantly, the proposed definition would
expand the Bureau's rulemaking authority under section 1032 of the
Dodd-Frank Act, which authorizes the Bureau to prescribe rules to
ensure that the features of any consumer financial product or
service are fully, accurately, and effectively disclosed to
consumers in a manner that permits consumers to understand the
costs, benefits, and risks associated with the product or service.
In addition, the proposed definition would expand the scope of the
Bureau's authority under section 1022(c) of the Dodd-Frank Act to
``monitor for risks to consumers in the offering or provision of
consumer financial products or services, including developments in
markets for such products or services,'' and the scope of the
Bureau's authority under section 1033 of the Dodd-Frank Act to
prescribe rules for covered persons with respect to consumer rights
to access information concerning consumer financial products or
services that the consumer received from such person.
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The Bureau invites comments on its analysis regarding the leasing
market and this proposed definition, and requests data on automobile
leases generally.
B. 12 CFR Part 1090 Defining Larger Participants of Certain Consumer
Financial Product and Service Markets
Section 1090.101 Definitions
The Bureau proposes to make a technical correction to the
definition of ``nonbank covered person'' in Sec. 1090.101 by
substituting the term ``consumer financial product or service'' for
``consumer product or service'' where it appears. With this
substitution, the definition would read:
Nonbank covered person means, except for persons described in 12
U.S.C. 5515(a) and 5516(a):
(1) Any person that engages in offering or providing a consumer
financial product or service; and
(2) Any affiliate of a person that engages in offering or providing
a consumer financial product or service if such affiliate acts as a
service provider to such person.
Section 1090.104 Consumer Reporting Market
104(a) Market-related definitions
104(a), paragraph (iii)(D) of the definition of ``Annual
receipts''--``Annual receipts of affiliated companies''
The Bureau proposes to make a technical correction to paragraph
(iii)(D) of the definition of ``annual receipts'' in Sec. 1090.104(a),
which governs how the affiliate aggregation rules apply to formerly
affiliated companies for purposes of the Consumer Reporting Rule. For
the reasons explained below, the correction would clarify that if a
company is an affiliated company of the nonbank covered person during
the relevant measurement period but ceases to be an affiliated company
during the same period, the annual receipts of the nonbank covered
person and the formerly affiliated company must be aggregated for the
entire period of measurement. As noted below, the Bureau is proposing
to make the same change to paragraph (iii)(D) of the definition of
``annual receipts'' in Sec. 1090.105(a) in the Consumer Debt
Collection Rule.
Under section 1024(a)(3)(B) of the Dodd-Frank Act, the activities
of affiliated companies are to be aggregated for purposes of computing
activity levels for the larger-participant rules. In the Consumer
Reporting and Consumer Debt Collection Rules, the Bureau has
implemented the aggregation called for by section 1024(a)(3)(B) by
prescribing the addition of all the receipts of a nonbank covered
person and its affiliated companies to produce the nonbank covered
person's annual receipts.\47\ The Bureau has prescribed similar
calculations for account volume in the Student Loan Servicing Rule and
for aggregate annual international money transfers in the International
Money Transfer Rule.\48\
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\47\ 12 CFR 1090.104(a), 1090.105(a).
\48\ 12 CFR 1090.106(a), 1090.107(a).
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The affiliate aggregation provisions of each of the larger-
participant rules address circumstances where a
[[Page 60768]]
company becomes affiliated with a nonbank covered person or ceases to
be affiliated with the nonbank covered person during the relevant
measurement period.\49\ For simplicity and completeness of coverage,
the Bureau believes it is appropriate in both circumstances to
aggregate the activity of the company with that of the nonbank covered
person for the entire period of measurement, even though the company
was an affiliated company of the nonbank covered person for only part
of the measurement period.
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\49\ This aspect is addressed in paragraphs (iii)(B) and
(iii)(D) of the definition of ``annual receipts'' in Sec.
1090.104(a), paragraphs (iii)(B) and (iii)(D) of the definition of
``annual receipts'' in Sec. 1090.105(a), paragraphs (iii)(B) and
(iii)(C) of the definition of ``account volume'' in Sec.
1090.106(a), and paragraph (iii)(B) of the definition of ``aggregate
annual international money transfers'' in Sec. 1090.107(a).
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This is the approach used in the Student Loan Servicing Rule's
definition of ``account volume'' and the International Money Transfer
Rule's definition of ``aggregate annual international money
transfers.'' \50\ It is also the approach that the Bureau intended to
adopt in the Consumer Reporting and Consumer Debt Collection Rules.
However, the language addressing aggregation of formerly-affiliated
companies in the definition of ``annual receipts'' in those rules is
unclear.\51\ To clarify the operation of those paragraphs, the Bureau
proposes to replace the final sentence of paragraph (iii)(D) of Sec.
1090.104(a)'s definition of ``annual receipts'' with: ``The annual
receipts of a nonbank covered person and its formerly affiliated
company are aggregated for the entire period of measurement if the
affiliation ceased during the applicable period of measurement as set
forth in paragraph (ii) of this definition.''
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\50\ Paragraph (iii)(C) of the definition of ``account volume''
in Sec. 1090.106(a) provides: ``If two affiliated companies cease
to be affiliated companies, the number of accounts of each continues
to be included in the other's account volume until the succeeding
December 31.'' Paragraph (iii)(B) of the definition of ``aggregate
annual international money transfers'' in Sec. 1090.107(a)
provides:
The annual international money transfers of a nonbank covered
person must be aggregated with the annual international money
transfers of any person that was an affiliated company of the
nonbank covered person at any time during the preceding calendar
year. The annual international money transfers of the nonbank
covered person and its affiliated companies are aggregated for the
entire preceding calendar year, even if the affiliation did not
exist for the entire calendar year.
\51\ Paragraph (iii) of the definition of ``annual receipts'' in
both Sec. 1090.104(a) and Sec. 1090.105(a) provides:
The annual receipts of a formerly affiliated company are not
included if affiliation ceased before the applicable period of
measurement as set forth in paragraph (ii) of this definition. This
exclusion of annual receipts of formerly affiliated companies
applies during the entire period of measurement, rather than only
for the period after which affiliation ceased.
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Section 1090.105 Consumer Debt Collection Market
105(a) Market-related definitions
105(a), paragraph (iii)(D) of the definition of ``Annual
receipts''--``Annual receipts of affiliated companies''
For the same reasons described above with respect to Sec.
1090.104(a), the Bureau proposes to replace the final sentence of
paragraph (iii)(D) of Sec. 1090.105(a)'s definition of ``annual
receipts'' with: ``The annual receipts of a nonbank covered person and
its formerly affiliated company are aggregated for the entire period of
measurement if the affiliation ceased during the applicable period of
measurement as set forth in paragraph (ii) of this definition.''
Section 1090.108 Automobile Financing Market
The Bureau is proposing Sec. 1090.108 to define larger
participants of the automobile financing market because of the
important role that automobiles and related financing play in
consumers' lives. Autos have become indispensable for most working
individuals, with nearly 90 percent of the workforce commuting to work
by car, and most driving alone.\52\ Consumers' reliance on vehicles is
underscored by recent studies on repayment patterns, which show that
consumers pay their auto loans before other secured and unsecured
debt.\53\ Auto loans are the third largest category of outstanding
household debt, behind mortgage and student loans. In the first quarter
of 2014, consumers in the United States had 87.4 million outstanding
auto loans valued at nearly $900 billion.\54\
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\52\ See Brian McKenzie & Melanie Rapino, U.S. Census Bureau,
Commuting in the United States: 2009 (2011), http://www.census.gov/prod/2011pubs/acs-15.pdf.
\53\ See TransUnion, New Developments around the Consumer
Payment Hierarchy (2014), http://media.marketwire.com/attachments/201403/233081_PaymentHierarchyInfographic2014FINAL.jpg (Full report
available at http://www.transunioninsights.com/studies/behaviorstudy).
\54\ Fed. Res. Bank of N.Y., Quarterly Report on Household Debt
and Credit (May 2014), http://www.newyorkfed.org/householdcredit/2014-q1/data/pdf/HHDC_2014Q1.pdf. According to the New York Federal
Reserve, ``auto loans'' are ``loans taken out to purchase a car,
including Auto Bank loans provided by banking institutions (banks,
credit unions, savings and loan associations), and Auto Finance
loans, provided by automobile dealers and automobile financing
companies.''
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As stated above, the Bureau is proposing to define a market for
automobile financing that 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. While a significant number of consumers obtain credit to
purchase their automobile,\55\ in recent years, consumers have begun to
migrate more towards leasing agreements. Leasing is growing quickly as
a proportion of new vehicle financing.\56\
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\55\ In addition to financing the initial acquisition of an
automobile, some consumers refinance their existing automobile
loans. Consumers typically refinance their automobile loans to lower
their loan interest rates to achieve lower monthly payments. The
level of refinancing depends on trends in interest rate levels over
the term for most auto loans, which ranges from three to seven
years.
\56\ As stated above, at the end of the first quarter of 2014,
leases comprised approximately 30 percent of new vehicle automotive
financing transactions, which is up from about 20 percent five years
ago. See Zabritski, supra note 25.
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Under the proposed automobile financing market, nonbank
participants include: (1) Specialty finance companies, (2) ``captive''
nonbanks (commonly referred to as ``captives''), and (3) Buy Here Pay
Here (BHPH) finance companies.\57\ Specialty financing companies serve
consumers in specialized markets. Many of these companies focus on
providing financing to subprime borrowers who tend to have past credit
problems, lower income, or limited credit histories, which prevent them
from being able to obtain financing elsewhere.
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\57\ Although dealers may also engage in some automobile
financing activities, they are not included for purposes of this
discussion of market participants.
---------------------------------------------------------------------------
Generally, captives are subsidiary finance companies owned by auto
manufacturers. They provide consumers with financing for the primary
purpose of facilitating their parent companies' and associated
franchised dealers' auto sales.
BHPH finance companies are similar to captives in that they are
associated with certain BHPH dealers,\58\ which traditionally focus on
subprime and deep subprime borrowers. While BHPH dealers are mostly
independently-owned entities that serve as the primary lender and
receive payments directly from consumers, some larger BHPH dealers will
sell or assign their contracts to specific BHPH finance companies once
the contract has been consummated with the consumer.
[[Page 60769]]
However, these BHPH finance companies do not focus on a particular auto
manufacturer unlike captives whose primary purpose is to extend credit
to consumers who want to purchase or lease a specific manufacturer's
vehicles.\59\
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\58\ Unlike captives, however, not all BHPH finance companies
are associated with specific automobile dealers. The Bureau is aware
of BHPH finance companies that provide financing to independently-
owned BHPH dealer franchises.
\59\ The BHPH segment of the market primarily serves deep
subprime borrowers. BHPH automobile dealers generally are
indifferent to the consumers' automobile choice. Typically, only
after the dealer assesses consumers' creditworthiness and determines
their maximum monthly payment does the dealer present automobile
options.
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According to the Bureau's estimates based on Experian Automotive's
AutoCount[supreg] database,\60\ the proposed automobile financing
market includes over five hundred nonbank automobile lenders \61\ and
is fairly concentrated. As measured by the number of transactions
identified in the AutoCount Lender Report\SM\, fewer than 40 entities
comprise over 90 percent of the auto loan and lease transactions in the
nonbank market.\62\ The top tier of this market is dominated by large
captives. The other large companies in the nonbank automobile financing
market are either specialty finance companies or BHPH finance
companies. The lower tiers of the nonbank market are comprised
generally of smaller regional specialty finance companies.
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\60\ Experian Automotive's AutoCount database is a vehicle
database that collects monthly transaction data from State
Departments of Motor Vehicles (DMVs). See also infra note 79 and
accompanying text.
\61\ To reach this estimate, the Bureau considered data from
Experian Automotive's AutoCount database for calendar year 2013,
with several adjustments. First, transactions with no lender listed
were excluded from the sample. Second, entities with fewer than 360
loans and leases on an annual basis were excluded from the sample.
Third, entities that were identified by Experian Automotive as
``Other'' in the lender type category were also excluded from the
sample. Fourth, the Bureau excluded entities that already fall
within the Bureau's supervisory authority or that it identified as
BHPH dealers and title lenders. In some cases, entities were also
consolidated due to known affiliations.
\62\ These estimates were derived using the same methodology
described in supra note 61.
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Auto credit is provided both through direct and indirect channels
creating different dynamics for consumers and industry participants. In
the direct lending channel, a consumer seeks credit directly from the
financing source, whereas in the indirect lending channel, the dealer
typically facilitates a loan from a third-party finance source.\63\
Depository institutions and credit unions have an advantage in the
direct lending space because these entities often have a pre-existing
relationship with consumers. Captives and other specialty finance
companies are more active in the indirect channel. Most consumers who
finance the purchase of an automobile--roughly 80 percent--use the
indirect channel and look to automobile dealers to facilitate their
purchase loans.\64\
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\63\ Such sources include depository institutions, nonbank
affiliates of a depository institution, independent nonbanks, and
captives.
\64\ See Delvin Davis, Ctr. For Responsible Lending, The State
of Lending in America & Its Impact on U.S. Households (Dec. 2012),
available at http://www.responsiblelending.org/state-of-lending/reports/4-Auto-Loans.pdf.
---------------------------------------------------------------------------
With indirect lending, dealers rather than consumers typically
select the lender who will provide the financing. Upon completion of
the vehicle selection process, the dealer usually collects basic
information regarding the applicant and uses an automated system to
forward that information to prospective indirect automobile lenders.
After evaluating the applicant, indirect auto lenders may provide the
dealer with purchase eligibility criteria or stipulations including,
but not limited to, a risk-based ``buy rate'' that establishes a
minimum interest rate at which the lender is willing to purchase a
retail installment sales contract executed between the consumer and the
dealer for the purchase of the vehicle.\65\
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\65\ The Bureau is aware that an indirect auto lender may also
have a policy that allows the dealer to mark up the interest rate
above the indirect auto lender's buy rate. In the event that the
dealer charges the consumer an interest rate that is higher than the
lender's buy rate, the lender may pay the dealer what is typically
referred to as ``reserve'' (or ``participation''), compensation
based upon the difference in interest revenues between the buy rate
and the actual note rate charged to the consumer in the retail
installment contract executed with the dealer. Dealer reserve is one
method lenders use to compensate dealers for the value they add by
originating loans and finding financing sources. The exact
computation of compensation based on dealer markup varies across
lenders and may vary between programs at the same lender.
---------------------------------------------------------------------------
A franchised dealer often can choose from a selection of funding
sources.\66\ However, a franchised dealer that is affiliated with a
manufacturer can be incentivized to use a captive through mechanisms
such as promotional discounts or limited-time financing offers that can
be used to attract consumers. An independent auto dealer, which is not
associated with a specific manufacturer or brand, typically does not
have access to captive finance sources but will have access to other
indirect sources, including depository institutions engaged in indirect
lending as well as specialty finance companies.
---------------------------------------------------------------------------
\66\ See supra note 63 and accompanying text.
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With the relevant eligibility criteria and stipulations, the dealer
then selects the indirect lender that will finance the loan to the
consumer and extends the loan through a retail installment sales
contract that the indirect lender purchases or acquires. The dealer is
typically compensated for arranging indirect financing. For indirect
automobile loans, the indirect automobile lender typically becomes
responsible for servicing the loan and consumers will then make loan
payments to the lender.
Similarly, leases may be obtained through direct or indirect
channels, although most are through indirect channels. To purchase an
automobile lease from a dealer, finance sources express their interest
by providing the dealer with the relevant terms of a lease similar to
those considered for a loan. These terms can include a ``money
factor,'' which establishes how much a consumer will be paying in
finance charges, and the length or term of the lease.\67\ However, in a
lease, a finance source will also quote a residual value, which is one
of the elements comprising both the consumer's monthly payments and the
consumer's pre-determined purchase option cost at the end of the lease
term. As a practical matter, few auto dealers enter into a financing or
leasing arrangement with a consumer unless there is an indirect lender
or lessor who will purchase the retail installment sales contract or
leasing contract.\68\
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\67\ Fed. Reserve Sys., Glossary, Keys to Vehicle Leasing (Mar.
13, 2013), available at http://www.federalreserve.gov/pubs/leasing/glossary.htm.
\68\ This does not apply to those auto dealers, such as BHPH
dealers, who serve as the primary lender.
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Refinancing of an existing credit obligation can enable a consumer
to reduce his or her monthly auto payment. The refinancing market is
highly dependent on interest rates and, thus, activity typically
increases as rates decrease relative to the initial rate at
origination. However, the average auto loan term for a new vehicle is
relatively short at around 66 months,\69\ and market rates during the
loan repayment period typically do not differ much from the rates at
origination. These dynamics explain why the Bureau believes that
overall refinancing volumes comprise only a small niche of the broader
auto financing market. Unfortunately, there is limited data available
pertaining to refinancing volume because, among other things, publicly
traded market participants generally tend to consolidate refinancing
activity within origination activity for financial reporting purposes.
---------------------------------------------------------------------------
\69\ Zabritski, supra note 25, at 39.
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Section 1090.108(a) Market-Related Definitions
Unless otherwise specified, the definitions in Sec. 1090.101
should be used when interpreting terms in this Proposed Rule. The
Proposed Rule would define additional terms relevant
[[Page 60770]]
to the proposed automobile financing market. These terms include
``aggregate annual originations,'' which the Proposed Rule would use as
the criterion for assessing larger-participant status; ``annual
originations''; ``automobile''; ``automobile financing''; ``automobile
lease''; and ``refinancings.''
The Bureau seeks comment on each of the definitions set forth in
the Proposed Rule and any suggested additions, clarifications,
modifications, or alternatives.
Aggregate annual originations. The Bureau is proposing to use
aggregate annual originations as the criterion to assess whether a
nonbank covered person is a larger participant of the automobile
financing market. Proposed Sec. 1090.108(a) would define the term
``aggregate annual originations'' as the sum of the number of annual
originations of a nonbank covered person and the number of annual
originations of each of the nonbank covered person's affiliated
companies, as calculated according to instructions set forth in the
proposed regulation and as discussed below.
Annual originations. Proposed Sec. 1090.108(a) would define the
term ``annual originations'' to mean the sum of the following
transactions for the preceding calendar year: 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. Only originations involving automobiles primarily used for
personal, family or household purposes would be counted as annual
originations for purposes of this larger-participant rule.
The Bureau proposes to exclude from annual originations any
investments in asset-backed securities. Automobile asset-backed
securities 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. Accordingly, the Bureau does not believe such transactions should
be considered as annual originations under the Proposed Rule. The
Bureau solicits comment as to whether this proposed exclusion for
asset-backed securities is appropriate and whether the Bureau should
define the term ``asset-backed securities'' in proposed Sec.
1090.108(a).
The Bureau is also considering whether to include other types of
automobile-secured loans. These could include, for example, automobile
title loans, in which a lender extends credit to a consumer that is
secured by the title to an automobile that the consumer owns. The
Bureau is proposing to define a market for automobile financing that
does not include automobile title loans because the Bureau believes
that this financial product or service is substantially different from
automobile financing activities. For example, auto title loans are
generally provided by companies that do not compete with lenders that
finance the acquisition of a vehicle. Loans provided by auto title
lenders typically are not used for the activities identified in the
criterion to measure market activity, such as the grant of credit to
purchase an automobile or to refinance an existing credit obligation.
Further, auto title loans are generally significantly shorter in term
and smaller in size than loans used to purchase an automobile or to
refinance an existing automobile loan. The Bureau thus believes that
auto title loans might be better analyzed separately from the
automobile financing market as part of a future larger-participant
rulemaking.\70\ However, the Bureau solicits feedback on whether it
should define the market for automobile financing and annual
originations to include other types of loans secured by automobiles
and, if so, whether it is appropriate to use the same criterion and
threshold for such loans as proposed here or whether an alternative
criterion and threshold would be preferable. The Bureau also solicits
comments on data sources that the Bureau might use in analyzing other
automobile-secured loans like automobile title loans that are not used
to purchase the vehicle.
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\70\ As noted above, this larger-participant rule is only one in
a series of rulemakings.
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Aggregating the annual originations of affiliated companies. Under
the Dodd-Frank Act, the activities of affiliated companies are to be
aggregated for purposes of computing activity levels for rules--like
this Proposed Rule--to determine larger participants in particular
markets for consumer products or services under section 1024(a)(1).\71\
Therefore, the Proposed Rule would define the ``aggregate annual
originations'' for each nonbank covered person as the sum of the number
of annual originations of the covered entity and the number of annual
originations of all its affiliated companies. For purposes of computing
the covered person's aggregate annual originations, the annual
originations of each affiliated company would first be calculated
separately and then aggregated with the originations of the covered
entity.
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\71\ 12 U.S.C. 5514(a)(3)(B) (``For purposes of computing
activity levels under [12 U.S.C. 5514(a)(1)] or rules issued
thereunder, activities of affiliated companies (other than insured
depository institutions or insured credit unions) shall be
aggregated.'').
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Paragraph (ii) of the proposed definition of ``aggregate annual
originations'' would set forth the method of aggregating the annual
originations of a nonbank covered person and its affiliated companies
when affiliation has started or ended within the preceding calendar
year. It would provide that the annual originations of a nonbank
covered person must be aggregated with the annual originations of any
person that was an affiliated company of the nonbank covered person at
any time during the preceding calendar year. The annual originations of
a nonbank covered person and its affiliated companies would be
aggregated for the entire preceding calendar year, even if the
affiliation did not exist for the entire calendar year. This provision
would not apply, however, if the affiliated company is a dealer that is
excluded by proposed Sec. 1090.108(c), which is discussed below.
Automobile. Proposed Sec. 1090.108(a) would define ``automobile''
to mean any self-propelled vehicle primarily used for personal, family,
or household purposes for on-road transportation. The proposed
definition would apply to both new and used vehicles. The proposed
definition would not include motor homes, recreational vehicles (RVs),
golf carts, and motor scooters.
The proposed definition of ``automobile'' was informed by the
definition of ``motor vehicle'' in section 1029(f) of the Dodd-Frank
Act,\72\ but includes modifications to limit its application to
vehicles primarily used for personal, family, or household purposes for
on-road transportation. The definition of ``motor vehicle'' found in
the Dodd-Frank Act encompasses a wide range of vehicles, and the Bureau
believes that using such a broad definition in this larger-participant
rulemaking would make the Proposed
[[Page 60771]]
Rule difficult to administer. Consistent with the definition of ``motor
vehicles,'' the proposed definition of ``automobile'' would cover
vehicles such as cars, sports utility vehicles, light-duty trucks, and
motorcycles. However, because the proposed definition is limited to
vehicles primarily used for personal, family, or household purposes,
heavy-duty trucks, buses, or ambulances are excluded as they are
designed for and primarily used for commercial purposes.
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\72\ Under section 1029(f)(1) of the Dodd-Frank Act, the term
``motor vehicle'' means: (A) Any self-propelled vehicle designed for
transporting persons or property on a street, highway, or other
road; (B) recreational boats and marine equipment; (C) motorcycles;
(D) motor homes, recreational vehicle trailers, and slide-in campers
as those terms are defined in section 571.3 and 575.103(d) of title
49, Code of Federal Regulations, or any successor thereto; and (E)
other vehicles that are titled and sold through dealers. 12 U.S.C.
5519(f)(1).
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Certain types of motor vehicles, such as motor homes, recreational
vehicles (RVs), golf carts and motor scooters, are in markets that
differ from those of the vehicles captured in the proposed definition
of ``automobile.'' Although the Bureau does not have sufficient data on
these other market segments, the Bureau does not believe that financing
for the types of motor vehicles that are excluded from its proposed
definition of ``automobile'' is done on the same scale as financing of
vehicles used by consumers as transportation to work or to carry out
their errands and other daily activities. Thus, the Bureau believes
that the vehicles excluded from the definition likely warrant different
larger-participant criteria and thresholds if they were included in the
market defined for this Proposed Rule. However, the Bureau seeks
comment and additional market data related to these assumptions. The
Bureau also seeks comment on its proposed definition of ``automobile,''
specifically whether the proposed definition should address other
vehicles or types of vehicles, and whether motorcycles should be a
separately defined term.\73\
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\73\ The Bureau notes that this larger-participant rule is only
one in a series of rulemakings and the Bureau could address the
financing of other vehicles or categories of vehicles not covered
under this Proposed Rule in a separate rulemaking should it
determine it appropriate to do so.
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Automobile financing. Proposed Sec. 1090.108(a) would define the
term ``automobile financing'' to mean providing the transactions
enumerated under the definition of the term ``annual originations'' as
defined in proposed Sec. 1090.108(a). Thus, under the Proposed Rule,
``automobile financing'' would mean granting credit for the purpose of
purchasing an automobile; refinancing existing credit obligations or
previously refinanced credit obligations that had been made for the
purchase of an automobile; purchasing or acquiring such credit
obligations (including refinancings); providing automobile leases; and
purchasing or acquiring automobile lease agreements. The Bureau
believes this proposed definition reflects the number of consumer loans
and leases made or facilitated (through purchases of the loans and
leases) regarding one of the most important nonfinancial assets to
American households.
Automobile lease. Proposed Sec. 1090.108(a) would define the term
``automobile lease'' to mean a lease for the use of an automobile, as
that term is defined in this Proposed Rule, that is a financial product
or service under either section 1002(15)(A)(ii) of the Dodd-Frank Act
or proposed Sec. 1001.2(a). A lease for the use of an automobile is a
financial product or service under section 1002(15)(A)(ii) if it: (1)
Is the functional equivalent of a purchase finance arrangement; (2) is
on a non-operating basis; and (3) has an initial term of at least 90
days.\74\ As explained above, the Bureau believes that most automobile
leases meet these requirements. The Bureau also believes that those
automobile leases that are not the functional equivalent of purchase
finance arrangements, and therefore do not fall under section
1002(15)(A)(ii), would nevertheless likely be covered by the proposed
new category of ``financial product or service'' under proposed Sec.
1001.2(a). Proposed Sec. 1001.2(a) is guided by the requirements in 12
CFR 23.2(d)(1), which implement the product-related requirements for
leases under CEBA. An automobile lease would be a financial product or
service under proposed Sec. 1001.2(a) as long as (1) the lease
qualifies as a full-payout lease and a net lease, as required under 12
CFR 23.3(a); (2) the lease has an initial term of at least 90 days, as
required under 12 CFR 23.11; and (3) the lease does not meet the
requirements for a financial product or service under section
1002(15)(A)(ii).
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\74\ 12 U.S.C. 5481(15)(A)(ii).
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Refinancing. The Bureau proposes to define the term ``refinancing''
for purposes of this rule by reference to Sec. 1026.20(a) of
Regulation Z.\75\ Section 1026.20(a) defines ``refinancing'' for
closed-end credit transactions, including those related to the purchase
of automobiles. If a transaction is determined to be a ``refinancing''
under Sec. 1026.20(a), a ``new transaction'' has occurred and the
creditor must provide the consumer with disclosures, among other
things. Under Regulation Z, a refinancing occurs only when an existing
obligation is satisfied and replaced by the original creditor or a
holder or servicer of the original obligation, and a new obligation is
undertaken by the same consumer. It is noted that if a new creditor
refinances an existing credit obligation, it is considered a new
transaction rather than a refinancing for purposes of Regulation Z
without reference to whether satisfaction and replacement occurs.\76\
Under Sec. 1026.20(a), whether satisfaction and replacement has
occurred is determined based on the parties' contract and applicable
state law. Section 1026.20(a) also provides certain exceptions to the
requirement for satisfaction and replacement.
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\75\ 12 CFR 1026.20.
\76\ 12 CFR 1026.20, comment 20(a)-5.
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The definition of ``refinancing'' in proposed Sec. 1090.108(a)
mirrors the Regulation Z definition except that the nonbank covered
person is not required to be the original creditor or a holder or
servicer of the original obligation to fall under the definition.\77\
Thus, as applied to this proposal, a nonbank covered person would be
required to include in its aggregate annual originations any grant of
credit for the purchase of an automobile that satisfies and replaces an
existing credit obligation, even if the nonbank covered person is not
the original creditor, holder or servicer of the existing credit
obligation. The Bureau believes it is appropriate to include
refinancing activity conducted by third parties as part of the
automobile financing market.\78\ As in Regulation Z, proposed Sec.
1090.108(a) would require that to be a refinancing, both the existing
and the new grant of credit must involve the same borrower.
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\77\ See id.
\78\ By contrast, under Regulation Z, such transactions are
omitted from the definition of ``refinancing'' but are nevertheless
subject to disclosure and other requirements as a new transaction.
Id.
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As an alternative, the Bureau is considering whether it would be
preferable to propose a new definition of ``refinancing'' for purposes
of the Proposed Rule. Auto finance companies that grant credit secured
by a vehicle are already subject to Sec. 1026.20(a). The Bureau
believes that using the Regulation Z definition would avoid adding
regulatory complexity that could arise through the creation of a new
definition for purposes of this larger-participant rulemaking, but
invites comments on this approach and whether the Regulation Z
definition of ``refinancing'' with the modification described above is
appropriate for purposes of the Proposed Rule.
Finally, as discussed above, the Bureau does not have a reliable
data source pertaining to refinancings in the automobile market.
Although the Bureau is aware that refinancings occur, particularly when
interest rates are declining, there is no standard reporting available
that describes what percentage of the total market for automobile
[[Page 60772]]
financing is comprised of refinancings and what part of the automobile
refinancing market is provided by entities that would be subject to the
Proposed Rule. Thus, to better understand this segment of the market,
the Bureau seeks data on refinancing activity in the market and the
market participants that engage in refinancing. The Bureau also seeks
comment on its proposal to include refinancings in the proposed
definition of ``annual originations'' and in the market definition of
``automobile financing.''
Section 1090.108(b) Test To Define Larger Participants
Criterion. The Bureau has broad discretion in choosing a criterion
for assessing whether a nonbank covered person is a larger participant
of a market. For any specific market, there might be several criteria,
used alone or in combination, that could be viewed as reasonable
alternatives. For the automobile financing market, the Bureau is
considering a number of criteria, including aggregate annual
originations, dollar volume of originations, and dollar volume of
outstanding loans. The Bureau invites comment on these three possible
criteria as well as suggestions for other criteria that commenters
believe might be superior.
Among these options, the Bureau proposes to use aggregate annual
originations as the criterion that establishes which entities are
larger participants of the automobile financing market. A discussion of
the definition of ``aggregate annual originations'' is set forth above.
The Bureau expects that aggregate annual originations will be an
appropriate criterion, because, among other things, it is a meaningful
measure of a nonbank covered person's level of participation in the
automobile financing market and of its impact on consumers. The annual
number of originations by a particular nonbank entity reflects the
number of loans and leases it makes or facilitates (through purchases
of the loans and leases) regarding one of the most important
nonfinancial assets to American households. Further, because the term
``aggregate annual originations'' would be defined, in part, in terms
of how many loans or leases an entity granted or purchased, the
aggregate annual originations criterion would generally correlate to
the size of the entity's loan and lease portfolios.
The Bureau anticipates that nonbank covered persons could calculate
aggregate annual originations without difficulty, should the occasion
arise to do so. As a general matter, most market participants generally
know the number of loans and leases they extend because they handle the
servicing for these accounts. Further, they know the number of loans
they make or purchase because they need to execute liens against the
automobile titles. Also, nonbank covered persons in the automobile
financing market will readily be able to ascertain aggregate annual
originations because they are presumably expecting a payment for each
loan and lease.
The Bureau has data on a significant portion of annual
originations, as defined in this Proposed Rule, from Experian
Automotive's AutoCount database. AutoCount is a vehicle database that
collects monthly transaction data from State Departments of Motor
Vehicles (DMVs). In 46 states, DMV title and registration information
includes the finance source on record.\79\ These finance sources are
listed either individually or categorized into lender type. The Bureau
proposes to use the AutoCount Lender Report as its data source for this
rulemaking because it is based on title and registration information
filed with State DMVs and, thus, is likely to be objective. It is also
national in scope. The report covers almost the entire United States
and includes transactions that in many ways approximate the Bureau's
proposed definition of ``annual originations.'' The Bureau recognizes,
however, that estimates of ``annual originations'' based on the
AutoCount data may be either over- or under inclusive due to
differences between what is included in the AutoCount data and in the
Bureau's proposed definitions. For example, the term ``annual
originations,'' as defined in the Proposed Rule, includes transactions
not tracked in the AutoCount report. Specifically, the Proposed Rule
defines ``annual originations'' to include the sum of a nonbank covered
person's loans, leases, refinancings, and the purchase and acquisition
of credit obligations (including refinancings) and leases. In contrast,
the AutoCount data are less inclusive and track only loans and leases
for which a title and registration is filed with the state DMV. Thus,
unlike the Proposed Rule, the AutoCount report does not include
refinancings and may not include all purchases and acquisitions of
credit obligations and leases. Similar to the Proposed Rule, AutoCount
excludes vehicles that are designed for and used primarily for
commercial purposes. However, the exact scope of which commercial
transactions are excluded in AutoCount may be different than in the
Proposed Rule. The Bureau invites comments on this data source as well
as suggestions for other data sources that commenters believe might
augment the Bureau's understanding and analysis of the market.
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\79\ The AutoCount data cover transactions in every state,
excluding Oklahoma, Wyoming, Rhode Island and Delaware.
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Threshold. Under the Proposed Rule, a nonbank covered person would
be a larger participant of the automobile financing market if the
person has at least 10,000 aggregate annual originations. The Bureau
estimates that the proposed threshold would bring within the Bureau's
supervisory authority about 38 entities, roughly 7 percent of all
nonbank covered persons in the automobile financing market.\80\ Based
on the number of covered transactions, the Bureau estimates that these
38 entities are responsible for approximately 91 percent of the
activity in the nonbank automobile financing market.\81\
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\80\ Experian Automotive's AutoCount as adjusted by the CFPB,
see supra note 61.
\81\ Id.
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The Bureau anticipates that the proposed aggregate annual
originations threshold of 10,000 would allow the Bureau to supervise
market participants that represent a substantial portion of the
automobile financing market and that have a significant impact on
consumers. In 2013, the 38 entities that the Bureau estimates would be
larger participants under the proposed threshold provided loans and
leases to approximately 6.8 million consumers.\82\ At the same time,
this threshold would likely subject to the Bureau's supervisory
authority only entities that can reasonably be considered larger
participants of the market.
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\82\ Id. The Bureau assumes that an average consumer only enters
into one auto loan or lease in a given year.
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The Bureau is also considering a lower or higher threshold. For
example, an aggregate annual originations threshold of 5,000 might
allow the Bureau to supervise approximately 55 entities, representing
nearly 93 percent of activity in this market.\83\ While lowering the
threshold would substantially increase the number of entities subject
to supervision, the lower threshold would result in only a marginal
increase in market coverage. The additional entities that would be
included using this lower threshold are only a fraction of the size of
the smallest entities that meet the proposed threshold and are mostly
regional finance companies. In comparison, the Bureau estimates that an
aggregate
[[Page 60773]]
annual originations threshold of 50,000 would allow the Bureau to
supervise the 17 very largest participants in the market, representing
approximately 86 percent of market activity.\84\ However, at this
higher threshold the Bureau would not be able to supervise as varied a
mix of nonbank larger participants that have a substantial impact on
the full spectrum of consumers in the market.
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\83\ Id.
\84\ Id.
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The Bureau seeks comment, including suggestions of alternatives on
the proposed threshold for defining larger participants of the
automobile financing market.
Section 1090.108(c) Exclusion
Proposed Sec. 1090.108(c)(1) would provide that those motor
vehicle dealers that are excluded from the Bureau's authority by
section 1029 of the Dodd-Frank Act do not qualify as larger
participants under this section.\85\ Proposed Sec. 1090.108(c)(2)
would also exclude additional motor vehicle dealers that are not
subject to the statutory exclusion--specifically, those motor vehicle
dealers that are identified in section 1029(b)(2) of the Dodd-Frank Act
and are predominantly engaged in the sale and servicing of motor
vehicles, the leasing and servicing of motor vehicles, or both. This
would exclude from the proposed larger-participant rule certain dealers
that extend retail credit or leases to consumers without routinely
assigning them to unaffiliated third parties. Although section
1029(b)(2) provides the Bureau with rulemaking and other authority over
such dealers, the Bureau has chosen to exclude them from the market
defined in this Proposed Rule. These entities use a different business
model, as described above, are typically much smaller in asset size and
activity level than other entities that the Bureau proposes to include,
and therefore form part of a separate and distinct market.\86\ However,
nonbank covered persons that meet the definition of ``motor vehicle
dealer'' under section 1029(f)(2), but are not predominantly engaged in
the sale and servicing of motor vehicles, the leasing and servicing of
motor vehicles, or both would not be excluded from the proposed larger-
participant rule.
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\85\ 12 U.S.C. 5519.
\86\ As the Bureau has explained, this larger-participant
rulemaking is only one in a series of rulemakings, and the Bureau
could address motor vehicle dealers identified in section 1029(b)(2)
in a separate larger-participant rulemaking with a criterion and
threshold that is better tailored to their business model and
activity levels, should it determine that it is appropriate to do
so.
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V. Request for Comments
The Bureau invites comment on all aspects of this notice of
proposed rulemaking and on the specific issues on which comment is
solicited elsewhere herein, including on any appropriate modifications
or exceptions to the Proposed Rule.
VI. Section 1022(b)(2)(A) of the Dodd-Frank Act
A. Overview
The Bureau is considering potential benefits, costs, and impacts of
the Proposed Rule.\87\ The Bureau requests comment on the preliminary
analysis presented below as well as submissions of additional data that
could inform the Bureau's analysis of the costs, benefits, and impacts
of the Proposed Rule. In developing the Proposed Rule, the Bureau has
consulted with or offered to consult with the Federal Trade Commission,
the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Office of the Comptroller of the
Currency, and the National Credit Union Administration regarding, among
other things, consistency with any prudential, market, or systemic
objectives administered by such agencies.
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\87\ Specifically, 12 U.S.C. 5512(b)(2)(A) calls for the Bureau
to consider the potential benefits and costs of a regulation to
consumers and covered persons, including the potential reduction of
access by consumers to consumer financial products or services, the
impact on depository institutions and credit unions with $10 billion
or less in total assets as described in 12 U.S.C. 5516, and the
impact on consumers in rural areas. In addition, 12 U.S.C.
5512(b)(2)(B) directs the Bureau to consult, before and during the
rulemaking, with appropriate prudential regulators or other Federal
agencies, regarding consistency with objectives those agencies
administer. The manner and extent to which the provisions of 12
U.S.C. 5512(b)(2) apply to a rulemaking of this kind that does not
establish standards of conduct are unclear. Nevertheless, to inform
this rulemaking more fully, the Bureau performed the analysis and
consultations described in those provisions of the Dodd-Frank Act.
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The Proposed Rule would define a category of nonbanks that would be
subject to the Bureau's nonbank supervision program pursuant to section
1024(a)(1)(B). The proposed category would include ``larger
participants'' of a market for ``automobile financing'' described in
the Proposed Rule. Participation in this market would be measured on
the basis of aggregate annual originations. If a nonbank covered
person, together with its affiliated companies, has aggregate annual
originations (measured for the preceding calendar year) of at least
10,000, it would be a larger participant in the market for automobile
financing. As prescribed by existing Sec. 1090.102, any nonbank
covered person that qualifies as a larger participant would remain a
larger participant until two years after the first day of the tax year
in which the person last met the larger-participant test.\88\ The
Proposed Rule would also include in the definition of ``financial
product[s] or service[s]'' a new category of automobile leases, as
defined by the Proposed Rule, under authority granted to the Bureau by
section 1002(15)(A)(xi)(II) of the Dodd-Frank Act.\89\
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\88\ 12 CFR 1090.102.
\89\ The Proposed Rule also clarifies how to address aggregation
of formerly-affiliated companies for purposes of assessing larger-
participant status under the existing Consumer Reporting and
Consumer Debt Collection Rules, by making changes to the definition
of ``annual receipts'' in those rules. As explained above, the
proposed changes to the affiliate aggregation provisions clarify the
Bureau's methodology for affiliate aggregation. The proposed changes
would provide marginal benefits for market participants in the
consumer reporting and consumer debt collection markets by making
those rules clearer and easier to understand. They may, however,
result in an additional cost to market participants that are seeking
to assess whether they are larger participants, but only if they
would not have collected information relevant to thresholds from
formerly affiliated companies for the entire preceding calendar year
when the affiliation ended during the preceding calendar year. The
Bureau does not know the extent to which participants seeking to
self-assess currently collect information relevant to thresholds
from formerly affiliated companies. However, if the proposed
clarification is finalized, participants seeking to self-assess
could arrange to obtain the necessary threshold information in
advance of ending the affiliation, and such arrangements would tend
to mitigate the costs of obtaining this information. Further, as
noted above, participants in these markets are not required to
engage in such self-assessments. Thus, both the benefits and costs
of these amendments would not be significant.
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B. Potential Benefits and Costs to Consumers and Covered Persons
This analysis considers the benefits, costs, and impacts of the key
provisions of the Proposed Rule against a baseline that includes the
Bureau's existing rules defining larger participants in certain
markets.\90\ At present, there is no Federal program for supervision of
nonbank covered persons in the automobile financing market with respect
to Federal consumer financial law. The Proposed Rule extends the
Bureau's supervisory authority over larger participants of the defined
automobile financing market. This includes the authority to supervise
for compliance with the Equal Credit Opportunity Act (ECOA), the Truth
in Lending Act (TILA), and the Consumer
[[Page 60774]]
Leasing Act, as well as other Federal consumer financial laws, to the
extent applicable.
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\90\ The Bureau has discretion in any rulemaking to choose an
appropriate scope of analysis with respect to potential benefits and
costs and an appropriate baseline. The Bureau, as a matter of
discretion, has chosen to describe a broader range of potential
effects to inform the rulemaking more fully.
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The Bureau notes at the outset that limited data are available with
which to quantify the potential benefits, costs, and impacts of the
Proposed Rule. As described above, the Bureau has utilized Experian
AutoCount database for quantitative information on the number of market
participants and their number and dollar volume of originations.
However, the Bureau lacks detailed information about their rate of
compliance with Federal consumer financial law and about the range of,
and costs of, compliance mechanisms used by market participants.
In light of these data limitations, this analysis generally
provides a qualitative discussion of the benefits, costs, and impacts
of the Proposed Rule. General economic principles, together with the
AutoCount data, provide insight into these benefits, costs, and
impacts. Where possible, the Bureau has made quantitative estimates
based on these principles and data as well as its experience of
undertaking similar supervisory activities with respect to depository
institutions and credit unions.
The discussion below describes four categories of potential
benefits and costs. First, the Proposed Rule, if adopted, would
authorize the Bureau to supervise certain nonbank entities in the
automobile financing market. These larger participants in the market
might respond to the possibility of supervision by changing their
systems and conduct, and those changes might result in costs, benefits,
or other impacts. Second, if the Bureau undertakes supervisory activity
at specific larger participants, those companies would incur costs from
responding to supervisory activity, and the results of the individual
supervisory activities might also produce benefits and costs.\91\
Third, entities might incur certain costs as a result of their efforts
to assess whether they would qualify as larger participants under the
Proposed Rule. Fourth, including certain automobile leases in the Dodd-
Frank Act definition of ``financial product or service'' would subject
those leases to the prohibition on unfair, deceptive, or abusive acts
or practices (UDAAP) under section 1031 of the Dodd-Frank Act and to
Bureau authority to prescribe certain rules applicable to a covered
person or service provider under section 1031(b) of the Dodd-Frank Act.
The proposed definition would also expand the Bureau's supervisory
authority, as described below, and these changes might also produce
benefits and costs, although the Bureau does not expect these effects
to be significant.
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\91\ Pursuant to 12 U.S.C. 5514(e), the Bureau also has
supervisory authority over service providers to nonbank covered
persons encompassed by 12 U.S.C. 5514(a)(1), which includes larger
participants. The Bureau does not have data on the number or
characteristics of service providers to the larger participants of
the automobile financing market. The discussion herein of potential
costs, benefits, and impacts that may result from the Proposed Rule
generally applies to service providers to larger participants.
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In considering the costs and benefits of the Proposed Rule, it is
important to note that various products or services are included in the
proposed automobile financing market. Direct lending, where the
consumer applies for credit directly to the financial institution,
makes up a relatively small portion of the total auto loan and sales
volume. Direct lending is currently dominated by traditional depository
institutions and credit unions already regulated by the Bureau and
other governmental agencies. Indirect lending, where a dealer--rather
than the consumer--finds a lender willing to provide credit to the
consumer, comprises a significant portion of the automobile financing
market. In addition, some consumers refinance the credit obligation for
their automobile after taking out the initial loan. Finally, leasing is
the other primary way in which consumers can finance the use of a
vehicle; under this arrangement a financial institution holds the title
to the vehicle that the consumer leases under a payment plan that
typically ends with an option to purchase the vehicle.\92\
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\92\ According to Experian Automotive, of all new and used auto
financing transactions recorded in the first quarter of 2014,
approximately 14 percent occurred through leasing arrangements,
while the remainder used purchase financing. See Zabritski, supra
note 25.
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1. Benefits and Costs of Responses to the Possibility of Supervision
The Proposed Rule would subject larger participants of the
automobile financing market to the possibility of Bureau supervision.
That the Bureau would be authorized to undertake supervisory activities
with respect to a nonbank covered person who qualified as a larger
participant would not necessarily mean the Bureau would in fact
undertake such activities with respect to that covered entity in the
near future. Rather, supervision of any particular larger participant
as a result of this rulemaking would be probabilistic in nature. For
example, the Bureau would examine certain larger participants on a
periodic or occasional basis. The Bureau's decisions about supervision
would be informed, as applicable, by the factors set forth in section
1024(b)(2), relating to the size and volume of individual participants,
the risks their consumer financial products and services pose to
consumers, the extent of State consumer protection oversight, and other
factors that the Bureau may determine are relevant. Each entity that
believed it qualified as a larger participant would know that it might
be supervised and might gauge, given its circumstances, the likelihood
that the Bureau would initiate an examination or other supervisory
activity.
The prospect of potential supervisory activity could create an
incentive for larger participants to allocate additional resources and
attention to compliance with Federal consumer financial law,
potentially leading to an increase in the level of compliance. These
entities might anticipate that by doing so (and thereby decreasing
risks to consumers) they could decrease the likelihood of their
actually being subjected to supervision as the Bureau evaluated the
factors outlined above. In addition, an actual examination would likely
reveal any past or present noncompliance, which the Bureau could seek
to correct through supervisory activity or, in some cases, enforcement
actions. Larger participants might therefore judge that the prospect of
supervision increased the potential consequences of noncompliance with
Federal consumer financial law, and they might seek to decrease that
risk by curing or mitigating any noncompliance. Larger participants
might thus be able to catch and address compliance problems at an
earlier point when the costs of correcting them would be lower.
The Bureau believes it is likely that many market participants
would increase compliance in response to the Bureau's supervisory
activities authorized by the Proposed Rule. However, because the
Proposed Rule itself would not require any nonbank covered person in
the automobile financing market to alter its conduct, any estimate of
the amount of increased compliance would require both an estimate of
current compliance levels and a prediction of market participants'
behavior in response to a final rule. The data the Bureau currently has
do not support a specific quantitative estimate or prediction. But, to
the extent that nonbank entities allocate resources to increase their
compliance in response to the Proposed Rule, that response would result
in both benefits and costs to consumers and covered persons.\93\
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\93\ Another approach to considering the benefits, costs, and
impacts of the Proposed Rule would be to focus almost entirely on
the supervision-related costs for larger participants and omit a
broader consideration of the benefits and costs of increased
compliance. As noted above, the Bureau has, as a matter of
discretion, chosen to describe a broader range of potential effects
to inform the rulemaking more fully.
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[[Page 60775]]
a. Benefits From Increased Compliance
Increased compliance with Federal consumer financial law by larger
participants in the market for automobile financing would be beneficial
to consumers who either finance the purchase of or lease automobiles,
or refinance their credit obligation related to the purchase of their
automobile. The number of individuals who could potentially be affected
is significant. As noted above, data from the first quarter of 2014
show auto lenders holding more than 87.4 million outstanding automobile
loans, totaling almost $900 billion.\94\ The market is even larger when
taking into account the automobile leasing market, which comprised an
additional 14 percent of the automobile financing market in the first
quarter of 2014.\95\ Increasing the rate of compliance with Federal
consumer financial law would benefit consumers and the consumer
financial market by providing more of the protections mandated by law.
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\94\ Supra note 54.
\95\ See Zabritski, supra note 25, at 20.
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Several Federal consumer financial laws offer protections to
consumers in regards to automobile financing as defined in the Proposed
Rule, including, to the extent applicable, TILA and Regulation Z, the
Fair Credit Reporting Act and Regulation V, the Consumer Leasing Act
and Regulation M, ECOA and Regulation B, and the Gramm-Leach-Bliley Act
and Regulation P.\96\ More broadly, the Bureau would examine whether
larger participants of the automobile financing market engage in
UDAAPs.\97\ Conduct that does not violate an express prohibition of
another Federal consumer financial law may nonetheless constitute a
UDAAP.\98\ To the extent that any larger participant or service
provider is currently engaged in any UDAAP in connection with any
transaction for or the offering of a consumer financial product or
service, the cessation of the unlawful act or practice would benefit
consumers. As the Bureau may review a larger participant's conduct in
relation to any consumer financial product or service during an
examination, larger participants might improve policies and procedures
globally in response to possible supervision in order to avoid engaging
in UDAAPs.
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\96\ The Bureau recognizes that the nature of a larger
participant's responsibility for compliance with these laws may vary
depending on the activity the larger participant engages in. For
example, under TILA, a larger participant that purchases a credit
obligation for the purchase of an automobile is likely an assignee,
not a ``creditor'' under TILA, and as such is generally liable only
for a violation of TILA that is ``apparent on the face of the
disclosure statement.'' 15 U.S.C. 1641(a).
\97\ 12 U.S.C. 5531.
\98\ The CFPB Supervision and Examination Manual provides
further guidance on how the UDAAP prohibition applies to supervised
entities. CFPB, CFPB Supervision and Examination Manual--Version 2.0
(Oct. 2012), available at http://www.consumerfinance.gov/guidance/supervision/manual.
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The possibility of supervision also may help make incentives to
comply with Federal consumer financial law more consistent between the
likely larger participants and depository institutions and credit
unions, which are already subject to Federal supervision with respect
to Federal consumer financial law. Introducing the possibility of
Federal supervision could encourage entities that would likely qualify
as larger participants to devote additional resources to compliance. It
could also help ensure that the benefits of Federal oversight reach
consumers who do not have ready access to automobile financing through
depository institutions and credit unions.
b. Costs of Increased Compliance
The Bureau recognizes that increasing compliance involves costs.
These costs may be fixed or ongoing. Nonbank entities in the automobile
financing market might need to hire or train additional personnel to
effectuate any changes in their practices that would be necessary to
produce the increased compliance. They might need to invest in changes
to their systems to carry out their revised procedures. In addition,
they might need to develop or enhance compliance management systems, to
ensure awareness of any gaps in compliance. Such changes would also
require investment and might entail increased operating costs.
Economic theory predicts that fixed costs will be absorbed by
providers, here the entities that may qualify as larger participants.
However, consumers may be adversely affected by increases in these
costs to the extent these cost increases cause current providers of
automobile financing to decrease volume, deter providers from
increasing volume, or deter entry by new providers in the future.\99\
This could result in consumers having more restricted choices than they
would otherwise. In certain situations, a decrease in the number of
market participants could better enable those remaining providers to
exercise market power, resulting in higher prices for consumers or
decreased product or service quality, or both.
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\99\ Alexei Alexandrov & Xiaoling Ang, Identifying a Suitable
Control Group Based on Microeconomic Theory: The Case of Escrows in
the Subprime Market (July 3, 2014) (finding consumers not adversely
affected by policy changes that implement a fixed cost), available
at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2462128.
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An entity that incurs ongoing costs in support of increasing
compliance might try to recoup these costs by attempting to pass those
costs directly through to consumers; for example, in the case of the
indirect channel, this could occur through lowering fees or other forms
of compensation paid to dealers and other entities. Whether and to what
extent either change would occur depends on the relative elasticities
of supply and demand in the automobile financing market. These
elasticities can vary across products or services that would be covered
by the Proposed Rule and may be influenced by the presence of
substitute products or services as well as the availability of
information, which would influence the perceived availability of
substitute products or services. For example, larger participants of
the automobile financing market may be in competition with depository
institutions or credit unions (or affiliates thereof) that are already
subject to supervision by the Bureau and/or Federal prudential
regulators with respect to Federal consumer financial law. To the
extent the Proposed Rule would result in an increase in the costs faced
by larger participants, that increase would be a competitive benefit to
banks and credit unions with sufficient liquidity to expand their
financing operations. Competition from banks and credit unions might
reduce the ability of larger participants to pass through cost
increases to consumers, dealers, or other entities as they may instead
seek alternate sources of financing. Moreover, consumers might respond
to such a cost increase by reducing the amounts they are willing to pay
in other aspects of the automobile purchase transaction, while dealers
could respond to decreased levels of financing revenues shared with
them by larger participants by either attempting to increase revenues
derived from other areas of the automobile purchase transaction, such
as the stated price of the vehicle or costs of accessories, or bearing
the loss of revenue.
In considering any potential price effect of the Proposed Rule, it
is important to take into account the fact
[[Page 60776]]
that nonbank covered persons below the larger participant threshold
would not be subject to supervision as a result of this rule. The costs
of these nonbank covered persons would therefore be unaffected by the
definition of larger participants in the Proposed Rule and so their
pricing should also not be affected. To the extent that nonbank larger
participants raise their prices in response to this rule, nonbank
entities that are not larger participants, along with banks and credit
unions that already compete in the market while bearing the cost of
supervision, could potentially offer more attractive transaction terms
relative to larger participants and thus deter larger participants from
increasing prices. While a shift in transactions from larger
participants toward nonbank entities that are not larger participants
would mitigate some of the benefits to consumers of supervision of
larger participants, the prospect of this shift might also reduce the
likelihood that larger participants would choose to increase their
prices in response to the Proposed Rule.
2. Benefits and Costs of Individual Supervisory Activities
In addition to the responses of market participants anticipating
supervision, the possible consequences of the Proposed Rule would
include the responses to and effects of individual examinations or
other supervisory activities that the Bureau might conduct in the
automobile financing market.
a. Benefits of Supervisory Activities
Supervisory activity could provide several types of benefits. For
example, as a result of supervisory activity, the Bureau and an entity
might uncover deficiencies in the entity's policies and procedures. The
Bureau's examination manual calls for the Bureau generally to prepare a
report of each examination, to assess the strength of the entity's
compliance mechanisms, and to assess the risks the entity poses to
consumers, among other things. The Bureau would share examination
findings with the examined entity because one purpose of supervision is
to inform the entity of problems detected by examiners. Thus, for
example, an examination might find evidence of widespread noncompliance
with Federal consumer financial law, or it might identify specific
areas where an entity has inadvertently failed to comply. These
examples are only illustrative of the kinds of information an
examination might uncover.
Detecting and informing entities about such problems should be
beneficial to consumers. When the Bureau notifies an entity about risks
associated with an aspect of its activities, the entity is expected to
adjust its practices to reduce those risks. That response may result in
increased compliance with Federal consumer financial law, with benefits
like those described above. Or it may avert a violation that would have
occurred had Bureau supervision not detected the risk promptly. The
Bureau may also inform entities about risks posed to consumers that
fall short of violating the law. Action to reduce those risks would
also be a benefit to consumers.
Given the obligations nonbank covered persons in the automobile
financing market have under Federal consumer financial law and the
existence of efforts to enforce such law, the results of supervision
also may benefit entities under supervision by detecting compliance
problems early. When an entity's noncompliance results in litigation or
an enforcement action, the entity must face both the costs of defending
its actions and the penalties for noncompliance, including potential
liability for damages to private plaintiffs. The entity must also
adjust its systems to ensure future compliance. Changing practices that
have been in place for long periods of time can be expected to be
relatively difficult because the practices may be severe enough to
represent a serious failing of an entity's systems. Supervision may
detect flaws at a point when correcting them would be relatively
inexpensive. Catching problems early can, in some situations, forestall
costly litigation. To the extent early correction limits the amount of
consumer harm caused by a violation, it can help limit the cost of
redress. In short, supervision might benefit larger participants by, in
the aggregate, reducing the need for other more expensive activities to
achieve compliance.\100\
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\100\ Further potential benefits to consumers, covered persons,
or both might arise from the Bureau's gathering of information
during supervisory activities. The goals of supervision include
informing the Bureau about activities of market participants and
assessing risks to consumers and to markets for consumer financial
products and services. The Bureau may use this information to
improve regulation of consumer financial products and services and
to improve enforcement of Federal consumer financial law, in order
to better serve its mission of ensuring consumers' access to fair,
transparent, and competitive markets for such products and services.
Benefits of this type would depend on what the Bureau learns during
supervision and how it uses that knowledge. For example, because the
Bureau would examine a number of covered persons in the automobile
financing market, the Bureau would build an understanding of how
effective compliance systems and processes function in that market.
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b. Costs of Supervisory Activities
The potential costs of actual supervisory activities would arise in
two categories. The first would involve any costs to larger
participants of increasing compliance in response to the Bureau's
findings during supervisory activity and to supervisory actions. These
costs would be similar in nature to the possible compliance costs,
described above, that larger participants in general might incur in
anticipation of possible supervisory actions. This analysis will not
repeat that discussion. The second category would be the cost of
supporting supervisory activity.
Supervisory activity may involve requests for information or
records, on-site or off-site examinations, or some combination of these
activities. For example, in an on-site examination, Bureau examiners
generally contact the entity for an initial conference with management.
That initial contact is often accompanied by a request for information
or records. Based on the discussion with management and an initial
review of the information received, examiners determine the scope of
the on-site exam. While on-site, examiners spend some time in further
conversation with management about the entity's policies, procedures,
and processes. The examiners also review documents, records, and
accounts to assess the entity's compliance and evaluate the entity's
compliance management system. As with the Bureau's other examinations,
examinations of nonbank larger participants of the automobile financing
market could involve issuing confidential examination reports and
compliance ratings. The Bureau's examination manual describes the
supervision process and indicates what materials and information an
entity could expect examiners to request and review, both before they
arrive and during their time on-site.
The primary cost an entity would face in connection with an
examination would be the cost of employees' time to collect and provide
the necessary information. If the Proposed Rule is adopted, the
frequency and duration of examinations of any particular entity would
depend on a number of factors, including the size of the entity, the
compliance or other risks identified, whether the entity has been
examined previously, and the demands on the Bureau's supervisory
resources imposed by other entities and markets. Nevertheless, some
rough estimates may be useful to provide a sense of the magnitude of
potential staff costs that entities might incur.
[[Page 60777]]
The cost of supporting supervisory activity may be calibrated using
prior Bureau experience in supervision. The Bureau considers its auto
financing examinations at depository institutions and credit unions as
a reasonable proxy for the duration and labor intensity of potential
nonbank larger participant examinations. This belief arises from the
similar role these institutions play in the market for automobile
financing, where they frequently coexist as direct competitors to one
another.
The average duration of the on-site portion of Bureau bank auto
financing examinations is approximately 9 weeks.\101\ Assuming that
each exam requires 2 weeks of preparation time by a larger
participant's staff prior to the exam as well as on-site assistance by
staff throughout the duration of the exam, the Bureau assumes that the
typical examination in this nonbank market would require 11 weeks of
staff time. The Bureau has not suggested that counsel or any particular
staffing level is required during an examination. However, for purposes
of this analysis, the Bureau assumes, conservatively, that an entity
might dedicate the equivalent of one full-time compliance officer and
one-tenth of a full-time attorney to the exam. The average hourly wage
of a compliance officer in a nonbank entity that operates in activities
related to installment lending is $33.97, and the average hourly wage
of a lawyer in the same industry is $83.88.\102\ Assuming that wages
account for 67.5 percent of total compensation, the total labor cost of
an examination would be about $27,611.\103\ The Bureau estimates that
the cost for an entity with 10,000 aggregate annual originations per
year, with an average amount financed of $21,750 per loan
origination,\104\ would be approximately 0.013 percent of total revenue
from originations for that year. This is a conservative estimate in
several respects because it reflects revenue only from this line of
business and uses an average amount financed in combination with the
minimum number of transactions that a larger participant would provide.
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\101\ This estimate was derived using confidential supervisory
Bureau data on the duration of on-site auto financing examinations
at depository institutions and credit unions. For purposes of this
calculation, the Bureau counted its auto financing examinations for
which the on-site portion had been completed, while excluding the
shortest and longest examinations to minimize the influence of
outliers. Additionally, the Bureau counted only the on-site portion
of an examination, which included time during the on-site period of
the examination that examiners spent off-site for holiday or other
travel considerations. However, the Bureau did not count time spent
scoping an examination before the on-site portion of the examination
or summarizing findings or preparing reports of examination
afterwards.
\102\ Bureau of Labor Statistics (BLS), Occupational Employment
Statistics, available at http://data.bls.gov/oes/. (BLS data for
``Nondepository Credit Intermediation'' (North American Industry
Classification System (NAICS) code 522200)). Dividing the hourly
wage of a full-time compliance officer by 67.5 percent yields a
total mean hourly cost (including total costs, such as salary,
benefits, and taxes) rounded to the nearest dollar of $50 per hour.
\103\ BLS, Employer Costs for Employee Compensation Database,
Series ID CMU2025220000000D, available at http://data.bls.gov/timeseries/CMU2025220000000D?data_tool=XGtable (providing wage and
salary percent of total compensation in the credit intermediation
and related activities private industry for the second quarter of
2013). All figures assume 40 hours of work per week.
\104\ The estimated average amount financed uses 2013
origination data from AutoCount for entities with 360 or greater
loans and leases on an annual basis. The dollar value listed is
based solely on loans, as the Bureau was unable to obtain data on
the average amount financed in lease transactions. That said, the
Bureau believes it is unlikely that the estimated revenue from
leasing transactions, including both the stream of payments over the
course of the lease as well as the option value of purchase or
resale price of the vehicle at the end of the lease, would differ in
a way that materially impacts the relationship between the cost of
supervision and revenues.
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The Bureau declines to predict, at this point, precisely how many
examinations in the automobile financing market it would undertake in a
given year. If the Proposed Rule is adopted, the Bureau would be able
to undertake supervisory activity in the identified market; however,
neither the Dodd-Frank Act nor the Proposed Rule specifies a particular
level or frequency of examinations. Given the Bureau's finite
supervisory resources, and the range of industries over which it has
supervisory responsibility for consumer financial protection, when and
how often a given larger participant would be supervised is uncertain.
The frequency of examinations would depend on a number of factors,
including the Bureau's understanding of the conduct of market
participants and the specific risks they pose to consumers; the
responses of larger participants to prior examinations; and the demands
that other markets make on the Bureau's supervisory resources. These
factors can be expected to change over time, and the Bureau's
understanding of these factors may change as it gathers more
information about the market through its supervision and by other
means.
3. Costs of Assessing Larger-Participant Status
The larger-participant rule does not require nonbank entities to
assess whether they are larger participants. However, the Bureau
acknowledges that in some cases they might decide to incur costs in
assessing whether they qualify as larger participants and potentially
disputing their status.
Larger-participant status depends on a nonbank's aggregate annual
originations, as defined in the Proposed Rule. An estimate of this
number should be readily extractible from company records, as market
participants likely evaluate the components of aggregate annual
originations as part of their regular business practices. In addition,
information on originations can be derived from title records that
market participants maintain and publicly record.
To the extent that some nonbank covered persons in the automobile
financing market do not already know whether their aggregate annual
originations exceed the threshold, such entities might, in response to
the Proposed Rule, develop new systems to count their aggregate annual
originations in accordance with the definition in the Proposed Rule.
The data the Bureau currently has do not support a detailed estimate of
how many nonbank entities would engage in such development or how much
they might spend. Regardless, nonbank entities would be unlikely to
spend significantly more on specialized systems to count aggregate
annual originations than it would cost them to be supervised by the
Bureau as larger participants. It bears emphasizing that even if
expenditures on an accounting system successfully proved that a nonbank
covered person in the automobile financing market was not a larger
participant, it would not necessarily follow that this entity could not
be supervised. The Bureau can supervise a nonbank entity whose conduct
the Bureau determines, pursuant to section 1024(a)(1)(C), poses risks
to consumers. Thus, a nonbank entity choosing to spend significant
amounts on an accounting system directed toward the larger-participant
test could not be sure it would not be subject to Bureau supervision
notwithstanding those expenses. The Bureau therefore believes it is
unlikely that any but a very few nonbank entities would undertake such
expenditures.
4. Benefits and Costs of Adding Certain Automobile Leases to the
Definition of ``Financial Product or Service''
Finally, the Bureau is proposing to define the term ``financial
product or service'' to include automobile leases that (1) meet the
requirements of section 108 of CEBA, as implemented by 12 CFR part 23,
and are thus, permissible for banks to offer or provide; and (2) are
not currently defined as a financial
[[Page 60778]]
product or service under section 1002(15)(A)(ii) of the Dodd-Frank Act.
As explained below, the Bureau believes that the benefits, costs, and
impacts to consumers and covered persons of the proposed definition
would likely be small. First, the proposed definition would not
extensively alter the substantive obligations of covered persons.
Second, the proposed definition would not substantially expand the
market participants brought under supervision as a result of the
Proposed Rule, or for entities already subject to supervision, the
scope of supervisory examinations. The Bureau lacks data about the
range of, and costs of, compliance mechanisms used by banks or nonbank
entities in the automobile financing market. In light of these data
limitations, the Bureau's analysis generally provides a qualitative
discussion of the benefits, costs, and impacts of the proposed
definition.
a. Benefits of the Proposed Definition
Benefits of the proposed definition would stem from enhanced
consumer protections relating to automobile leases that would fall
under the definition. As financial products or services under the Dodd-
Frank Act, such leases would become subject to the UDAAP prohibition
under section 1031 of the Dodd-Frank Act. These leases are already
subject to a similar prohibition against unfair or deceptive acts or
practices (UDAP) in or affecting commerce under section 5 of the
Federal Trade Commission Act (FTC Act).\105\ The prohibitions set forth
in section 5 of the FTC Act and section 1031 of the Dodd-Frank Act,
however, are not precisely co-extensive. Most notably, section 5 of the
FTC Act does not include a prohibition on abusive acts or practices
similar to that under section 1031 of the Dodd-Frank Act. Accordingly,
consumers would benefit from the expanded scope of consumer protection
under section 1031 of the Dodd-Frank Act in connection with
transactions involving these leases.
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\105\ 15 U.S.C. 45. This prohibition is enforced by the Federal
Trade Commission with respect to nonbanks under section 5 and by the
prudential regulators with respect to banks under section 8 of the
Federal Deposit Insurance Act, 12 U.S.C. 1818.
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The proposed definition also has the potential to expand
supervisory activities in two distinct ways. First, the proposed
definition, as incorporated into the larger participant rule proposal,
could bring certain nonbank entities under Bureau supervision by
expanding the activities counted in determining whether participants of
the automobile financing market qualify as larger participants and are
thus subject to supervision under the Proposed Rule. To the extent that
nonbank entities in the automobile financing market would be brought
under supervision as a result of the proposed definition, both
consumers and covered persons would benefit. The nature of these
benefits, including from both the possibility of supervision and actual
individual supervisory activities, are discussed above.
Second, the proposed definition could affect the scope of
supervision for other nonbank entities and certain banks and credit
unions.\106\ For nonbank entities in the automobile financing market
that would be subject to supervision as a larger participant even
absent the proposed definition, the proposed definition would not
expand the leasing activities of such entities subject to supervision.
However, the proposed definition would expand the scope of supervision
for leasing covered by the proposed definition to include compliance
with section 1031 of the Dodd-Frank Act.
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\106\ With respect to nonbanks, the Bureau currently supervises
mortgage companies, payday lenders, and private student lenders, as
well as larger participants of the consumer reporting, consumer debt
collection, and student loan servicing markets, and will soon have
authority to supervise larger participants of the international
money transfer market. The Bureau is not aware of any significant
automobile leasing activity by these entities. Thus, the Bureau
believes that the proposed definition in itself would have at most a
marginal impact on the scope of examinations for these entities.
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With respect to banks and credit unions, the Bureau has supervisory
authority over large banks with total assets of more than $10 billion
(and their affiliates) for compliance with Federal consumer financial
laws, and the prudential regulators exercise primary supervisory
authority over other banks with total assets of $10 billion or less for
compliance with Federal consumer financial laws. As noted above,
although the proposed definition would not expand the leasing
activities of banks subject to supervision, for leasing covered under
the proposed definition, it would expand the scope of that supervision
to include compliance with section 1031 of the Dodd-Frank Act. Again,
the benefits to consumers of that expanded supervision authority would
be similar to the general benefits of supervision discussed above.
Although the Bureau has identified the above potential consumer
benefits from the expanded supervision authority that could result from
the proposed definition, the Bureau believes such benefits would be
limited in extent. Most significantly, as discussed above, the Bureau
believes that most automobile leases currently qualify as a financial
product or service under section 1002(15)(A)(ii) of the Dodd-Frank Act.
Thus, the Bureau believes that few, if any, nonbank participants in the
automobile financing market will be subject to the Bureau's supervision
under the Proposed Rule as a result of the proposed definition.
Further, for bank and nonbank entities that would be subject to
supervision even absent the proposed definition, the Bureau believes
that the proposed definition would expand only the scope of supervision
of the leasing activities of such entities. Notably, even absent the
proposed definition, all leasing activities of such entities would be
subject to supervision by the Bureau or the prudential regulators for
compliance with the ``enumerated consumer laws'' as defined in section
1002(12) of the Dodd-Frank Act, including the Consumer Leasing
Act.\107\ And under the existing regulatory framework, the prudential
regulators are authorized to supervise banks for compliance with
section 5 of the FTC Act. Thus, for entities that would be subject to
supervision even absent the proposed definition, the expanded
supervision resulting from the proposed definition would be focused on
the entity's compliance with section 1031 of the Dodd-Frank Act in
connection with the activities covered by the proposed definition.
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\107\ With respect to the enumerated consumer laws, the scope of
the Bureau's authority is defined by the scope of those laws, not by
the activities listed under section 1002(15)(A) of the Dodd-Frank
Act.
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Finally, under section 1031(b) of the Dodd-Frank Act, the Bureau
has authority to prescribe rules applicable to a covered person or
service provider identifying as unlawful unfair, deceptive, or abusive
acts or practices in connection with any transaction with a consumer
for a consumer financial product or service, or the offering of a
consumer financial product or service. Thus, if the proposed definition
is finalized, the Bureau could promulgate such rules in connection with
transactions for the leases that would fall under the proposed
definition. The Bureau would consider the benefits, costs, and impacts
of any such rulemaking as part of its analysis under section 1022 for
that rulemaking. The Bureau notes that any such rulemaking would likely
aim to provide consumers and covered persons with additional clarity in
regard to identifying unfair, deceptive or abusive acts or practices.
It is not possible, however, to identify
[[Page 60779]]
with any greater specificity here the potential benefits to consumers
or covered persons from the proposed definition as a result of an
unspecified future rulemaking.\108\
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\108\ The proposed definition would also benefit consumers by
expanding the scope of certain other Bureau authorities under title
X of the Dodd-Frank Act. Perhaps most significantly, the proposed
definition would expand the Bureau's rulemaking authority under
section 1032 of the Dodd-Frank Act, which authorizes the Bureau to
prescribe rules to ensure that the features of any consumer
financial product or service are fully, accurately, and effectively
disclosed to consumers in a manner that permits consumers to
understand the costs, benefits, and risks associated with the
product or service. In addition, the proposed definition would
expand the scope of the Bureau's authority under section 1022(c) of
the Dodd-Frank Act to ``monitor for risks to consumers in the
offering or provision of consumer financial products or services,
including developments in markets for such products or services,''
and the scope of the Bureau's authority under section 1033 of the
Dodd-Frank Act to prescribe rules for covered persons with respect
to consumer rights to access information concerning consumer
financial products or services that the consumer received from such
person. As with respect to section 1031(b) of the Dodd-Frank Act, it
is not possible for the Bureau to identify with specificity here the
benefits to consumers that might result from the Bureau's potential
future exercise of these authorities. The Bureau, however, notes
that it would consider the benefits, costs, and impacts of any
rulemakings under sections 1032 or 1033 of the Dodd-Frank Act as
part of the section 1022 analysis for such rulemakings.
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b. Costs of the Proposed Definition
The proposed definition would impose compliance costs on covered
persons by subjecting leasing activities that fall under the proposed
definition to the UDAAP prohibitions in section 1031 of the Dodd-Frank
Act. Those entities would incur some cost of compliance because, as
laid out above, the prohibitions under section 1031 of the Dodd-Frank
Act and section 5 of the FTC Act are not co-extensive: In particular,
section 5 of the FTC Act does not include a prohibition on abusive acts
or practices similar to that under section 1031 of the Dodd-Frank Act.
However, given the fact that, as interpreted by the Bureau, section
1002(15)(A)(ii) covers most automobile leases and the substantial
overlap of the prohibited conduct under section 1031 of the Dodd-Frank
Act and section 5 of the FTC Act, in the Bureau's judgment, the
compliance costs to covered persons of this new prohibition would be
limited in extent.
Regarding supervision, the proposed definition, as incorporated
into the larger participant rule proposal, could also bring certain
nonbank entities under Bureau supervision and would affect the scope of
supervision for other nonbank entities, banks, and credit unions. With
respect to nonbanks, the proposed definition would, as discussed above,
expand the activities counted in determining whether participants of
the automobile financing market qualify as larger participants and are
thus subject to supervision under the Proposed Rule. To the extent that
larger participants in the automobile financing market are brought
under supervision as a result of the proposed definition, such entities
would incur costs. The nature of these costs, including from the
possibility of supervision as well as from actual individual
supervisory activities, are discussed above. For participants of the
automobile financing market that would be subject to supervision under
the proposed larger-participant rule even absent the proposed
definition, the proposed definition would impose costs by expanding the
leasing activities of such entities subject to supervision for
compliance with section 1031 of the Dodd-Frank Act. With respect to
banks and credit unions, by expanding the leasing activities subject to
the section 1031 UDAAP prohibition, as discussed above, the proposed
definition would correspondingly expand the activities subject to
supervision by either the Bureau or the prudential regulators, as
applicable, for compliance with that prohibition.
For both banks and nonbanks, the Bureau believes that the increased
costs of supervision identified above would be small. As discussed
above, the Bureau believes that most auto leases currently qualify as a
financial product or service under section 1002(15)(A)(ii) of the Dodd-
Frank Act. Thus, the Bureau believes that few, if any, nonbank
participants in the automobile financing market will be brought under
Bureau supervision under the Proposed Rule as a result of the proposed
definition. Similarly, for banks and nonbank entities that would be
subject to supervision even absent the proposed definition, the Bureau
believes that the proposed definition would only subject the leasing
activities of such entities to slightly expanded supervision. Notably,
even absent the proposed definition, all leasing activities of such
entities would be subject to supervision by the Bureau or the
prudential regulators for compliance with the enumerated consumer laws,
including the Consumer Leasing Act.\109\ And under the existing
regulatory framework, the prudential regulators are authorized to
supervise banks for compliance with section 5 of the FTC Act. Thus, for
entities that would be subject to supervision even absent the Proposed
Rule, the scope of expanded supervision for the limited activities that
would fall under the proposed definition would be further limited to
compliance with section 1031 of the Dodd-Frank Act. The Bureau believes
that the additional cost to entities already subject to supervision of
being supervised for compliance with section 1031 of the Dodd-Frank Act
would be minimal.
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\109\ With respect to the enumerated consumer laws, the scope of
the Bureau's authority is defined by the scope of those laws, not by
the activities listed under section 1002(15)(A) of the Dodd-Frank
Act.
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Finally, under section 1031(b) of the Dodd-Frank Act, the Bureau
has authority to prescribe rules applicable to a covered person or
service provider identifying as unlawful unfair, deceptive, or abusive
acts or practices in connection with any transaction with a consumer
for a consumer financial product or service, or the offering of a
consumer financial product or service. Thus, if the proposed definition
is finalized, the Bureau could promulgate such rules in connection with
transactions for the leases that would fall under the proposed
definition. Such a rule may impose costs on covered persons or service
providers. It is not possible to identify with any greater specificity
here the potential costs to covered persons or service providers of any
such hypothetical future rulemaking. The Bureau notes, however, that it
would consider the benefits, costs, and impacts of any such rulemaking
as part of its analysis under section 1022 for that rulemaking.\110\
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\110\ The proposed definition would also impose costs on covered
persons by expanding the scope of certain other Bureau authorities
under title X of the Dodd-Frank Act. Specifically, the proposed
definition would expand the Bureau's rulemaking authority under
section 1032 of the Dodd-Frank Act, which authorizes the Bureau to
prescribe rules to ensure that the features of any consumer
financial product or service are fully, accurately, and effectively
disclosed to consumers in a manner that permits consumers to
understand the costs, benefits, and risks associated with the
product or service. In addition, the proposed definition would
expand the scope of the Bureau's authority under section 1022(c) of
the Dodd-Frank Act to ``monitor for risks to consumers in the
offering or provision of consumer financial products or services,
including developments in markets for such products or services,''
and the scope of the Bureau's authority under section 1033 of the
Dodd-Frank Act, to prescribe rules for covered persons with respect
to consumer rights to access information concerning consumer
financial products or services that the consumer received from such
person. As with respect to section 1031(b) of the Dodd-Frank Act, it
is not possible for the Bureau to identify with specificity here the
costs to covered persons that may result from the Bureau's potential
future exercise of these authorities. The Bureau, however, notes
that it would consider the benefits, costs, and impacts of any
rulemakings under sections 1032 or 1033 of the Dodd-Frank Act as
part of the section 1022 analysis for such rulemakings.
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5. Consideration of Alternatives
The Bureau is considering different thresholds for larger-
participant status
[[Page 60780]]
in the market for automobile financing. One alternative the Bureau is
considering is a larger threshold of, for example, 50,000 aggregate
annual originations. Under such an alternative, the benefits of
supervision to both consumers and covered persons would likely be
substantially reduced because some firms impacting a large portion of
consumers in important market segments, such as captive, subprime, and
BHPH lending, would be omitted. On the other hand, the overall
potential costs across all nonbank covered persons would of course be
reduced if fewer firms were defined as larger participants and thus
fewer were subject to the Bureau's supervision authority on that basis.
Similarly, the Bureau is also considering lower thresholds, such as
5,000 aggregate annual originations, but believes this would only
marginally increase the proportion of market activity that the Bureau
could supervise while potentially exposing a greater number of nonbank
covered persons to the costs listed above. However, the total direct
costs for actual supervisory activity might not change substantially
because the Bureau conducts exams on a risk basis and would not
necessarily examine more or fewer entities if the rule's coverage were
broader or narrower.
The Bureau is also considering various other criteria for assessing
larger-participant status, including dollar volume of originations and
total unpaid principal balances. Calculating either of these metrics
might be more involved than calculating the number of originations for
a given nonbank entity. If so, then a given entity might face greater
costs for evaluating or disputing whether it qualified as a larger
participant should the occasion to do so arise. Additionally, as some
nonbank entities might, for example, specialize in sectors featuring
higher average loan amounts or different prepayment and default rates
than others, using aggregate annual originations more directly captures
the number of consumers impacted by the Proposed Rule. For each
criterion, the Bureau expects that it could choose a suitable threshold
for which the set of larger participants, among those entities
participating in the market today, would be similar to those expected
to qualify under the Proposed Rule. Consequently, the costs, benefits,
and impacts of this Proposed Rule should not depend on which criterion
the Bureau uses.
C. Potential Specific Impacts of the Proposed Rule
1. Depository Institutions and Credit Unions With $10 Billion or Less
in Total Assets, As Described in Section 1026 of the Dodd-Frank Act
No depository institutions or credit unions of any size would
become larger participants in the market for automobile leases under
the Proposed Rule. Further, as explained above, the proposed change in
the definition of financial product or service would not in itself have
any significant effect on depository institutions and credit unions
with $10 billion or less in total assets. Nevertheless, the Proposed
Rule might, as discussed above, have some impact on depository
institutions or credit unions that provide financing for automobile
transactions. The Proposed Rule might therefore alter market dynamics
in a market in which some depository institutions and credit unions
with less than $10 billion in assets may be active. For example, if
nonbanks' price of credit for loan acquisitions or leases were to
increase, or similarly were the compensation for selling those same
products to decrease due to increased costs related to supervision,
then depository institutions or credit unions of any size might benefit
by the relative change in competitors' costs.
2. Impact of the Provisions on Consumer Access to Credit and on
Consumers in Rural Areas
Because the rule applies uniformly to automobile financing
transactions of both rural and non-rural consumers, the rule should not
have a unique impact on rural consumers. The Bureau is not aware of any
evidence suggesting that rural consumers have been disproportionately
harmed by nonbank entities' failure to comply with Federal consumer
financial law. The Bureau would welcome any comments that may provide
information related to how automobile financing transactions affect
rural consumers.
VII. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), as amended by the Small
Business Regulatory Enforcement Fairness Act of 1996,\111\ requires
each agency to consider the potential impact of its regulations on
small entities, including small businesses, small governmental units,
and small not-for-profit organizations.\112\ The RFA defines a ``small
business'' as a business that meets the size standard developed by the
Small Business Administration (SBA) pursuant to the Small Business
Act.\113\
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\111\ The RFA, Public Law 96-354, 94 Stat. 1164 (1980) (codified
as amended at 5 U.S.C. 601-12).
\112\ The term ```small organization' means any not-for-profit
enterprise which is independently owned and operated and is not
dominant in its field, unless an agency establishes [an alternative
definition after notice and comment].'' 5 U.S.C. 601(4). The term
```small governmental jurisdiction' means governments of cities,
counties, towns, townships, villages, school districts, or special
districts, with a population of less than fifty thousand, unless an
agency establishes [an alternative definition after notice and
comment].'' Id. at 601(5). The Bureau is not currently aware of any
small governmental units or small not-for-profit organizations to
which the Proposed Rule would apply.
\113\ 5 U.S.C. 601(3). The Bureau may establish an alternative
definition after consultation with SBA and an opportunity for public
comment. Id.
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The RFA generally requires an agency to conduct an initial
regulatory flexibility analysis (IRFA) of any proposed rule subject to
notice-and-comment rulemaking requirements, unless the agency certifies
that the proposed rule would not have a significant economic impact on
a substantial number of small entities.\114\ The Bureau also is subject
to certain additional procedures under the RFA involving the convening
of a panel to consult with small entity representatives prior to
proposing a rule for which an IRFA is required.\115\
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\114\ 5 U.S.C. 605(b).
\115\ 5 U.S.C. 609.
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The undersigned certifies that the Proposed Rule, if adopted, would
not have a significant economic impact on a substantial number of small
entities and that an IRFA is therefore not required.
The Proposed Rule would define a class of nonbank covered persons
as larger participants of the automobile financing market and thereby
would authorize the Bureau to undertake supervisory activities with
respect to those nonbank covered persons. The Proposed Rule would also
define the term ``financial product[s] or service[s]'' to include
automobile leases that (1) meet the requirements of section 108 of
CEBA, as implemented by 12 CFR part 23, and are thus permissible for
banks to offer or provide; and (2) are not currently defined as a
financial product or service under section 1002(15)(A)(ii) of the Dodd-
Frank Act. The Proposed Rule would not affect a substantial number of
small businesses.
Regarding insured depositories and credit unions, these entities
are small businesses only if their assets are below $550 million. The
proposed definition of larger participants of the automobile financing
market applies only to nonbank entities, so it would have no impact on
depository institutions or
[[Page 60781]]
credit unions of any size. The proposed definition of the term
financial product or service to include certain automobile leases would
have little impact on compliance and supervision costs for insured
depositories and credit unions. The leasing activities covered under
the proposed definition would become subject to the UDAAP prohibition
under section 1031 of the Dodd-Frank Act. Although the two are not co-
extensive, as discussed above, a similar prohibition on UDAP in or
affecting commerce under section 5 of the FTC Act already applies to
these activities. Similarly, small banks are already subject to
supervision for compliance with section 5 of the FTC Act, as well as
with the enumerated consumer laws. In addition, most small banks have a
very low share of leases relative to loans, and most of this leasing
activity already qualifies as a financial product or service under
section 1002(15)(A)(ii) of the Dodd-Frank Act. Accordingly, the Bureau
estimates that very few to no small banks would experience a
significant impact due to the proposed change to the definition of a
financial product or service.
Regarding nonbank entities, the Proposed Rule adopts a threshold
for larger-participant status of at least 10,000 aggregate annual
originations.\116\ Under the size standard for the most relevant SBA
classification, i.e., NAICS code 522220, an entity engaged in
automobile financing is a small business if its annual receipts are
below $38.5 million.\117\ The Bureau used AutoCount data for 2013
combined with public financial statements, securitization filings, and
additional market research to estimate annual receipts for each of the
potential larger participants.\118\ Based on this review, it appears
that few, if any, of the approximately 38 potential larger participants
identified by the Bureau's analysis meet the small business threshold
classification.\119\ The Bureau therefore estimates that no or very few
small businesses would be classified as larger participants of the
automobile financing market under the Proposed Rule.\120\
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\116\ As noted above, if a nonbank covered person meets the
larger-participant test, it would remain a larger participant until
two years from the first day of the tax year in which it last met
the larger-participant test.
\117\ 13 CFR 121.201 (NAICS code 522220) (as amended by 79 FR
33647, 33655 (June 12, 2014)). The Bureau believes that larger
participants in the proposed nonbank automobile financing market are
likely to be classified under NAICS code 522220, sales financing.
NAICS lists ``automobile financing'' and ``automobile finance
leasing companies'' as index entries corresponding to this code. See
U.S. Census Bureau, North American Industry Classification System,
2012 NAICS Definition 522220 Sales Financing, available at http://www.census.gov/cgi-bin/sssd/naics/naicsrch.
\118\ To generate these estimates, the Bureau first calculated
an estimate of the average stream of interest income the 38
potential larger participants would receive over a 12-month period
for all loans originated in 2013, as well as the income each entity
would receive during the same period for loans made in previous
years if the number of originations were identical to 2013 levels.
This initial calculation excludes leases that also generate income.
It also assumes no prepayment, which would increase receipts; no
defaults, which would decrease receipts; and no other income
generated from any other sources. The Bureau then analyzed public
financial statements to verify any potential outliers. Using this
methodology, the Bureau found six potential larger participants with
receipts from loans that fall below the $38.5 million size standard
in 2013; however, three of these entities hold a substantial number
of leases and therefore likely have over $38.5 million in combined
receipts from loans and leases, assuming lease terms similar in
payment size to loans. Further market research indicates the
remaining three entities likely generate additional revenue from
other sources, suggesting that their annual receipts also exceed the
relevant size standard.
\119\ The Bureau's analysis concluding that few, if any,
potential larger participants meet the relevant size standard is
described in supra note 118. The Bureau also believes that it is
unlikely that any small entities would be rendered larger
participants of the consumer reporting or consumer debt collection
markets by the proposed technical amendments to Sec. 1090.104(a)
and Sec. 1090.105(a), since very few entities in those markets are
likely to have annual receipts that are so close to the larger-
participant threshold that inclusion of additional receipts from a
formerly-affiliated company would affect their larger-participant
status.
\120\ According to the 2007 Economic Census, more than 2,000
small firms are encompassed under the most applicable NAICS code
(522220). U.S. Census Bureau, American FactFinder Database, Estab
and Firm Size: Summary Statistics by Revenue Size of Establishments
for the United States: 2007, available at http://
factfinder2.census.gov/bkmk/table/1.0/en/ECN/2007_US/52SSSZ4//
naics~522220. Thus, even if a few small firms were classified as
larger participants, they would constitute less than one percent of
the small firms in the industry under that NAICS code.
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Finally, the proposed definition of the term financial product or
service to include certain automobile leases would have little impact
on small nonbank entities engaged in automobile leasing. As mentioned
above, the vast majority of automobile leases likely already qualify as
a financial product or service under section 1002(15)(A)(ii) of the
Dodd-Frank Act, and so the change in definition is unlikely to affect
the larger-participant status of any small business. With respect to
costs related to compliance, if the proposed definition is finalized,
small nonbanks would have to comply with the UDAAP prohibition under
section 1031 of the Dodd-Frank Act when providing automobile leases
covered under the proposed definition. However, as with small banks,
small nonbanks that provide automobile leases must already comply with
similar UDAP prohibitions under section 5 of the FTC Act as well as the
applicable enumerated consumer laws, such as the Consumer Leasing Act.
Additionally, as explained above, there are likely to be few, if any,
small nonbank businesses in the automobile financing market that would
be subject to supervision irrespective of the proposed definition. To
the extent that any small nonbanks are larger participants under the
Proposed Rule, the Bureau believes that the proposed definition would
expand the scope of leasing activities of such entities subject to
supervision for compliance with section 1031. The economic impact of
this expansion in scope would not be significant. Notably, even absent
the proposed definition, all leasing activities of such entities would
be subject to supervision by the Bureau for compliance with the
enumerated consumer laws, including the Consumer Leasing Act.\121\
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\121\ As noted above, with respect to the enumerated consumer
laws, the scope of the Bureau's authority is defined by the scope of
those laws, not by the activities listed under section 1002(15)(A)
of the Dodd-Frank Act.
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Considering the limited public information available for several of
the smallest potential larger participants, the Bureau requests comment
on the impact of the Proposed Rule on small nonbank entities and
solicits data that may be relevant to this analysis. The Bureau also
solicits comments on whether NAICS code 522220 or any other NAICS code
is more appropriate for this market.
Additionally, if a larger participant's annual receipts fell below
the $38.5 million SBA size standard, the Proposed Rule would not result
in a ``significant impact'' on the entity. The Proposed Rule would not
itself impose any business conduct obligations beyond those described
above regarding the automobile leases defined under the Proposed Rule
as financial products or services. Furthermore, the Bureau's
supervisory activity would have very little economic impact on a
supervised entity. When and how often the Bureau would in fact engage
in supervisory activity, such as an examination, with respect to a
larger participant (and, if so, the extent of such activity) would
depend on a number of considerations, including the Bureau's allocation
of resources and the application of the statutory factors set forth in
section 1024(b)(2) of the Dodd-Frank Act. Given the Bureau's finite
supervisory resources, and the range of industries over which it has
supervisory responsibility for consumer financial protection, when and
how often a given a larger participant would be supervised is
uncertain. Moreover, if supervisory activity occurred, the costs that
would result from such activity are expected to
[[Page 60782]]
be minimal in relation to the overall activities of a larger
participant.\122\ Hence, the Proposed Rule would not have a significant
economic impact on a substantial number of small entities because the
Proposed Rule would not impose any significant business conduct
obligations on the defined class of larger participants and the cost of
supervisory activities would be nominal in relation to the revenue of a
larger participant whose annual revenue fell below the $38.5 million
SBA size standard.\123\
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\122\ As noted in part VI.B.2.b above, the Bureau estimates that
the cost of participation in an examination would be approximately
0.013 percent of the annual revenue generated from originations for
an entity at the threshold of 10,000 aggregate annual originations.
\123\ Because the Proposed Rule aggregates the activities of
affiliated companies in part by adding together annual originations,
two companies that are small businesses might, together, have
aggregate annual originations over 10,000. The Bureau anticipates no
more than a very few such cases, if any, in the automobile financing
market.
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Finally, section 1024(e) of the Dodd-Frank Act authorizes the
Bureau to supervise service providers to nonbank covered persons
encompassed by section 1024(a)(1), which includes larger participants.
Because the Proposed Rule does not specifically address service
providers, effects on service providers need not be discussed for
purposes of this RFA analysis. Even were such effects relevant, the
Bureau believes that it would be very unlikely that any supervisory
activities with respect to the service providers to the approximately
38 potential larger participants of the proposed market for automobile
financing would result in a significant economic impact on a
substantial number of small entities.\124\
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\124\ As noted above, according to the 2007 Economic Census,
more than 2,000 small firms are encompassed under NAICS code 522220,
and the number of those firms that are service providers for the 38
potential larger participants will be only a small fraction of that
number. Other service providers may be classified under NAICS code
522320 for financial transactions processing, reserve, and clearing
house activities, which also includes more than 2,000 small firms.
U.S. Census Bureau, American FactFinder Database, Estab and Firm
Size: Summary Statistics by Revenue Size of Establishments for the
United States: 2007, available at http://factfinder2.census.gov/
bkmk/table/1.0/en/ECN/2007_US/52SSSZ4//naics~522320. Still other
service providers are likely to be considered in other NAICS codes
corresponding to the service provider's primary business activities.
As noted above with respect to larger participants themselves, the
frequency and duration of examinations that would be conducted at
any particular service provider would depend on a variety of
factors. However, it is implausible that in any given year the
Bureau would conduct examinations of a substantial number of the
more than 4,000 small firms in NAICS code 522220 and 522320, or the
small firm service providers that happen to be in any other NAICS
code. Moreover, the impact of supervisory activities, including
examinations, at such small firm service providers can be expected
to be less, given the Bureau's exercise of its discretion in
supervision, than at the larger participants themselves.
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Accordingly, the undersigned certifies that the Proposed Rule would
not have a significant economic impact on a substantial number of small
entities.
VIII. Paperwork Reduction Act
The Bureau has determined that this Proposed Rule would not impose
any new recordkeeping, reporting, or disclosure requirements on covered
entities or members of the public that would constitute collections of
information requiring approval under the Paperwork Reduction Act, 44
U.S.C. 3501, et seq.
List of Subjects in 12 CFR Part 1000 and 12 CFR Part 1090
Consumer protection, Credit.
Authority and Issuance
For the reasons set forth in the preamble, the Bureau proposes to
add 12 CFR part 1001 and proposes to amend 12 CFR part 1090, subpart B,
to read as follows:
PART 1001--FINANCIAL PRODUCTS OR SERVICES
Sec.
1001.1 Authority and purpose.
1001.2 Definitions.
0
1. The authority citation for part 1001 is to read:
Authority: 12 U.S.C. 5481(15)(A)(xi); and 12 U.S.C. 5512(b)(1).
0
2. Add part 1001 to Chapter X in Title 12 of the Code of Federal
Regulations to read as follows:
PART 1001--FINANCIAL PRODUCTS OR SERVICES
Sec. 1001.1 Authority and purpose.
Under 12 U.S.C. 5481(15)(A)(xi), the Bureau is authorized to define
certain financial products or services for purposes of title X of the
Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376 (2010) (Title X) in
addition to those defined in 12 U.S.C. 5481(15)(A)(i)-(x). The purpose
of this part is to implement that authority.
Sec. 1001.2 Definitions.
Except as otherwise provided in Title X, in addition to the
definitions set forth in 12 U.S.C. 5481(15)(A)(i)-(x), the term
``financial product or service'' means, for purposes of Title X:
(a) Extending or brokering leases of an automobile, as defined by
12 CFR 1090.108(a), where the lease:
(1) Qualifies as a full-payout lease and a net lease, as provided
by 12 CFR 23.3(a), and has an initial term of not less than 90 days, as
provided by 12 CFR 23.11; and
(2) Is not a financial product or service under 12 U.S.C.
5481(15)(A)(ii).
PART 1090--DEFINING LARGER PARTICIPANTS OF CERTAIN CONSUMER
FINANCIAL PRODUCT AND SERVICE MARKETS
0
3. The authority citation for part 1090 continues to read as follows:
Authority: 12 U.S.C. 5514(a)(1)(B); 12 U.S.C. 5514(a)(2); 12
U.S.C. 5514(b)(7)(A); and 12 U.S.C. 5512(b)(1).
0
4. Section 1090.101 is amended by revising the definition of ``Nonbank
covered person'' to read as follows:
Sec. 1090.101 Definitions.
* * * * *
Nonbank covered person means, except for persons described in 12
U.S.C. 5515(a) and 5516(a):
(1) Any person that engages in offering or providing a consumer
financial product or service; and
(2) Any affiliate of a person that engages in offering or providing
a consumer financial product or service if such affiliate acts as a
service provider to such person.
* * * * *
0
5. Section 1090.104 is amended by revising paragraph (a)(iii)(D) of the
definition ``annual receipts'' to read as follows:
Sec. 1090.104 Consumer reporting market.
(a) * * *
(iii) * * *
(D) The annual receipts of a formerly affiliated company are not
included if the affiliation ceased before the applicable period of
measurement as set forth in paragraph (ii) of this definition. The
annual receipts of a nonbank covered person and its formerly affiliated
company are aggregated for the entire period of measurement if the
affiliation ceased during the applicable period of measurement as set
forth in paragraph (ii) of this definition.
* * * * *
0
6. Section 1090.105 is amended by revising paragraph (a)(iii)(D) of the
definition ``annual receipts'' to read as follows:
Sec. 1090.105 Consumer debt collection market.
(a) * * *
(iii) * * *
(D) The annual receipts of a formerly affiliated company are not
included if the affiliation ceased before the applicable period of
measurement as set forth in paragraph (ii) of this definition. The
annual receipts of a nonbank
[[Page 60783]]
covered person and its formerly affiliated company are aggregated for
the entire period of measurement if the affiliation ceased during the
applicable period of measurement as set forth in paragraph (ii) of this
definition.
* * * * *
0
7. Add Sec. 1090.108 to subpart B to read as follows:
Sec. 1090.108 Automobile financing market.
(a) Market-related definitions. As used in this section:
Aggregate annual originations means the sum of the number of annual
originations of a nonbank covered person and the number of annual
originations of each of the nonbank covered person's affiliated
companies, calculated as follows:
(i) Annual Originations.
(A) Annual originations means the sum of the following transactions
for the preceding calendar year:
(1) Credit granted for the purpose of purchasing an automobile;
(2) Automobile leases;
(3) Refinancings of obligations described in (1) above, and any
subsequent refinancings thereof; and
(4) Purchases or acquisitions of obligations described in (1) or
(3) above or of automobile lease agreements.
(B) The term annual originations does not include investments in
asset-backed securities.
(ii) Aggregating the annual originations of affiliated companies.
The annual originations of a nonbank covered person must be aggregated
with the annual originations of any person (other than an entity
described in paragraph (c)) that was an affiliated company of the
nonbank covered person at any time during the preceding calendar year.
The annual originations of a nonbank covered person and its affiliated
companies are aggregated for the entire preceding calendar year, even
if the affiliation did not exist for the entire calendar year.
Automobile means any self-propelled vehicle primarily used for
personal, family, or household purposes for on-road transportation. The
term does not include motor homes, recreational vehicles (RVs), golf
carts, and motor scooters.
Automobile financing means providing the transactions identified
under the term ``annual originations'' as defined in this section.
Automobile lease means a lease that is for the use of an
automobile, as defined in this section, and that meets the requirements
of 12 U.S.C. 5481(15)(A)(ii) or 12 CFR 1001.2(a).
Refinancing has the same meaning as in 12 CFR 1026.20(a), except
that the nonbank covered person need not be the original creditor or a
holder or servicer of the original obligation.
(b) Test to define larger participants. Except as provided in
paragraph (c), a nonbank covered person that engages in automobile
financing is a larger participant of the automobile financing market if
the person has at least 10,000 aggregate annual originations.
(c) Exclusion for dealers. The following entities do not qualify as
larger participants under this section:
(1) persons excluded from the authority of the Bureau by 12 U.S.C.
5519; and
(2) persons who meet the definition in 12 U.S.C. 5519(f)(2); are
identified in 12 U.S.C. 5519(b)(2); and are predominantly engaged in
the sale and servicing of motor vehicles, the leasing and servicing of
motor vehicles, or both.
Dated: September 16, 2014.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2014-23115 Filed 10-7-14; 8:45 am]
BILLING CODE 4810-AM-P