Auto loans are the third largest category of household debt, behind mortgages and student loans. But these loans are not all financed by banks, which are heavily regulated.
Consumers can either get a loan through direct financing, where they seek credit directly from a lender (often a bank), or through indirect financing, where an auto dealer typically enters into a retail installment sales contract that it then sells to a third-party.
The U.S. Consumer Finance Protection Bureau said Wednesday that it is asserting its authority to oversee what are called “non-bank” auto finance companies — the lenders who write many of the subprime loans for low-income car buyers.
American consumers had about $900 billion in auto loans outstanding in the fourth quarter of 2014. The automobile leasing market also continues to grow as more than a quarter of new cars are acquired through leases.
The Bureau already supervises auto financing at the largest banks and credit unions. Today’s action extends that supervision to any non-bank auto finance company that makes, acquires, or refinances 10,000 or more loans or leases in a year
The agency estimates that it will have authority to supervise about 34 of the largest non-bank auto finance companies and their affiliated companies that engage in auto financing. These companies together originate about 90 percent of non-bank auto loans and leases, and in 2013 provided financing to about 6.8 million consumers.
The Bureau said it will be assessing potential risks to consumers and whether auto finance companies are complying with requirements of federal law. Among other things, examiners will be evaluating whether auto finance companies are:
Fairly marketing and disclosing auto financing terms: The Bureau will ensure that non-bank lenders are not using deceptive tactics to market loans or leases. The Bureau would be concerned if consumers are being misled about the benefits or terms of financial products. The Bureau is also looking to ensure that consumers understand the terms they are getting.
Providing accurate information to credit bureaus: The Bureau will assess whether information auto finance companies provide to credit bureaus is accurate. The CFPB recently took an enforcement action against an auto finance company that distorted consumer credit records by inaccurately reporting information like the consumers’ payment history and delinquency status to credit bureaus. The CFPB is looking to prevent inaccurate information from being reported in the future.
Treating consumers fairly when collecting debts: The Bureau will assess whether auto finance companies are using illegal debt collection tactics. The Bureau will be looking to ensure that collectors are relying on accurate information and using legal processes when they collect on debts. The Bureau also will review the repossession process, including the practices of third-party service providers that are employed to repossess autos.
Lending fairly: The Bureau will assess whether auto finance companies’ practices comply with the Equal Credit Opportunity Act and other Bureau authorities protecting consumers.