Auto Finance Examination Procedures cf.gov 8
CFPB Examination Procedures
Auto Finance
Automobile Finance Examination Procedures
After completing the examination risk assessment and scoping, examiners should use these procedures to conduct an automobile finance examination. Because the Consumer Financial
Exam Date: Prepared By: Reviewer: Docket #: Entity Name:
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Protection Bureau (CFPB or Bureau) expects
Event No.:
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regulated entities under its supervision and
enforcement authority to have an effective compliance management system adapted to its
business strategy and operations, examiners should also use the Compliance Management
Review (CMR) procedures to review and test components of the supervised entity's compliance
management system.1
These procedures are organized into seven modules, which include guidance for examining all aspects of auto finance. As determined by the examination scope, and in conjunction with the CMR procedures, each examination will include parts of one or more of the following modules. Module 7 ? Examiner Conclusions and Wrap-up is a required module and must be completed for all examinations.
Module 1 Company Business Model
Module 2 Advertising and Marketing
Module 3 Application and Origination
Module 4 Payment Processing and Account Maintenance
Module 5 Collections, Debt Restructuring, Repossession, and Accounts in Bankruptcy
Module 6 Credit Reporting, Information Sharing, and Privacy
Module 7 Examiner Conclusions and Wrap-up
1 A supervised entity must develop and maintain an effective compliance management system that is integrated into the overall
framework for product design, delivery, and administration of the entire product and service lifecycle. Ultimately, compliance should be part of the day-to-day responsibilities of management and the employees of a supervised entity; issues should be selfidentified; and corrective actions should be initiated by the entity. Supervised entities are also expected to manage relationships with service providers to ensure that these providers effectively manage compliance with Federal consumer financial laws applicable to the product or service being provided. See CFPB Supervision and Examination Manual,; see also CFPB Compliance Bulletin and Policy Guidance; 2016-02, Service Providers, .
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Auto Finance
Examination Objectives
1. To assess the supervised entity's compliance management system, including internal controls, policies, and procedures for preventing violations of Federal consumer financial law.
2. To identify acts or practices that materially increase the risk of violations of Federal consumer financial law.
3. To gather facts that help determine whether a supervised entity engages in acts or practices that are likely to violate Federal consumer financial law.
4. To determine, in consultation with headquarters, whether a violation of a Federal consumer financial law has occurred, and whether further supervisory or enforcement action is appropriate.
Background
Section 1024 of the Dodd-Frank Act (12 U.S.C. 5514(a)(1)(B)) gave the CFPB supervisory authority over "larger participants" of certain markets for consumer financial products or services, as the CFPB defines by rule.2 Under this authority, the Bureau issued its final rule defining larger participants of the automobile financing market, 12 CFR 1090.108, on June 30, 2015.3 The rule became effective on August 31, 2015.4
Per the rule, a nonbank covered person that engages in automobile financing is generally a larger participant if such person has at least 10,000 aggregate annual originations,5 which the Bureau defined to include the following transactions:
Credit granted for the purpose of purchasing an automobile;
Automobile leases;
2 Pub. L. No. 111-203 (2010).
3 Defining Larger Participants of the Automobile Financing Market and Defining Certain Automobile Leasing Activity as a Financial Product or Service, 80 Fed. Reg. 37495 (June 30, 2015).
4 Id.
5 12 CFR 1090.108(b).
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Refinancings of credit granted for the purpose of purchasing an automobile (and any subsequent refinancings thereof) that are secured by an automobile; and
Purchases or acquisitions of any of the foregoing obligations.6
The rule also clarified that auto dealers, including Buy-Here, Pay-Here (BHPH) dealers, are not larger participants under the rule.7
Sources of Auto Financing
Consumers often purchase or obtain a vehicle by acquiring credit or entering into a lease arrangement. When acquiring credit, consumers can go through an indirect or a direct channel.
Indirect Lending Channel
With indirect lending, or dealer arranged financing, the dealer, rather than the consumer, typically selects the lender that will provide financing. Upon completion of the vehicle selection process, the dealer collects the consumer's credit application information and forwards that information to one or more lenders using a standardized platform, such as DealerTrack, RouteOne, or Credit Union Direct Lending (CUDL).
When selecting a lender to approve the loan, the dealer may have incentives to select a particular lender over another. For example, a franchised dealer, a dealer that sells vehicles for certain auto manufacturers, may have incentives, such as promotional discounts or limited-time financing offers, to use the manufacturer's subsidiary finance company ? typically called a captive finance company ? over another lender. Regardless of which lender the dealer selects, the underwriting and approval process is typically the same. That is, after evaluating the applicant, the lender will provide the dealer with its credit decision, including purchase eligibility criteria and other stipulations, such as a risk-based "buy rate."8
After receiving a credit decision, the dealer will then finalize a retail installment sales contract with the consumer and subsequently sell that contract to the lender that provided the dealer with
6 12 CFR ? 1090.108(a)(i)(A).
7 Id. ? 1090.108(c); Section 1029 of the Dodd-Frank Act, 12 USC 5519, limits the Bureau's authority over auto dealers. The final larger participant rule references this exclusion. See 12 CFR 1090.108(c)(1). The larger participant rule also excludes motor vehicle dealers that are predominantly engaged in the sale (and/or leasing) and servicing of motor vehicles and operate a line of business that involves the extension of retail credit or retail leases directly to consumers without routinely assigning them to unaffiliated third party finance or leasing sources. See 12 CFR 1090.108(c)(2) (citing 12 USC 5519(b)(2) and (f)(2)); see also 80 Fed. Reg. at 37515-16 (explaining the exclusion for BHPH dealers in paragraph (c)(2)).
8 The "buy rate" establishes the minimum interest rate at which the finance company is willing to purchase the retail installment sales contract executed between the consumer and the dealer for the purchase of the vehicle.
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an approved credit decision. The lender will then own and service the loan, or transfer those rights and responsibilities to another company.
Direct Lending Channel
In the direct lending context, consumers directly apply for financing with a finance company, bank, or credit union of their choosing. After receiving an approval, the consumer will use the loan proceeds to directly purchase a vehicle from a seller.
Leasing
A lease agreement, between a lessor and lessee, sets forth terms that allow the lessee to use the vehicle for a set number of months, typically 12 to 48 months, while making a payment to the lessor each month. Leasing a vehicle is similar to obtaining credit in that both require an application, decision, and ongoing contractual obligation. For example, like a consumer seeking credit to purchase a vehicle, a consumer seeking to lease a vehicle must provide basic financial information such as income and credit history. Moreover, by signing the lease agreement, the consumer undertakes a major financial obligation in the form of a commitment to make a stream of payments over a specified period. 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.9
Buy-Here, Pay-Here
While most Buy-Here, Pay-Here (BHPH) dealers are independently owned entities that serve as the primary lender and servicer, some larger BHPH dealers sell or assign their contracts to an affiliated BHPH finance company once the contract has been consummated with the consumer.
Ancillary Products and Services
In addition to the actual vehicle, auto dealers and finance companies sometimes offer ancillary, or add-on, products and services at the time of vehicle purchase. For example:
Guaranteed Auto Protection or Guaranteed Asset Protection (GAP) is a product designed to cover the difference, or "gap," between the amount owed by the consumer on the auto loan and the amount received from the auto insurer in the event the vehicle is stolen, damaged, or totaled.
Generally, there are two types of GAP products in the market. A "GAP waiver" is a contractual agreement between the consumer and the finance company to cancel the debt in the event the vehicle is stolen, damaged, or totaled. The agreement typically appears in the
9 The residual value is the projected market value of the vehicle at the end of the lease, which is used in calculating the amount the consumer would have to pay to purchase the vehicle at the end of the lease term.
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retail installment sales contract or as an addendum to the sales contract. Most lease contracts offered by a captive finance company will typically include a GAP waiver.
A "GAP waiver insurance" is an agreement between a consumer and an insurer. With this product, the consumer agrees to pay the insurer premiums for coverage and in return, the insurer agrees to pay the consumer the "gap" amount in the event of a total loss. Upon receiving this payout, the consumer will typically use it to pay off the remaining balance on the auto loan.
An Extended Warranty is a product that covers the cost of some repairs either in addition to or after the manufacturer's warranty ends. These products typically exclude routine maintenance, such as oil changes and tire replacements.
Credit insurance is a product in which the provider agrees to make the consumer's auto payments upon the occurrence of certain situations, such as death or disability. There are four main types of credit insurance:
o Credit life insurance ? pays off all or some of the outstanding balance on the loan in the event the consumer dies;
o Credit disability insurance ? makes payments on the loan if the consumer becomes ill or injured and, as a result, cannot work;
o Involuntary unemployment insurance ? makes payments on the loan if the consumer becomes unemployed; and
o Credit property insurance ? protects the car secured by the loan from events such as theft, accident, or natural disasters. This differs from property insurance.
Applicable Laws/Regulations
Entities offering auto finance products or services must comply with Federal consumer financial laws to the extent that the law applies to the particular entity and its activities:
The Truth in Lending Act (TILA) and its implementing regulation, Regulation Z, require creditors to disclose information relating to the cost of loans, comply with advertising requirements, and process credit balances.
The Consumer Leasing Act (CLA) and its implementing regulation, Regulation M, require lessors to provide specific disclosures prior to consummation of a consumer lease and include certain disclosures in advertisements that contain specified triggering terms.
The Electronic Fund Transfer Act (EFTA) and its implementing regulation, Regulation E, protect consumers engaging in electronic fund transfers. Among other things, Regulation E prohibits persons from requiring, as a condition of loan approval, a customer's authorization for loan repayment through a recurring electronic funds transfer (EFT) except in limited circumstances.
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The Fair Debt Collection Practices Act (FDCPA) governs collection activities conducted by third party collection agencies, as well as servicer collection activities if the servicer acquired the loan when it was already in default.
The Fair Credit Reporting Act (FCRA) and its implementing regulation, Regulation V, require that furnishers of information to consumer reporting agencies ensure the accuracy of data they place in the consumer reporting system. Additionally, the FCRA prohibits the use of consumer reports for impermissible purposes, and it requires users of consumer reports to provide certain disclosures to consumers. The FCRA also limits certain information sharing between affiliated companies. Examiners should note that the FCRA's implementing regulations may differ for depository and non-depository institutions.
The Gramm-Leach-Bliley Act (GLBA) and its implementing regulation, Regulation P, require entities to provide privacy notices and limit information sharing in particular ways.
The Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B, set forth requirements for accepting applications and providing notice of any adverse action, and prohibit discrimination against any borrower with respect to any aspect of a credit transaction:
o On the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract);
o Because all or part of the applicant's income derives from any public assistance program; or
o Because the applicant has in good faith exercised any right under the Consumer Credit Protection Act.10
If examiners identify concerns related to ECOA or Regulation B, they should consult with the Fair Lending team in the Office of Supervision Policy, as those issues are beyond the scope of these procedures. An examination of whether an entity's auto finance activities involve discrimination or other practices in violation of the ECOA will rely on procedures outlined in the CFPB's ECOA Examination Procedures.
10 The Consumer Credit Protection Act, 15 USC 1601 et seq., is the collection of federal statutes that protects consumers when
applying for or receiving credit. The Act includes statutes that have dispute rights for consumers, such as the Fair Credit Reporting Act. The ECOA prohibits discriminating against an applicant who has exercised a dispute right pursuant to one of the statutes outlined in the Act.
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To carry out the Examination Objectives, the examination process may also include assessing other risks to consumers. Collecting information about risks to consumers, whether or not there are specific legal guidelines addressing such risks, can help inform the CFPB's policymaking. Moreover, these risks may include potentially unfair, deceptive, or abusive acts or practices (UDAAPs) with respect to the entity's interactions with consumers.11 The CFPB uses the following standards when assessing UDAAPs:
o A representation, omission, act, or practice is deceptive when:
The representation, omission, act, or practice misleads or is likely to mislead the consumer;
The consumer's interpretation of the representation, omission, act, or practice is reasonable under the circumstances; and
The misleading representation, omission, act, or practice is material.
o An act or practice is unfair when:
It causes or is likely to cause substantial injury to consumers;
The injury is not reasonably avoidable by consumers; and
The injury is not outweighed by countervailing benefits to consumers or to competition.
o An abusive act or practice:
Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
Takes unreasonable advantage of ?
A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
The inability of the consumer to protect the consumer's interests in selecting or using a consumer financial product or service; or
The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
11 Section 1036 of the Dodd-Frank Act, 12 USC 5536.
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Refer to the examination procedures regarding UDAAPs for more information about the legal standards and the CFPB's approach to examining for UDAAPs.
The particular facts in a case are crucial to a determination of UDAAPs. As set forth in the Examination Objectives section, examiners should follow the CFPB internal consultation requirements to determine whether the applicable legal standards have been met before a violation of any Federal consumer financial law is cited, including a UDAAP violation.
General Considerations
Completing the examination modules, as applicable, will allow examiners to develop a thorough understanding of a regulated entity's practices and operations. To complete the modules, examiners should obtain and review, as applicable, each entity's:
Organizational charts and process flowcharts;
Board minutes, annual reports, or the equivalent, to the extent available;
Relevant management reporting;
Policies and procedures;
Compensation and employee incentive structures and policies;
Rate sheets;
Fee sheets;
Loan/lease applications;
Loan/lease underwriting guidelines;
Loan/lease account documentation, notes, disclosures, and all other contents of underwriting and closing files;
Operating checklists, worksheets, and review documents;
Relevant computer program and system details;
Dealer agreements, due diligence and monitoring procedures, and origination (lending or leasing) procedures;
Servicing related policies and procedures, such as those related to payment posting and payment allocation, and repossessions;
Service provider due diligence and monitoring procedures, and service provider contracts;
Compliance monitoring and/or audit reports;
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