The Consumer Financial Protection Bureau on Wednesday proposed bringing the financing units of the big automakers under federal supervision for the first time, a move that would ultimately let the agency examine the lending arms of Toyota, Ford and Honda.
The proposed rule would extend the bureau’s current oversight of bank auto lenders to cover 38 auto finance companies that make, acquire or refinance 10,000 or more loans or leases a year. These firms provided financing to about 6.8 million consumers last year, according to the CFPB.
The bureau has grown concerned that some car buyers are being steered into expensive loans when they qualify for cheaper ones and being misled about the terms and benefits of add-on products.
The CFPB and the Justice Department have ongoing investigations into whether auto lenders and dealers are tacking on extra interest rate charges on loans made to minority borrowers. As a part of the probe, the pair reached a $98 million settlement with Ally Financial last year.
In a statement, CFPB Director Richard Cordray alluded to that settlement and said the proposed rule would allow the bureau to “root out discrimination and ensure consumers are being treated fairly across this market.”
Auto dealers and lenders have bristled at the bureau’s characterization of interest-rate markups. In response to the CFPB’s proposal, the National Automobile Dealers Association (NADA) and the National Association of Minority Automobile Dealers issued a joint statement questioning how the agency is defining discrimination.
“There are legitimate, market-based reasons for disparities in interest rates – from monthly budget constraints, to the presence of more competitive offers, to inventory reduction considerations – all of which are nondiscriminatory and all of which can be documented in the transaction,” the statement said.
Earlier this year, NADA recommended that dealers establish a markup ceiling, never exceed it and document a legitimate reason when they offer a discount below that ceiling. But consumer advocates want dealers to disclose the rationale to buyers in all cases.
Expanding the CFPB’s oversight to include auto finance companies will give the agency the power to conduct on-site examinations that could result in enforcement actions. The bureau said it also wants to make sure that auto finance companies are providing accurate information to credit bureaus and treating consumers fairly with debt collection.
Ford Motor Credit Co. spokeswoman Margaret Mellot said the company is “studying what the CFPB has published.” She added that the company will “adhere to any regulations that apply to our business.”
At Toyota Financial Services, chief compliance officer Linda Iannone said that “we are still reviewing the proposal but we have always assumed that we would be subject to CFPB supervision due to our market position. Over the past few years, we have been actively building out our compliance management system to better serve our customers and to meet CFPB expectations.”
Officials at other large auto finance companies did not immediately return requests for comment on the proposal.
The CFPB proposal arrives as federal prosecutors have launched investigations into the subprime underwriting standards and securitization at the financing arm of General Motors and the consumer-lending unit of Spain’s Santander.
The investigations have raised concerns that investor demand is leading lenders to relax their standards too much, which could result in big losses. But recent reports from Moody’s Investors Service and the Federal Reserve Bank of New York say lenders are pulling back on extending car loans to consumers with very poor credit histories.