The US Consumer Financial Protection Bureau (CFPB) has announced its intention to oversee larger non-bank motor finance companies for the first time, in a move similar to the April takeover of the UK industry’s regulation by the Financial Conduct Authority.
The takeover of supervision by the CFPB will place another 38 motor finance companies throughout the USA under its supervision. These companies are responsible for approximately 90% of the motor finance market in the USA and CFPB supervision will hopefully protect another 6.8 million consumers.
According to the CFPB the US motor finance industry had 87 million loans outstanding with a total portfolio size of $900bn (£550bn) in January 2014. In addition the car industry in the US employs over 4 million staff.
In particular the non-bank lenders, such as captive finance houses, were extending hundreds of billions of dollars in loans said Richard Cordray, director of the CFPB, in a speech given to the press in Indiana, USA. These institutions were therefore responsible for driving the market in sub-prime loans he said, a market he described as having many people "more vulnerable to predatory practices."
For this reason Cordray said: "Today we are announcing a proposal to extend our supervisory oversight to larger nonbank auto lenders, including these "captive" lenders. This proposal is needed to level the playing field for banks and non-banks in the auto lending market. We already supervise the auto lending practices of banks with more than $10 billion in assets, and this step would extend our supervision to the larger nonbank companies as well."
Permission to extend their remit in this way was given to the CFPB by an Act of Congress in 2010. The act allowed the CFPB to supervise larger non-bank participants in consumer finance markets having given a 60 day comment period after registering the rule in the Federal Register.
The CFPB hopes by taking over the supervision of the larger non-bank lenders in the market it will be able to eliminate a number of practices which have been subject to investigation by the bureau in recent months.
Cordray, giving an example of one such investigation, said: "Over the summer, we took action against an auto finance company that distorted consumer credit records. For years, the company knew it was sending incorrect information about tens of thousands of its own customers to the credit bureaus.
Among complaints that pushed the CFPB to take action were consumers complaining about inaccurate deficiency balances after repossessions, and abusive or deceptive debt collection tactics.
One particular area of concern that Cordray highlighted was the risk of discrimination in the loans process through a process known as mark up.
This system allowed dealers and brokers to add a discretionary interest rate premium to the loan in addition to the advanced amount by the third party lender. This had, according to the CFPB, led to "tens of millions of dollars in consumer harm each year"
One such use of the practice was uncovered at Ally Bank, who purchased the original General Motors loan portfolio. The company was found to have marked up around 235,000 loans, and was eventually penalised $18m and forced to pay $80m in remediation payments to those affected.