Three years have elapsed since Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in the wake of the financial crisis.
As institutions wait for many of the Dodd-Frank Act provisions to be implemented, recent decisions announced by the Consumer Financial Protection Bureau have caused angst for certain financial companies. Nonbank entities in particular are worried about regulations that restrict their business dealings due to tighter scrutiny from federal watchdogs.
This will surely affect the financial industry as a whole.
These companies provide financial products or services to consumers, yet operate without a bank, thrift or credit union charter—insurance companies, hedge funds, private equity firms, credit reporting agencies, credit counseling services, auto dealers.
As of July 3, the bureau issued a procedural rule that establishes its supervisory authority over any nonbank it has “reasonable cause” to determine is involved in “conduct that poses risks to consumers with regard to consumer financial products or services.”
This supervisory authority extends to service providers of those nonbanks that fall under bureau supervision.
Under the new rule, then, the bureau has authority to supervise any entity in the chain of a transaction that it reasonably believes is doing something that poses a risk to the consumer.
For instance, when someone shopping for a car applies for a loan with a car dealer, a representative of the dealer requires an application and a credit report. That application and results of the credit report are processed and sent to several prospective, indirect lenders who evaluate the consumer based on his or her creditworthiness.
The consumer either qualifies for the loan or is denied. But any of these nonbank entities would be subject to supervisory authority should the bureau determine their actions failed the bureau’s standards for consumer protection.
In determining what conduct can land a nonbank in trouble with the bureau, the independent consumer bureau monitors entities for potentially unfair, deceptive or abusive practices, or other acts that might violate federal consumer financial law.
Consumer complaints about the nonbank, as well as judicial opinions and administrative decisions, can form the basis of the bureau’s “reasonable cause” determinations.
The new rule sets procedures whereby the bureau is to notify the nonbank in question, allow the company to respond to the notice, then consider a petition to terminate its supervisory authority over the nonbank after two years. During that time, however, the company must issue reports and allow for examinations to prove its compliance with consumer protection laws.
While it is yet to be determined just how far the bureau will go with this new regulatory procedure, this much is clear for automobile lenders: The days of “dealer markups” and other similar practices are in jeopardy.
In March, before the final rule on its supervisory authority of nonbanks was adopted, the bureau issued a bulletin addressing the practice whereby indirect auto lenders allow auto dealers to “mark up” lender-established interest rates. This “dealer markup” is then split between the indirect lender and dealer.
In its bulletin, the bureau asserted that the standard practices of indirect auto lenders in these types of transactions likely subjects them to the supervisory authority. The bureau sees significant risk in discretionary “dealer markups” that it believes encourages pricing disparities that could be made on the basis of race, national origin or other prohibited reasons.
Indirect auto lenders can, in fact, be sued by the bureau if the lender funds such discriminatory vehicle loans made by auto dealers.
Auto lenders are not the only type of nonbank participants facing possible supervisory authority under the bureau’s watch.
In January, the bureau adopted its final rule providing for amendments to the Truth in Lending Act.
The final rule will end tiered commissions for originators on consumer loans secured by a first mortgage on the consumer’s primary residence, and applies equally to mortgage brokers not directly employed by a bank.
The basis for this change is to remove financial incentives for loan originators who may otherwise steer consumers into riskier financial products.
Three years after passing into law, provisions of the Dodd-Frank Act may be slow to roll out for implementation. Nevertheless, the bureau is clearly establishing its authority in protecting Americans from the types of practices the Obama administration believes led to the financial crisis.
These latest rulings serve as a road map for future enforcement actions by the bureau and may easily be expanded beyond auto lenders and loan originators to similar types of indirect consumer financing transactions.•
Duncan is a partner at Bose McKinney & Evans LLP. Views expressed here are the writer’s.