Different Facts And Features Of Direct Auto Financing And Supervision

When you wish to buy a car on loan there are several banks and financial institutions you can go to avail the desired credit. There are a few notable features and facts that you should know about these ‘direct lenders.’ This knowledge will help you to step into their office with enough confidence and know what you can expect from them and the best offer to choose according to your need and affordability.

  • These institutions actually finance the borrowers directly and also advertise on different platforms to attract more and more customers to increase their business volumes.
  • These direct lenders will have a large number of physical branches that are conveniently located that will help the borrowers to access them more easily and conveniently.
  • They will offer better facilities that may vary from one to the other lender as the high level of competition for gaining more customers calls for a diverse form of acquisition expense.
  • Typically, the car dealer is a much unlikely referral source for these direct lenders and therefore they need to resort to alternate means to attract more consumers toward them so that they can deal with any credit agency.

Moreover, in most of the cases, it is seen that these direct lenders that include banks and other sources of lending such as Liberty Lending may have a very strong, long and close tie-up with the independent insurance agents and often get a large number of referrals due to such collaboration.

When these independent insurance agents steer customers to these direct lending banks for making their necessary credit arrangements before making their car purchases, the banks in turn often recommend them to go to that specific insurance agent or company for getting their car insured, which is mandatory according to the law. This, in fact, is a mutually beneficial association.

Auto finance supervision

Well, now that you know that there is a relation between the direct lenders and the insurance companies and both work for the benefit of each other, you may wonder who is going to supervise the whole act in order to ensure that there is no foul play.

Herein the role of CFPB or Consumer Finance Protect Bureau comes handy. It has different tools to ensure that the rights of the consumers are well protected. It follows the final rule for the nonbank automobile financing market as well along with the traditional ones. It also implements a series of CFPB examination procedures to ensure that everything goes as planned and as it should be going.

The process followed by the Consumer Financial Protection Bureau can be summarized as follows:

  • It currently supervises all major banks, credit unions, and thrifts that are engaged with auto financing along with all of their affiliates.
  • However, on June 10, 2015, the CFPB designed and implemented a final rule to expand its supervisory authority and control the nonbanks as well terming them as the ‘larger participants’ of the auto financing market.

In the final form as defined by the CFPB, this rule is significantly similar to the proposed rule that was issued in September 2014. According to this final CFPB rule, the market for automobile financing includes:

  • Any credit grants made for the purchase of a new car
  • Any refinancing of such loan obligations
  • Any purchases or acquisitions of any such credit obligations and refinancing and
  • Any agreements to lease a car or purchase and acquisition of such lease agreements.

As far as the ‘larger participants’ of this auto finance market is considered, they are defined as the companies and affiliate that have completed a minimum of 10,000 aggregate annual loans and lease originations in the previous calendar year.

Definition larger participants

In addition to that, the CFPB has also emphasized that any annual originations by an affiliate must be combined with the total annual originations of the primary nonbank company. This rule is applicable even if the affiliate company did not have any active relationship with the nonbank company in the past entire calendar year.

However, there are a few exclusions made in the definition of the ‘larger participants.’ These are:

  • The motor vehicle dealers that are typically excluded from the CFPB authority under Section 1029(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act
  • The motor vehicle dealers that cover retail credit or leases directly to the consumers and do not assign such credits on a regular basis and
  • The leases made to any unaffiliated third party.

In addition to the above, there are a few specific dealers who are also exempted for the supervisory authority of the CFPB. These are those dealers that satisfy the statutory definition of: 

  • A motor vehicle dealer under Section 1029(f) and
  • Those who are described in Section 1029(b).

“ It also excludes those dealers who are mainly engaged in the sales and servicing of motor vehicles or in car leasing and servicing of motor vehicles or both.

In total there are about 34 nonbank financial companies that meet the criteria of CFPB definition for a ‘larger participant’ of the auto financing market. CFPB estimates to take in more under their final rule. They expect that all these companies typically originate more than 90% of the nonbank lease and loan activity.

The definitions and terms included

The CFPB oversees any activity or transaction that has any sort of connection with auto financing. It has, therefore, a separate section of definitions that will imply whether or not it is an auto finance transaction. These definitions include:

  • Automobile meaning any self-propelled vehicle
  • Annual originations meaning any grant for vehicle purchase
  • Aggregated annual originations involving all annual originations of nonbanks and its affiliates
  • Automobile lease meaning anything that falls under section 1002(15)(A)(ii) of the Dodd-Frank Act and
  • Refinancing meaning any grant of credit that involves the replacement of any existing credit.

Therefore, it can be said that all the aspects of the auto finance are well covered and controlled by the CFPB and therefore there is no chance of any foul play by the original creditor, servicer or holder of any credit obligation.