[Federal Register Volume 79, Number 195 (Wednesday, October 8, 2014)]
[Proposed Rules]
[Pages 60762-60783]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-23115]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 79, No. 195 / Wednesday, October 8, 2014 / 
Proposed Rules  

[[Page 60762]]



BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Parts 1001 and 1090

[Docket No. CFPB-2014-0024]
RIN 3170-AA46


Defining Larger Participants of the Automobile Financing Market 
and Defining Certain Automobile Leasing Activity as a Financial Product 
or Service

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Proposed rule with request for public comment.

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SUMMARY: The Bureau of Consumer Financial Protection (Bureau or CFPB) 
proposes to amend the regulation defining larger participants of 
certain consumer financial product and service markets by adding a new 
section to define larger participants of a market for automobile 
financing. The new section would define a market that includes grants 
of credit for the purchase of an automobile, refinancings of such 
credit obligations, and purchases or acquisitions of such credit 
obligations (including refinancings). It would also include automobile 
leases and purchases or acquisitions of such automobile lease 
agreements. The Bureau is proposing this rule pursuant to its 
authority, under the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act), to supervise certain nonbank covered 
persons for compliance with Federal consumer financial law and for 
other purposes. The Bureau has the authority to supervise nonbank 
covered persons of all sizes in the residential mortgage, private 
education lending, and payday lending markets. In addition, the Bureau 
has the authority to supervise nonbank ``larger participant[s]'' of 
markets for other consumer financial products or services, as the 
Bureau defines by rule. The proposal (Proposed Rule) would identify a 
market for automobile financing and define as larger participants of 
this market certain nonbank covered persons that would be subject to 
the Bureau's supervisory authority. The Proposed Rule would also define 
certain automobile leases as a ``financial product or service'' under 
section 1002(15)(A)(xi)(II) of the Dodd-Frank Act. Finally, the 
Proposed Rule would make certain technical corrections to existing 
larger-participant rules.

DATES: Comments must be received on or before December 8, 2014.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2014-
0024 or RIN 3170-AA46, by any of the following methods:
     Electronic: http://www.regulations.gov. Follow the 
instructions for submitting comments.
     Mail: Monica Jackson, Office of the Executive Secretary, 
Consumer Financial Protection Bureau, 1700 G Street NW., Washington, DC 
20552.
     Hand Delivery/Courier: Monica Jackson, Office of the 
Executive Secretary, Consumer Financial Protection Bureau, 1275 First 
Street NE., Washington, DC 20002.
    Instructions: All submissions should include the agency name and 
docket number or Regulatory Information Number (RIN) for this 
rulemaking. Because paper mail in the Washington, DC area and at the 
Bureau is subject to delay, commenters are encouraged to submit 
comments electronically. In general, all comments received will be 
posted without change to http://www.regulations.gov. In addition, 
comments will be available for public inspection and copying at 1275 
First Street NE., Washington, DC 20002, on official business days 
between the hours of 10 a.m. and 5 p.m. Eastern Time. You can make an 
appointment to inspect the documents by telephoning (202) 435-7275.
    All comments, including attachments and other supporting materials, 
will become part of the public record and subject to public disclosure. 
Sensitive personal information, such as account numbers or Social 
Security numbers, should not be included. Comments will not be edited 
to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: Jolina Cuaresma, Counsel, Andrea 
Pruitt Edmonds and Amanda Quester, Senior Counsels, Office of 
Regulations, at (202) 435-7700.

SUPPLEMENTARY INFORMATION: 

I. Overview

    Section 1024 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act), codified at 12 U.S.C. 5514,\1\ gives 
the Bureau supervisory authority over all nonbank covered persons \2\ 
offering or providing three enumerated types of consumer financial 
products or services: (1) Origination, brokerage, or servicing of 
consumer loans secured by real estate, and related mortgage loan 
modification or foreclosure relief services; (2) private education 
loans; and (3) payday loans.\3\ The Bureau also has supervisory 
authority over ``larger participant[s] of a market for other consumer 
financial products or services,'' as the Bureau defines by rule.\4\
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    \1\ Public Law 111-203, section 1024, 124 Stat. 1376, 1987 
(2010) (codified at 12 U.S.C. 5514).
    \2\ The provisions of 12 U.S.C. 5514 apply to certain categories 
of nondepository (nonbank) covered persons, described in subsection 
(a)(1), and expressly exclude from coverage persons described in 12 
U.S.C. 5515(a) or 5516(a). ``Covered persons'' include: ``(A) any 
person that engages in offering or providing a consumer financial 
product or service; and (B) any affiliate of a person described [in 
(A)] if such affiliate acts as a service provider to such person.'' 
12 U.S.C. 5481(6).
    \3\ 12 U.S.C. 5514(a)(1)(A), (D), (E). The Bureau also has the 
authority to supervise any nonbank covered person that it ``has 
reasonable cause to determine, by order, after notice to the covered 
person and a reasonable opportunity . . . to respond . . . is 
engaging, or has engaged, in conduct that poses risks to consumers 
with regard to the offering or provision of consumer financial 
products or services.'' 12 U.S.C. 5514(a)(1)(C); see also 12 CFR 
part 1091 (prescribing procedures for making determinations under 12 
U.S.C. 5514(a)(1)(C)). In addition, the Bureau has supervisory 
authority over very large depository institutions and credit unions 
and their affiliates. 12 U.S.C. 5515(a). Furthermore, the Bureau has 
certain authorities relating to the supervision of other depository 
institutions and credit unions. 12 U.S.C. 5516(c)(1), (e). One of 
the Bureau's mandates under the Dodd-Frank Act is to ensure that 
``Federal consumer financial law is enforced consistently without 
regard to the status of a person as a depository institution, in 
order to promote fair competition.'' 12 U.S.C. 5511(b)(4).
    \4\ 12 U.S.C. 5514(a)(1)(B), (a)(2); see also 12 U.S.C. 5481(5) 
(defining ``consumer financial product or service'').
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    This Proposed Rule, if adopted, would (1) define certain nonbank 
covered persons as larger participants of a market for automobile 
financing that would include grants of credit for the purchase of an 
automobile, refinancings of such credit obligations and any subsequent 
refinancings thereof, purchases or acquisitions of such credit 
obligations (including refinancings), automobile leases, and purchases 
or

[[Page 60763]]

acquisitions of automobile lease agreements; (2) define, pursuant to 
section 1002(15)(A)(xi)(II) of the Dodd-Frank Act, the term ``financial 
product or service'' to include certain types of automobile leases that 
banks are authorized to offer and that the Bureau finds have or likely 
will have a material impact on consumers; and (3) make certain 
technical corrections to revise a term used in subpart A of 12 CFR part 
1090 and to clarify the affiliate aggregation requirements in two 
earlier larger-participant rules.
    This Proposed Rule would be the fifth in a series of rulemakings to 
define larger participants of markets for other consumer financial 
products or services for purposes of section 1024(a)(1)(B) of the Dodd-
Frank Act.\5\ The Proposed Rule would establish the Bureau's 
supervisory authority over certain nonbank covered persons 
participating in a market for automobile financing. The Proposed Rule 
would describe this market for consumer financial products or services, 
which the Proposed Rule labels ``automobile financing.'' The proposed 
definition would not encompass all activities that could be considered 
auto financing. Any reference herein to ``the automobile financing 
market'' means only the particular market for automobile financing 
identified by the Proposed Rule.
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    \5\ The first three rules defined larger participants of markets 
for consumer reporting, 77 FR 42874 (July 20, 2012) (Consumer 
Reporting Rule), consumer debt collection, 77 FR 65775 (Oct. 31, 
2012) (Consumer Debt Collection Rule), and student loan servicing, 
78 FR 73383 (Dec. 6, 2013) (Student Loan Servicing Rule). The Bureau 
also recently released a fourth rule, which defines larger 
participants of a market for international money transfers and is 
available at http://files.consumerfinance.gov/f/201409_cfpb_final-rule_larger-participant-rule-international-money-transfer-market.pdf 
(International Money Transfer Rule).
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    The Bureau is authorized to supervise nonbank covered persons 
subject to section 1024 of the Dodd-Frank Act for purposes of: (1) 
Assessing compliance with Federal consumer financial law; (2) obtaining 
information about such persons' activities and compliance systems or 
procedures; and (3) detecting and assessing risks to consumers and 
consumer financial markets.\6\ The Bureau conducts examinations, of 
various scopes, of supervised entities. In addition, the Bureau may, as 
appropriate, request information from supervised entities without 
conducting examinations.\7\
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    \6\ 12 U.S.C. 5514(b)(1).
    \7\ See 12 U.S.C. 5514(b) (authorizing the Bureau both to 
conduct examinations and to require reports from entities subject to 
supervision).
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    The Bureau prioritizes supervisory activity among nonbank covered 
persons on the basis of risk, taking into account, among other factors, 
the size of each entity, the volume of its transactions involving 
consumer financial products or services, the size and risk presented by 
the market in which it is a participant, the extent of relevant State 
oversight, and any field and market information that the Bureau has on 
the entity. Such field and market information might include, for 
example, information from complaints and any other information the 
Bureau has about risks to consumers posed by a particular entity.
    The specifics of how an examination takes place vary by market and 
entity. However, the examination process generally proceeds as follows. 
Bureau examiners contact the entity for an initial conference with 
management and often request records and other information. Bureau 
examiners will ordinarily also review the components of the supervised 
entity's compliance management system. Based on these discussions and a 
preliminary review of the information received, examiners determine the 
scope of an on-site examination and then coordinate with the entity to 
initiate the on-site portion of the examination. While on-site, 
examiners spend a period of time discussing with management the 
entity's policies, processes, and procedures; reviewing documents and 
records; testing transactions and accounts for compliance; and 
evaluating the entity's compliance management system. Examinations may 
involve issuing confidential examination reports, supervisory letters, 
and compliance ratings. In addition to the process described above, the 
Bureau may also conduct off-site examinations.
    The Bureau has published a general examination manual describing 
the Bureau's supervisory approach and procedures.\8\ As explained in 
the manual, the Bureau will structure examinations to address various 
factors related to a supervised entity's compliance with Federal 
consumer financial law and other relevant considerations.
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    \8\ CFPB, CFPB Supervision and Examination Manual (Oct. 1, 
2012), available at http://www.consumerfinance.gov/guidance/supervision/manual/.
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    This Proposed Rule would establish a category of nonbank covered 
persons that is subject to the Bureau's supervisory authority under 
section 1024 by defining ``larger participants'' of a market for 
automobile financing.\9\ The aspect of the Proposed Rule defining 
larger participants of a market for automobile financing pertains only 
to that purpose and would not impose new substantive consumer 
protection requirements. Nonbank covered persons generally are subject 
to the Bureau's regulatory and enforcement authority, and any 
applicable Federal consumer financial law, regardless of whether they 
are subject to the Bureau's supervisory authority.
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    \9\ The Bureau's supervisory authority also extends to service 
providers of those covered persons that are subject to supervision 
under 12 U.S.C. 5514(a)(1). 12 U.S.C. 5514(e); see also 12 U.S.C. 
5481(26) (defining ``service provider'').
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    The Bureau proposes to add Sec.  1001.1 and Sec.  1001.2(a) in new 
part 1001 to title 12 of the Code of Federal Regulations. Proposed 
Sec.  1001.1 would state the authority and purpose of part 1001, which 
is to implement the Bureau's authority, granted by section 
1002(15)(A)(xi) of the Dodd-Frank Act, to define the term ``financial 
product or service'' to include financial products or services in 
addition to those defined in sections 1002(15)(A)(i)-(x). Proposed 
Sec.  1001.2(a) would define the term ``financial product or service'' 
under that same authority to include certain automobile leases.

II. Summary of Proposed Rule

    The Bureau is authorized to define larger participants in markets 
for consumer financial products or services. Subpart A of the Bureau's 
existing larger-participant rule, 12 CFR part 1090, prescribes various 
procedures, definitions, standards, and protocols that apply with 
respect to all markets in which the Bureau defines larger 
participants.\10\ Those generally applicable provisions would also 
apply to the automobile financing market described by this Proposed 
Rule. The definitions in Sec.  1090.101 should be used, unless 
otherwise specified, when interpreting terms in this Proposed Rule.
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    \10\ 12 CFR 1090.100-.103.
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    The Bureau includes relevant market descriptions and larger-
participant tests, as it develops them, in subpart B.\11\ Accordingly, 
the Proposed Rule defining larger participants of the automobile 
financing market would become Sec.  1090.108 in subpart B.
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    \11\ 77 FR 42874, 42875 (Consumer Reporting Rule), 12 CFR 
1090.104; 77 FR 65775, 65777 (Consumer Debt Collection Rule), 12 CFR 
1090.105; 78 FR 73383, 73384 (Student Loan Servicing Rule), 12 CFR 
1090.106. As noted above, the Bureau also recently released the 
International Money Transfer Rule, which is available at http://files.consumerfinance.gov/f/201409_cfpb_final-rule_larger-participant-rule-international-money-transfer-market.pdf.
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    The Proposed Rule would define a market for automobile financing 
that

[[Page 60764]]

would cover specific activities and would set forth a test to determine 
whether a nonbank covered person is a larger participant of that 
market. Nonbanks that are the subject of this Proposed Rule provide 
automobile financing by engaging in one or more of the following 
activities: Granting credit for the purpose of purchasing an 
automobile; refinancing existing credit obligations or previously 
refinanced credit obligations that had been made for the purchase of an 
automobile; purchasing or acquiring such credit obligations (including 
refinancings); providing automobile leases; and purchasing or acquiring 
automobile lease agreements.
    The Bureau is not proposing to include automobile title lending or 
the securitization of automobile loans and leases within the meaning of 
the term ``automobile financing'' in this Proposed Rule, although as 
discussed below the Bureau is seeking comment on this approach. 
Moreover, the Proposed Rule excludes certain auto dealers.\12\ The 
Proposed Rule also would not apply to depository institutions and 
credit unions that engage in automobile financing, including those 
already subject to the Bureau's supervisory authority.
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    \12\ Under section 1029 of the Dodd-Frank Act, the Bureau may 
not exercise its authority over certain auto dealers, as outlined in 
that section. As explained below, the proposed larger-participant 
rule would also exclude certain dealers that extend retail credit or 
leases without routinely assigning them to unaffiliated third 
parties, even though such dealers are not subject to the statutory 
exclusion.
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    The Proposed Rule would define ``automobile'' to mean any self-
propelled vehicle primarily used for personal, family, or household 
purposes for on-road transportation.\13\ The Proposed Rule would define 
``annual originations'' as grants of credit for the purchase of an 
automobile, refinancings of such credit obligations and any subsequent 
refinancings thereof, and purchases or acquisitions of such credit 
obligations (including refinancings). It would also include 
``automobile leases'' and purchases or acquisitions of automobile lease 
agreements. Under the Proposed Rule, the term ``automobile lease'' 
would mean leases that fall within the meaning of section 
1002(15)(A)(ii) of the Dodd-Frank Act or meet the requirements of 
proposed Sec.  1001.2(a), which is discussed below.
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    \13\ Any reference to the term ``automobile'' means only the 
particular vehicles identified by the Proposed Rule. The term 
``auto'' as used in this Proposed Rule is intended to include a 
broader category of vehicles. Similarly, the term ``auto financing'' 
is used generically and more broadly than the proposed defined term 
``automobile financing.''
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    The Proposed Rule would set forth a test to determine whether a 
nonbank covered person is a larger participant of the automobile 
financing market. A nonbank covered person would be a larger 
participant if it has at least 10,000 aggregate annual originations. As 
prescribed by existing Sec.  1090.102, any nonbank covered person that 
qualifies as a larger participant would remain a larger participant 
until two years after the first day of the tax year in which the person 
last met the applicable test.\14\
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    \14\ 12 CFR 1090.102.
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    Pursuant to existing Sec.  1090.103, a person would be able to 
dispute whether it qualifies as a larger participant in the automobile 
financing market. The Bureau would notify an entity when the Bureau 
intended to undertake supervisory activity; the entity would then have 
an opportunity to submit documentary evidence and written arguments in 
support of its claim that it was not a larger participant.\15\ Section 
1090.103(d) provides that the Bureau may require submission of certain 
records, documents, and other information for purposes of assessing 
whether a person is a larger participant of a covered market;\16\ this 
authority would be available to the Bureau to facilitate its 
identification of larger participants of the automobile financing 
market, just as in other markets.
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    \15\ 12 CFR 1090.103(a).
    \16\ 12 CFR 1090.103(d).
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    As noted above, the Bureau is proposing to include automobile 
leases in the criterion it would use to define larger participants in 
the market for automobile financing. Certain consumer leases are 
identified as a financial product or service under section 
1002(15)(A)(ii) and, thus, the Bureau would have authority over such 
leases and those leases would count toward the threshold for the 
larger-participant test in this Proposed Rule. While most consumer 
leases fall within section 1002(15)(A)(ii), some likely will not 
because section 1002(15)(A)(ii) requires that leases be, among other 
things, the functional equivalent of purchase finance arrangements.\17\ 
As discussed further below, the Bureau believes that the purpose of the 
Proposed Rule and the Bureau's overall mission would be best served by 
covering automobile leasing more broadly. Accordingly, the Bureau also 
proposes in Sec.  1001.2(a) to define the term ``financial product or 
service'' under its authority granted by section 1002(15)(A)(xi)(II) of 
the Dodd-Frank Act to include automobile leases that do not fall under 
the definition in section 1002(15)(A)(ii).
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    \17\ As discussed in greater detail below, section 
1002(15)(A)(ii) also requires that leases be non-operating and have 
an initial term of at least 90 days. The Bureau believes that 
automobile leases in the current consumer leasing market meet these 
two criteria.
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    Finally, the Proposed Rule would amend the Bureau's existing 
larger-participant rule. Specifically, the Bureau is proposing to make 
a technical correction to existing Sec.  1090.101, by inserting the 
word ``financial'' before the term ``product or service'' in the 
definition of ``nonbank covered person.'' The Proposed Rule would also 
amend paragraph (iii)(D) of the definition of ``annual receipts'' in 
existing Sec.  1090.104(a) and Sec.  1090.105(a), which governs how the 
affiliate aggregation rules apply to formerly affiliated companies for 
purposes of the consumer reporting and consumer debt collection larger-
participant rules. The proposal would clarify that if a company ceases 
to be an affiliated company of a nonbank covered person during the 
relevant measurement period, its annual receipts must be aggregated for 
the entire period of measurement.

III. Legal Authority and Procedural Matters

A. Rulemaking Authority

    The Bureau is issuing this Proposed Rule pursuant to its authority 
under the Dodd-Frank Act: (1) Sections 1024(a)(1)(B) and (a)(2), which 
authorize the Bureau to supervise nonbanks that are larger participants 
of markets for consumer financial products or services, as defined by 
rule; \18\ (2) section 1024(b)(7), which, among other things, 
authorizes the Bureau to prescribe rules to facilitate the supervision 
of covered persons under section 1024; \19\ (3) section 1022(b)(1), 
which grants the Bureau the authority to prescribe rules as may be 
necessary or appropriate to enable the Bureau to administer and carry 
out the purposes and objectives of Federal consumer financial law, and 
to prevent evasions of such law; \20\ and (4) section 1002(15)(A)(xi), 
which authorizes the Bureau to prescribe rules to define ``other 
financial product[s] or service[s],'' if the Bureau finds that such 
financial products or services are: (i) Entered into or conducted as a 
subterfuge or with a purpose to evade any Federal consumer financial 
law; or (ii) permissible for a bank or a financial holding company to 
offer or provide under any applicable Federal law or regulation, and 
have, or likely will have, a material impact on consumers.\21\
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    \18\ 12 U.S.C. 5514(a)(1)(B), (a)(2).
    \19\ 12 U.S.C. 5514(b)(7).
    \20\ 12 U.S.C. 5512(b)(1).
    \21\ 12 U.S.C. 5481(15)(A)(xi).

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[[Page 60765]]

B. Proposed Effective Date of Final Rule

    The Administrative Procedure Act generally requires that rules be 
published not less than 30 days before their effective dates.\22\ The 
Bureau is proposing that the final rule arising from this Proposed Rule 
would be effective 60 days after publication.
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    \22\ 5 U.S.C. 553(d).
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IV. Section-by-Section Analysis

A. 12 CFR Part 1001 Financial Product or Service

Section 1001.1 Authority and Purpose
    Proposed Sec.  1001.1 states the authority and purpose for new part 
1001. It explains that under section 1002(15)(A)(xi) of the Dodd-Frank 
Act, the Bureau is authorized to define certain financial products or 
services for purposes of title X of the Dodd-Frank Act, in addition to 
those defined in sections 1002(15)(A)(i)-(x). As proposed Sec.  1001.1 
explains, the purpose of part 1001 is to implement that authority.
Section 1001.2 Definitions
    2(a)
    Proposed Sec.  1001.2(a) would define the term ``financial product 
or service'' under section 1002(15)(A)(xi)(II) of the Dodd-Frank Act, 
to include certain automobile leases that (1) meet the requirements of 
section 108 of the Competitive Equality Banking Act of 1987 (CEBA),\23\ 
as implemented by 12 CFR part 23, and are thus permissible for banks to 
offer or provide; and (2) are not currently defined as a financial 
product or service under section 1002(15)(A)(ii) of the Dodd-Frank Act. 
Under section 1002(15)(A)(xi)(II), for purposes of title X of the Act, 
the Bureau may define as a covered financial product or service, by 
regulation: ``such other financial product or service . . . if the 
Bureau finds that such financial product or service is-- . . . (II) 
permissible for a bank or for a financial holding company to offer or 
to provide under any provision of a Federal law or regulation 
applicable to a bank or a financial holding company, and has, or likely 
will have, a material impact on consumers.'' The Bureau is proposing 
Sec.  1001.2(a) pursuant to this authority.
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    \23\ Public Law 100-86, 101 Stat. 519 (1987) (codified at 12 
U.S.C. 24(Tenth)).
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    Depository institutions have long engaged in auto leasing 
activities, and nonbank entities are a major player in the leasing 
sector.\24\ It is an important and growing part of the auto financing 
market for consumers. While the auto financing market is largely 
comprised of purchase loans, in recent years consumers have begun to 
migrate more towards leasing agreements.\25\ As of the first quarter of 
2014, leases comprise approximately 30 percent of new vehicle 
automotive financing transactions, which is up from about 20 percent 
five years ago.\26\ Furthermore, of all new and used auto financing 
transactions recorded in the first quarter of 2014, approximately 14 
percent occurred through leasing arrangements, while the remainder used 
purchase financing.\27\
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    \24\ DBRS, Methodology: Rating U.S. Auto Lease Securitizations 4 
(Jan. 2010), available at http://www.dbrs.com/research/231458.
    \25\ Melinda Zabritski, Experian Automotive, State of the 
Automotive Finance Market First Quarter 2014 (June 5, 2014), 
available at http://www.experian.com/assets/automotive/brochures/experian-auto-2014-q1-credit-webinar-presentation-6-5-2014.pdf?WT.srch=Auto_Q12014FinanceTrends_PDF.
    \26\ See id. at 21.
    \27\ See id. at 20.
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    The Bureau is proposing to include automobile leasing in the 
consumer financial product or service market for automobile financing 
for purposes of a rule defining larger participants in that market. 
Section 1002(15)(A)(ii) defines the term ``financial product or 
service'' to include certain leases that, among other things, are the 
functional equivalent of purchase finance arrangements.\28\ As 
discussed below, the Bureau believes that most consumer automobile 
leases meet this requirement; however, some may not. The Dodd-Frank Act 
accounts for the possibility that the enumerated list of financial 
products and services in sections 1002(15)(A)(i)-(x) may not completely 
capture the markets for financial products or services available to 
consumers. Specifically, section 1002(15)(A)(xi)(II) grants the Bureau 
the authority to define additional financial products or services by 
regulation as described above. Pursuant to this authority, the Bureau 
is proposing Sec.  1001.2(a) to define automobile leases that (1) meet 
the requirements of section 108 of CEBA, as implemented by 12 CFR part 
23, and are thus permissible for banks to offer or provide; and (2) are 
not currently defined as a financial product or service under section 
1002(15)(A)(ii) of the Dodd-Frank Act.
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    \28\ Section 1002(15)(A)(ii) also requires that leases be non-
operating and have an initial term of at least 90 days. The Bureau 
believes that automobile leases in the current consumer leasing 
market meet these two criteria.
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    Section 1002(15)(A)(ii) defines the term ``financial product or 
service,'' in relevant part, as: ``extending or brokering leases of 
personal . . . property that are the functional equivalent of purchase 
finance arrangements, if--(I) the lease is on a non-operating basis; 
[and] (II) the initial term of the lease is at least 90 days.'' \29\ 
For ease of reference, the Bureau refers to these types of leasing 
arrangements herein as ``category (ii)'' leases. As explained below, in 
the Bureau's view, the features of a category (ii) lease are found in 
most consumer automobile leases.
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    \29\ Section 1002(5) of the Dodd-Frank Act defines ``Consumer 
financial product or service'' as ``any financial product or service 
that is described in one or more categories under--(A) paragraph 
(15) and is offered or provided for use by consumers primarily for 
personal, family, or household purposes; or (B) clause (i), (iii), 
(ix), or (x) of paragraph (15)(A), and is delivered, offered, or 
provided in connection with a consumer financial product or service 
referred to in subparagraph (A).''
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    The Bureau believes the phrase ``functional equivalent of purchase 
finance arrangements''--which is not defined in the Dodd-Frank Act 
\30\--is reasonably interpreted to encompass most automobile leases. 
Under section 1021 of the Dodd-Frank Act, the Bureau is charged with 
``implement[ing], and, where applicable, enforc[ing] Federal consumer 
financial law consistently for the purpose of ensuring that all 
consumers have access to markets for consumer financial products and 
services and that markets for consumer financial products and services 
are fair, transparent, and competitive.'' \31\ In light of this purpose 
and mandate, the Bureau believes the term ``functional equivalent of 
purchase finance arrangements'' is best interpreted from the 
perspective of the consumer.
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    \30\ The Bureau is not aware of any Federal or State statute or 
regulation that defines the term.
    \31\ 12 U.S.C. 5511(a).
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    For consumers, leasing a vehicle requires an application process 
and an ongoing contractual obligation that are both financial in nature 
and similar to entering into a financial arrangement to purchase a 
vehicle. Like a consumer seeking to qualify for a loan to purchase a 
vehicle, a consumer seeking to lease a vehicle must provide basic 
financial information such as income and credit history.\32\ Though a 
consumer who leases an automobile need not finance the entire cost of 
the vehicle, the consumer still undertakes a major financial obligation 
in the form of a commitment to make a stream of payments over a 
significant period of time.\33\ The consumer must consider

[[Page 60766]]

how much cash to use, if any, for a down payment, the preferred lease 
term, and the affordability of monthly payments and other costs 
including maintenance, insurance, and state registration fees.
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    \32\ See Fed. Trade Comm'n, Consumer Information: Understanding 
Vehicle Financing (Jan. 2014), available at http://www.consumer.ftc.gov/articles/0056-understanding-vehicle-financing.
    \33\ Like consumers who borrow money to purchase a vehicle, 
consumers who lease are contractually obligated to make monthly 
lease payments during the lease term. See Fed. Res. Sys., Key to 
Vehicle Leasing Consumer Guide (Mar. 13, 2013), available at http://www.federalreserve.gov/pubs/leasing/.
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    Auto leasing also shares many other features with auto lending. A 
consumer must demonstrate an ability to pay the monthly payments in 
order to qualify for a lease and a consumer's creditworthiness impacts 
the terms of the lease. An auto finance company may furnish information 
about a lessee, such as payment history, to credit bureaus in the same 
manner that the company does for a borrower. Also, similar to a 
consumer who finances an auto with a loan, a consumer who leases an 
auto bears the responsibility for the vehicle's upkeep and must 
maintain, repair, and service the vehicle during the lease term.\34\ 
The consumer must also insure the vehicle and bears the risk should the 
vehicle become damaged or totaled.\35\ Similarly, if a consumer fails 
to make loan or lease payments, the vehicle must be returned to the 
auto finance company, and fees or penalties may apply.\36\ Most 
importantly, regardless of whether consumers seek to purchase or lease 
a vehicle, they must negotiate the price and terms. For all the 
foregoing reasons, automobile leases carry similar obligations and 
risks that vehicle loans present to consumers. In addition, in an auto 
leasing arrangement, 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.\37\ Accordingly, 
from the perspective of a consumer, leasing presents an alternative 
method to a loan for acquiring a vehicle through a series of 
installment payments, and is therefore reasonably understood to be the 
functional equivalent of purchase finance arrangements.
---------------------------------------------------------------------------

    \34\ See id.
    \35\ See id.
    \36\ See id. Also, if a consumer terminates a lease early, early 
termination fees may apply.
    \37\ CFPB, Ask CFPB: What is residual value? (June 24, 2012), 
available at http://www.consumerfinance.gov/askcfpb/737/what-residual-value.html. The residual value is the projected market 
value of the vehicle at the end of the lease, which is usually the 
amount the consumer would have to pay to purchase the vehicle at the 
end of the lease term. Additionally, the consumer may be responsible 
for any applicable taxes or fees.
---------------------------------------------------------------------------

    Moreover, autos are important to the financial well-being of 
consumers regardless of whether the consumer obtains the use of a 
vehicle through a lease or a loan. Consumers rely on autos for their 
transportation needs, including to and from the workplace. From a 
consumer's standpoint, whether a vehicle is leased or financed through 
a loan, any consumer financial law violation that impedes access to a 
vehicle or otherwise creates problems related to the loan or leasing 
arrangement can have a critical impact on the consumer. Thus, as 
interpreted by the Bureau, most automobile leases are the functional 
equivalent of purchase finance arrangements.
    The Bureau believes that typical auto leases also meet the 
remaining two requirements of section 1002(15)(A)(ii) of the Dodd-Frank 
Act. First, auto leases are generally ``non-operating.'' Consistent 
with the definition in Regulation Y, which governs bank holding 
companies and changes in bank control, the Bureau interprets ``non-
operating'' to mean that the lease provider is not, directly or 
indirectly, engaged in operating, servicing, maintaining, or repairing 
the leased property during the lease term.\38\ Under most auto leases, 
the consumer, rather than the lessor, is responsible for ensuring the 
care and maintenance of the vehicle.\39\ Second, most leases have terms 
well beyond 90 days. Lease terms for autos typically range from 12 to 
60 months, with the majority of leases ranging from 24 to 48 
months.\40\ Thus, the Bureau believes that most automobile leases 
readily fall under section 1002(15)(A)(ii) as financial products or 
services.
---------------------------------------------------------------------------

    \38\ 12 CFR 225.28(b)(3)(i) n.6 (``The requirement that the 
lease be on a nonoperating basis means that the bank holding company 
may not, directly or indirectly, engage in operating, servicing, 
maintaining, or repairing leased property during the lease term. For 
purposes of the leasing of automobiles, the requirement that the 
lease be on a nonoperating basis means that the bank holding company 
may not, directly or indirectly: (1) Provide servicing, repair, or 
maintenance of the leased vehicle during the lease term; (2) 
purchase parts and accessories in bulk or for an individual vehicle 
after the lessee has taken delivery of the vehicle; (3) provide the 
loan of an automobile during servicing of the leased vehicle; (4) 
purchase insurance for the lessee; or (5) provide for the renewal of 
the vehicle's license merely as a service to the lessee where the 
lessee could renew the license without authorization from the 
lessor.'').
    \39\ See supra note 33.
    \40\ See Zabritski, supra note 25, at 25; see also supra note 
33.
---------------------------------------------------------------------------

    However, as discussed above, the requirement that category (ii) 
leases be the functional equivalent of purchase finance arrangements 
means that coverage of leases under section 1002(15)(A)(ii) will 
necessarily depend on a number of factors and circumstances that may 
vary between particular leases and institutions. Given the potential 
variance in the terms of lease agreements, the Bureau is concerned that 
not all automobile leases that materially impact consumers will 
necessarily qualify for coverage under section 1002(15)(A)(ii) and that 
market participants may have a difficult time discerning which leases 
meet the definition and which do not. Such a result would make the 
automobile financing larger-participant rule difficult to administer 
with respect to leasing and would not provide optimal protection to 
consumers. To further the mandate of protecting consumers and for ease 
of administering the automobile financing larger-participant rule, the 
Bureau is proposing to exercise its authority under section 
1002(15)(A)(xi)(II) of the Dodd-Frank Act to define certain automobile 
leases not covered under section 1002(15)(A)(ii) as financial products 
or services within the meaning of section 1002(15)(A) of the Dodd-Frank 
Act.
    Under section 1002(15)(A)(xi)(II), for purposes of title X of the 
Dodd-Frank Act, the Bureau may define as a covered financial product or 
service, by regulation: ``such other financial product or service . . . 
if the Bureau finds that such financial product or service is-- . . . 
(II) permissible for a bank or for a financial holding company to offer 
or to provide under any provision of a Federal law or regulation 
applicable to a bank or a financial holding company, and has, or will 
have, a material impact on consumers.'' In this proposal, the Bureau 
would define the term ``financial product or service'' under section 
1002(15)(A)(xi)(II) to include certain automobile leases that: (1) meet 
the requirements of section 108 of CEBA, as implemented by 12 CFR part 
23, and therefore are permissible for banks to offer or provide; and 
(2) are not the functional equivalent of purchase finance arrangements 
under section 1002(15)(A)(ii) of the Dodd-Frank Act.
    Banks and financial holding companies are broadly authorized to 
engage in automobile leasing. With respect to national banks, CEBA 
amended the National Bank Act, to add, among other things, 12 U.S.C. 
24(Tenth), which authorizes national banks to ``invest in tangible 
personal property, including, without limitation, vehicles, 
manufactured homes, machinery, equipment, or furniture, for lease 
financing transactions on a net lease basis.'' \41\ Neither CEBA nor 
its

[[Page 60767]]

implementing regulations require that such leases be the functional 
equivalent of loans, credit, or purchase finance arrangements.\42\ 
Similarly, under Regulation Y, bank and financial holding companies may 
engage in leasing of personal property irrespective of whether the 
leases are the functional equivalent of loans, credit, or purchase 
finance arrangements.\43\
---------------------------------------------------------------------------

    \41\ Under the implementing regulations, net lease is defined as 
``a lease under which the national bank will not, directly or 
indirectly, provide or be obligated to provide for:
    (1) Servicing, repair, or maintenance of the leased property 
during the lease term;
    (2) Parts or accessories for the leased property;
    (3) Loan of replacement or substitute property while the leased 
property is being serviced;
    (4) Payment of insurance for the lessee, except where the lessee 
has failed in its contractual obligation to purchase or maintain 
required insurance; or
    (5) Renewal of any license or registration for the property 
unless renewal by the bank is necessary to protect its interest as 
owner or financier of the property.''
    12 CFR 23.2(f).
    \42\ See 12 U.S.C. 24(Tenth); 12 CFR 23.2, 23.3.
    \43\ 12 CFR 225.28(b)(3). Bank holding companies are limited to 
leases that are non-operating, as described above, and have a term 
of at least 90 days. Id.
---------------------------------------------------------------------------

    Additionally, the Bureau believes that, whether or not a particular 
automobile lease qualifies as a category (ii) lease, all consumer 
automobile leasing, including leasing covered by the proposed 
definition, has a material impact on consumers. As discussed below, 
access to a vehicle is critical for consumers. Auto leasing is a 
significant financial obligation, and consumers are increasingly 
turning to leasing as a means to obtain a vehicle. The impact of 
automobile leasing on consumers and their financial well-being does not 
turn on whether a lease is the functional equivalent of a purchase 
finance arrangement.
    Accordingly, as authorized under section 1002(15)(A)(xi)(II) of the 
Dodd-Frank Act, the Bureau is proposing to define the term ``financial 
product or service'' to include extending or brokering leases for 
automobiles, where the lease: (1) qualifies as a full-payout lease \44\ 
and a net lease, as provided by 12 CFR 23.3(a), and has an initial term 
of not less than 90 days, as provided by 12 CFR 23.11; and (2) is not a 
financial product or service under section 1002(15)(A)(ii).\45\ The 
proposed definition meets the requirements of section 
1002(15)(A)(xi)(II). As discussed above, banks and financial holding 
companies are permitted to engage in automobile leasing described under 
this definition, and such automobile leasing has a material impact on 
consumers.
---------------------------------------------------------------------------

    \44\ Under the implementing regulations, ``full-payout lease'' 
is defined as ``a lease in which the national bank reasonably 
expects to realize the return of its full investment in the leased 
property, plus the estimated cost of financing the property over the 
term of the lease, from:
    (1) Rentals;
    (2) Estimated tax benefits; and
    (3) The estimated residual value of the property at the 
expiration of the lease term.''
    12 CFR 23.2(e).
    \45\ For purposes of this definition, ``automobile'' would be 
defined as proposed in 12 CFR 1090.108(a).
---------------------------------------------------------------------------

    This proposed definition would ensure that such leases are subject 
to the same range of protections applicable to ``financial product[s] 
or service[s]'' under the Dodd-Frank Act. For example, it would ensure 
that the offering or providing of the defined leases is subject to the 
prohibition against unfair, deceptive, or abusive acts or practices in 
section 1031 of the Dodd-Frank Act.\46\ Because leases that are not the 
functional equivalent of purchase finance arrangements can raise the 
same consumer protection concerns as category (ii) leases, the Bureau 
believes that it is appropriate to subject these additional leases to 
the Dodd-Frank Act provisions that apply to ``financial product[s] or 
service[s].'' Comprehensive coverage of automobile leasing will also 
make the Proposed Rule defining larger participants of the automobile 
financing market more accurately reflect the structure of that market 
and easier to administer by eliminating uncertainty about which types 
of leasing activities are counted.
---------------------------------------------------------------------------

    \46\ The proposed definition would also expand the scope of 
certain other Bureau authorities under title X of the Dodd-Frank 
Act. Perhaps most significantly, the proposed definition would 
expand the Bureau's rulemaking authority under section 1032 of the 
Dodd-Frank Act, which authorizes the Bureau to prescribe rules to 
ensure that the features of any consumer financial product or 
service are fully, accurately, and effectively disclosed to 
consumers in a manner that permits consumers to understand the 
costs, benefits, and risks associated with the product or service. 
In addition, the proposed definition would expand the scope of the 
Bureau's authority under section 1022(c) of the Dodd-Frank Act to 
``monitor for risks to consumers in the offering or provision of 
consumer financial products or services, including developments in 
markets for such products or services,'' and the scope of the 
Bureau's authority under section 1033 of the Dodd-Frank Act to 
prescribe rules for covered persons with respect to consumer rights 
to access information concerning consumer financial products or 
services that the consumer received from such person.
---------------------------------------------------------------------------

    The Bureau invites comments on its analysis regarding the leasing 
market and this proposed definition, and requests data on automobile 
leases generally.

B. 12 CFR Part 1090 Defining Larger Participants of Certain Consumer 
Financial Product and Service Markets

Section 1090.101 Definitions
    The Bureau proposes to make a technical correction to the 
definition of ``nonbank covered person'' in Sec.  1090.101 by 
substituting the term ``consumer financial product or service'' for 
``consumer product or service'' where it appears. With this 
substitution, the definition would read:
    Nonbank covered person means, except for persons described in 12 
U.S.C. 5515(a) and 5516(a):
    (1) Any person that engages in offering or providing a consumer 
financial product or service; and
    (2) Any affiliate of a person that engages in offering or providing 
a consumer financial product or service if such affiliate acts as a 
service provider to such person.
Section 1090.104 Consumer Reporting Market
    104(a) Market-related definitions
    104(a), paragraph (iii)(D) of the definition of ``Annual 
receipts''--``Annual receipts of affiliated companies''
    The Bureau proposes to make a technical correction to paragraph 
(iii)(D) of the definition of ``annual receipts'' in Sec.  1090.104(a), 
which governs how the affiliate aggregation rules apply to formerly 
affiliated companies for purposes of the Consumer Reporting Rule. For 
the reasons explained below, the correction would clarify that if a 
company is an affiliated company of the nonbank covered person during 
the relevant measurement period but ceases to be an affiliated company 
during the same period, the annual receipts of the nonbank covered 
person and the formerly affiliated company must be aggregated for the 
entire period of measurement. As noted below, the Bureau is proposing 
to make the same change to paragraph (iii)(D) of the definition of 
``annual receipts'' in Sec.  1090.105(a) in the Consumer Debt 
Collection Rule.
    Under section 1024(a)(3)(B) of the Dodd-Frank Act, the activities 
of affiliated companies are to be aggregated for purposes of computing 
activity levels for the larger-participant rules. In the Consumer 
Reporting and Consumer Debt Collection Rules, the Bureau has 
implemented the aggregation called for by section 1024(a)(3)(B) by 
prescribing the addition of all the receipts of a nonbank covered 
person and its affiliated companies to produce the nonbank covered 
person's annual receipts.\47\ The Bureau has prescribed similar 
calculations for account volume in the Student Loan Servicing Rule and 
for aggregate annual international money transfers in the International 
Money Transfer Rule.\48\
---------------------------------------------------------------------------

    \47\ 12 CFR 1090.104(a), 1090.105(a).
    \48\ 12 CFR 1090.106(a), 1090.107(a).
---------------------------------------------------------------------------

    The affiliate aggregation provisions of each of the larger-
participant rules address circumstances where a

[[Page 60768]]

company becomes affiliated with a nonbank covered person or ceases to 
be affiliated with the nonbank covered person during the relevant 
measurement period.\49\ For simplicity and completeness of coverage, 
the Bureau believes it is appropriate in both circumstances to 
aggregate the activity of the company with that of the nonbank covered 
person for the entire period of measurement, even though the company 
was an affiliated company of the nonbank covered person for only part 
of the measurement period.
---------------------------------------------------------------------------

    \49\ This aspect is addressed in paragraphs (iii)(B) and 
(iii)(D) of the definition of ``annual receipts'' in Sec.  
1090.104(a), paragraphs (iii)(B) and (iii)(D) of the definition of 
``annual receipts'' in Sec.  1090.105(a), paragraphs (iii)(B) and 
(iii)(C) of the definition of ``account volume'' in Sec.  
1090.106(a), and paragraph (iii)(B) of the definition of ``aggregate 
annual international money transfers'' in Sec.  1090.107(a).
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    This is the approach used in the Student Loan Servicing Rule's 
definition of ``account volume'' and the International Money Transfer 
Rule's definition of ``aggregate annual international money 
transfers.'' \50\ It is also the approach that the Bureau intended to 
adopt in the Consumer Reporting and Consumer Debt Collection Rules. 
However, the language addressing aggregation of formerly-affiliated 
companies in the definition of ``annual receipts'' in those rules is 
unclear.\51\ To clarify the operation of those paragraphs, the Bureau 
proposes to replace the final sentence of paragraph (iii)(D) of Sec.  
1090.104(a)'s definition of ``annual receipts'' with: ``The annual 
receipts of a nonbank covered person and its formerly affiliated 
company are aggregated for the entire period of measurement if the 
affiliation ceased during the applicable period of measurement as set 
forth in paragraph (ii) of this definition.''
---------------------------------------------------------------------------

    \50\ Paragraph (iii)(C) of the definition of ``account volume'' 
in Sec.  1090.106(a) provides: ``If two affiliated companies cease 
to be affiliated companies, the number of accounts of each continues 
to be included in the other's account volume until the succeeding 
December 31.'' Paragraph (iii)(B) of the definition of ``aggregate 
annual international money transfers'' in Sec.  1090.107(a) 
provides:
    The annual international money transfers of a nonbank covered 
person must be aggregated with the annual international money 
transfers of any person that was an affiliated company of the 
nonbank covered person at any time during the preceding calendar 
year. The annual international money transfers of the nonbank 
covered person and its affiliated companies are aggregated for the 
entire preceding calendar year, even if the affiliation did not 
exist for the entire calendar year.
    \51\ Paragraph (iii) of the definition of ``annual receipts'' in 
both Sec.  1090.104(a) and Sec.  1090.105(a) provides:
    The annual receipts of a formerly affiliated company are not 
included if affiliation ceased before the applicable period of 
measurement as set forth in paragraph (ii) of this definition. This 
exclusion of annual receipts of formerly affiliated companies 
applies during the entire period of measurement, rather than only 
for the period after which affiliation ceased.
---------------------------------------------------------------------------

Section 1090.105 Consumer Debt Collection Market
    105(a) Market-related definitions
    105(a), paragraph (iii)(D) of the definition of ``Annual 
receipts''--``Annual receipts of affiliated companies''
    For the same reasons described above with respect to Sec.  
1090.104(a), the Bureau proposes to replace the final sentence of 
paragraph (iii)(D) of Sec.  1090.105(a)'s definition of ``annual 
receipts'' with: ``The annual receipts of a nonbank covered person and 
its formerly affiliated company are aggregated for the entire period of 
measurement if the affiliation ceased during the applicable period of 
measurement as set forth in paragraph (ii) of this definition.''
Section 1090.108 Automobile Financing Market
    The Bureau is proposing Sec.  1090.108 to define larger 
participants of the automobile financing market because of the 
important role that automobiles and related financing play in 
consumers' lives. Autos have become indispensable for most working 
individuals, with nearly 90 percent of the workforce commuting to work 
by car, and most driving alone.\52\ Consumers' reliance on vehicles is 
underscored by recent studies on repayment patterns, which show that 
consumers pay their auto loans before other secured and unsecured 
debt.\53\ Auto loans are the third largest category of outstanding 
household debt, behind mortgage and student loans. In the first quarter 
of 2014, consumers in the United States had 87.4 million outstanding 
auto loans valued at nearly $900 billion.\54\
---------------------------------------------------------------------------

    \52\ See Brian McKenzie & Melanie Rapino, U.S. Census Bureau, 
Commuting in the United States: 2009 (2011), http://www.census.gov/prod/2011pubs/acs-15.pdf.
    \53\ See TransUnion, New Developments around the Consumer 
Payment Hierarchy (2014), http://media.marketwire.com/attachments/201403/233081_PaymentHierarchyInfographic2014FINAL.jpg (Full report 
available at http://www.transunioninsights.com/studies/behaviorstudy).
    \54\ Fed. Res. Bank of N.Y., Quarterly Report on Household Debt 
and Credit (May 2014), http://www.newyorkfed.org/householdcredit/2014-q1/data/pdf/HHDC_2014Q1.pdf. According to the New York Federal 
Reserve, ``auto loans'' are ``loans taken out to purchase a car, 
including Auto Bank loans provided by banking institutions (banks, 
credit unions, savings and loan associations), and Auto Finance 
loans, provided by automobile dealers and automobile financing 
companies.''
---------------------------------------------------------------------------

    As stated above, the Bureau is proposing to define a market for 
automobile financing that would include grants of credit for the 
purchase of an automobile, refinancings of such credit obligations and 
any subsequent refinancings thereof, and purchases or acquisitions of 
such credit obligations (including refinancings). It would also include 
automobile leases and purchases or acquisitions of automobile lease 
agreements. While a significant number of consumers obtain credit to 
purchase their automobile,\55\ in recent years, consumers have begun to 
migrate more towards leasing agreements. Leasing is growing quickly as 
a proportion of new vehicle financing.\56\
---------------------------------------------------------------------------

    \55\ In addition to financing the initial acquisition of an 
automobile, some consumers refinance their existing automobile 
loans. Consumers typically refinance their automobile loans to lower 
their loan interest rates to achieve lower monthly payments. The 
level of refinancing depends on trends in interest rate levels over 
the term for most auto loans, which ranges from three to seven 
years.
    \56\ As stated above, at the end of the first quarter of 2014, 
leases comprised approximately 30 percent of new vehicle automotive 
financing transactions, which is up from about 20 percent five years 
ago. See Zabritski, supra note 25.
---------------------------------------------------------------------------

    Under the proposed automobile financing market, nonbank 
participants include: (1) Specialty finance companies, (2) ``captive'' 
nonbanks (commonly referred to as ``captives''), and (3) Buy Here Pay 
Here (BHPH) finance companies.\57\ Specialty financing companies serve 
consumers in specialized markets. Many of these companies focus on 
providing financing to subprime borrowers who tend to have past credit 
problems, lower income, or limited credit histories, which prevent them 
from being able to obtain financing elsewhere.
---------------------------------------------------------------------------

    \57\ Although dealers may also engage in some automobile 
financing activities, they are not included for purposes of this 
discussion of market participants.
---------------------------------------------------------------------------

    Generally, captives are subsidiary finance companies owned by auto 
manufacturers. They provide consumers with financing for the primary 
purpose of facilitating their parent companies' and associated 
franchised dealers' auto sales.
    BHPH finance companies are similar to captives in that they are 
associated with certain BHPH dealers,\58\ which traditionally focus on 
subprime and deep subprime borrowers. While BHPH dealers are mostly 
independently-owned entities that serve as the primary lender and 
receive payments directly from consumers, some larger BHPH dealers will 
sell or assign their contracts to specific BHPH finance companies once 
the contract has been consummated with the consumer.

[[Page 60769]]

However, these BHPH finance companies do not focus on a particular auto 
manufacturer unlike captives whose primary purpose is to extend credit 
to consumers who want to purchase or lease a specific manufacturer's 
vehicles.\59\
---------------------------------------------------------------------------

    \58\ Unlike captives, however, not all BHPH finance companies 
are associated with specific automobile dealers. The Bureau is aware 
of BHPH finance companies that provide financing to independently-
owned BHPH dealer franchises.
    \59\ The BHPH segment of the market primarily serves deep 
subprime borrowers. BHPH automobile dealers generally are 
indifferent to the consumers' automobile choice. Typically, only 
after the dealer assesses consumers' creditworthiness and determines 
their maximum monthly payment does the dealer present automobile 
options.
---------------------------------------------------------------------------

    According to the Bureau's estimates based on Experian Automotive's 
AutoCount[supreg] database,\60\ the proposed automobile financing 
market includes over five hundred nonbank automobile lenders \61\ and 
is fairly concentrated. As measured by the number of transactions 
identified in the AutoCount Lender Report\SM\, fewer than 40 entities 
comprise over 90 percent of the auto loan and lease transactions in the 
nonbank market.\62\ The top tier of this market is dominated by large 
captives. The other large companies in the nonbank automobile financing 
market are either specialty finance companies or BHPH finance 
companies. The lower tiers of the nonbank market are comprised 
generally of smaller regional specialty finance companies.
---------------------------------------------------------------------------

    \60\ Experian Automotive's AutoCount database is a vehicle 
database that collects monthly transaction data from State 
Departments of Motor Vehicles (DMVs). See also infra note 79 and 
accompanying text.
    \61\ To reach this estimate, the Bureau considered data from 
Experian Automotive's AutoCount database for calendar year 2013, 
with several adjustments. First, transactions with no lender listed 
were excluded from the sample. Second, entities with fewer than 360 
loans and leases on an annual basis were excluded from the sample. 
Third, entities that were identified by Experian Automotive as 
``Other'' in the lender type category were also excluded from the 
sample. Fourth, the Bureau excluded entities that already fall 
within the Bureau's supervisory authority or that it identified as 
BHPH dealers and title lenders. In some cases, entities were also 
consolidated due to known affiliations.
    \62\ These estimates were derived using the same methodology 
described in supra note 61.
---------------------------------------------------------------------------

    Auto credit is provided both through direct and indirect channels 
creating different dynamics for consumers and industry participants. In 
the direct lending channel, a consumer seeks credit directly from the 
financing source, whereas in the indirect lending channel, the dealer 
typically facilitates a loan from a third-party finance source.\63\ 
Depository institutions and credit unions have an advantage in the 
direct lending space because these entities often have a pre-existing 
relationship with consumers. Captives and other specialty finance 
companies are more active in the indirect channel. Most consumers who 
finance the purchase of an automobile--roughly 80 percent--use the 
indirect channel and look to automobile dealers to facilitate their 
purchase loans.\64\
---------------------------------------------------------------------------

    \63\ Such sources include depository institutions, nonbank 
affiliates of a depository institution, independent nonbanks, and 
captives.
    \64\ See Delvin Davis, Ctr. For Responsible Lending, The State 
of Lending in America & Its Impact on U.S. Households (Dec. 2012), 
available at http://www.responsiblelending.org/state-of-lending/reports/4-Auto-Loans.pdf.
---------------------------------------------------------------------------

    With indirect lending, dealers rather than consumers typically 
select the lender who will provide the financing. Upon completion of 
the vehicle selection process, the dealer usually collects basic 
information regarding the applicant and uses an automated system to 
forward that information to prospective indirect automobile lenders. 
After evaluating the applicant, indirect auto lenders may provide the 
dealer with purchase eligibility criteria or stipulations including, 
but not limited to, a risk-based ``buy rate'' that establishes a 
minimum interest rate at which the lender is willing to purchase a 
retail installment sales contract executed between the consumer and the 
dealer for the purchase of the vehicle.\65\
---------------------------------------------------------------------------

    \65\ The Bureau is aware that an indirect auto lender may also 
have a policy that allows the dealer to mark up the interest rate 
above the indirect auto lender's buy rate. In the event that the 
dealer charges the consumer an interest rate that is higher than the 
lender's buy rate, the lender may pay the dealer what is typically 
referred to as ``reserve'' (or ``participation''), compensation 
based upon the difference in interest revenues between the buy rate 
and the actual note rate charged to the consumer in the retail 
installment contract executed with the dealer. Dealer reserve is one 
method lenders use to compensate dealers for the value they add by 
originating loans and finding financing sources. The exact 
computation of compensation based on dealer markup varies across 
lenders and may vary between programs at the same lender.
---------------------------------------------------------------------------

    A franchised dealer often can choose from a selection of funding 
sources.\66\ However, a franchised dealer that is affiliated with a 
manufacturer can be incentivized to use a captive through mechanisms 
such as promotional discounts or limited-time financing offers that can 
be used to attract consumers. An independent auto dealer, which is not 
associated with a specific manufacturer or brand, typically does not 
have access to captive finance sources but will have access to other 
indirect sources, including depository institutions engaged in indirect 
lending as well as specialty finance companies.
---------------------------------------------------------------------------

    \66\ See supra note 63 and accompanying text.
---------------------------------------------------------------------------

    With the relevant eligibility criteria and stipulations, the dealer 
then selects the indirect lender that will finance the loan to the 
consumer and extends the loan through a retail installment sales 
contract that the indirect lender purchases or acquires. The dealer is 
typically compensated for arranging indirect financing. For indirect 
automobile loans, the indirect automobile lender typically becomes 
responsible for servicing the loan and consumers will then make loan 
payments to the lender.
    Similarly, leases may be obtained through direct or indirect 
channels, although most are through indirect channels. To purchase an 
automobile lease from a dealer, finance sources express their interest 
by providing the dealer with the relevant terms of a lease similar to 
those considered for a loan. These terms can include a ``money 
factor,'' which establishes how much a consumer will be paying in 
finance charges, and the length or term of the lease.\67\ However, in a 
lease, a finance source will also quote a residual value, which is one 
of the elements comprising both the consumer's monthly payments and the 
consumer's pre-determined purchase option cost at the end of the lease 
term. As a practical matter, few auto dealers enter into a financing or 
leasing arrangement with a consumer unless there is an indirect lender 
or lessor who will purchase the retail installment sales contract or 
leasing contract.\68\
---------------------------------------------------------------------------

    \67\ Fed. Reserve Sys., Glossary, Keys to Vehicle Leasing (Mar. 
13, 2013), available at http://www.federalreserve.gov/pubs/leasing/glossary.htm.
    \68\ This does not apply to those auto dealers, such as BHPH 
dealers, who serve as the primary lender.
---------------------------------------------------------------------------

    Refinancing of an existing credit obligation can enable a consumer 
to reduce his or her monthly auto payment. The refinancing market is 
highly dependent on interest rates and, thus, activity typically 
increases as rates decrease relative to the initial rate at 
origination. However, the average auto loan term for a new vehicle is 
relatively short at around 66 months,\69\ and market rates during the 
loan repayment period typically do not differ much from the rates at 
origination. These dynamics explain why the Bureau believes that 
overall refinancing volumes comprise only a small niche of the broader 
auto financing market. Unfortunately, there is limited data available 
pertaining to refinancing volume because, among other things, publicly 
traded market participants generally tend to consolidate refinancing 
activity within origination activity for financial reporting purposes.
---------------------------------------------------------------------------

    \69\ Zabritski, supra note 25, at 39.
---------------------------------------------------------------------------

Section 1090.108(a) Market-Related Definitions
    Unless otherwise specified, the definitions in Sec.  1090.101 
should be used when interpreting terms in this Proposed Rule. The 
Proposed Rule would define additional terms relevant

[[Page 60770]]

to the proposed automobile financing market. These terms include 
``aggregate annual originations,'' which the Proposed Rule would use as 
the criterion for assessing larger-participant status; ``annual 
originations''; ``automobile''; ``automobile financing''; ``automobile 
lease''; and ``refinancings.''
    The Bureau seeks comment on each of the definitions set forth in 
the Proposed Rule and any suggested additions, clarifications, 
modifications, or alternatives.
    Aggregate annual originations. The Bureau is proposing to use 
aggregate annual originations as the criterion to assess whether a 
nonbank covered person is a larger participant of the automobile 
financing market. Proposed Sec.  1090.108(a) would define the term 
``aggregate annual originations'' as the sum of the number of annual 
originations of a nonbank covered person and the number of annual 
originations of each of the nonbank covered person's affiliated 
companies, as calculated according to instructions set forth in the 
proposed regulation and as discussed below.
    Annual originations. Proposed Sec.  1090.108(a) would define the 
term ``annual originations'' to mean the sum of the following 
transactions for the preceding calendar year: Grants of credit for the 
purchase of an automobile, refinancings of such credit obligations and 
any subsequent refinancings thereof, and purchases or acquisitions of 
such credit obligations (including refinancings). It would also include 
automobile leases and purchases or acquisitions of automobile lease 
agreements. Only originations involving automobiles primarily used for 
personal, family or household purposes would be counted as annual 
originations for purposes of this larger-participant rule.
    The Bureau proposes to exclude from annual originations any 
investments in asset-backed securities. Automobile asset-backed 
securities are investment vehicles in which the principal and interest 
payments from automobile loans serve as collateral for bonds sold to 
investors and do not generally alter the contractual obligation between 
the consumer and the entity that granted the credit or services the 
loan. Accordingly, the Bureau does not believe such transactions should 
be considered as annual originations under the Proposed Rule. The 
Bureau solicits comment as to whether this proposed exclusion for 
asset-backed securities is appropriate and whether the Bureau should 
define the term ``asset-backed securities'' in proposed Sec.  
1090.108(a).
    The Bureau is also considering whether to include other types of 
automobile-secured loans. These could include, for example, automobile 
title loans, in which a lender extends credit to a consumer that is 
secured by the title to an automobile that the consumer owns. The 
Bureau is proposing to define a market for automobile financing that 
does not include automobile title loans because the Bureau believes 
that this financial product or service is substantially different from 
automobile financing activities. For example, auto title loans are 
generally provided by companies that do not compete with lenders that 
finance the acquisition of a vehicle. Loans provided by auto title 
lenders typically are not used for the activities identified in the 
criterion to measure market activity, such as the grant of credit to 
purchase an automobile or to refinance an existing credit obligation. 
Further, auto title loans are generally significantly shorter in term 
and smaller in size than loans used to purchase an automobile or to 
refinance an existing automobile loan. The Bureau thus believes that 
auto title loans might be better analyzed separately from the 
automobile financing market as part of a future larger-participant 
rulemaking.\70\ However, the Bureau solicits feedback on whether it 
should define the market for automobile financing and annual 
originations to include other types of loans secured by automobiles 
and, if so, whether it is appropriate to use the same criterion and 
threshold for such loans as proposed here or whether an alternative 
criterion and threshold would be preferable. The Bureau also solicits 
comments on data sources that the Bureau might use in analyzing other 
automobile-secured loans like automobile title loans that are not used 
to purchase the vehicle.
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    \70\ As noted above, this larger-participant rule is only one in 
a series of rulemakings.
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    Aggregating the annual originations of affiliated companies. Under 
the Dodd-Frank Act, the activities of affiliated companies are to be 
aggregated for purposes of computing activity levels for rules--like 
this Proposed Rule--to determine larger participants in particular 
markets for consumer products or services under section 1024(a)(1).\71\ 
Therefore, the Proposed Rule would define the ``aggregate annual 
originations'' for each nonbank covered person as the sum of the number 
of annual originations of the covered entity and the number of annual 
originations of all its affiliated companies. For purposes of computing 
the covered person's aggregate annual originations, the annual 
originations of each affiliated company would first be calculated 
separately and then aggregated with the originations of the covered 
entity.
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    \71\ 12 U.S.C. 5514(a)(3)(B) (``For purposes of computing 
activity levels under [12 U.S.C. 5514(a)(1)] or rules issued 
thereunder, activities of affiliated companies (other than insured 
depository institutions or insured credit unions) shall be 
aggregated.'').
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    Paragraph (ii) of the proposed definition of ``aggregate annual 
originations'' would set forth the method of aggregating the annual 
originations of a nonbank covered person and its affiliated companies 
when affiliation has started or ended within the preceding calendar 
year. It would provide that the annual originations of a nonbank 
covered person must be aggregated with the annual originations of any 
person that was an affiliated company of the nonbank covered person at 
any time during the preceding calendar year. The annual originations of 
a nonbank covered person and its affiliated companies would be 
aggregated for the entire preceding calendar year, even if the 
affiliation did not exist for the entire calendar year. This provision 
would not apply, however, if the affiliated company is a dealer that is 
excluded by proposed Sec.  1090.108(c), which is discussed below.
    Automobile. Proposed Sec.  1090.108(a) would define ``automobile'' 
to mean any self-propelled vehicle primarily used for personal, family, 
or household purposes for on-road transportation. The proposed 
definition would apply to both new and used vehicles. The proposed 
definition would not include motor homes, recreational vehicles (RVs), 
golf carts, and motor scooters.
    The proposed definition of ``automobile'' was informed by the 
definition of ``motor vehicle'' in section 1029(f) of the Dodd-Frank 
Act,\72\ but includes modifications to limit its application to 
vehicles primarily used for personal, family, or household purposes for 
on-road transportation. The definition of ``motor vehicle'' found in 
the Dodd-Frank Act encompasses a wide range of vehicles, and the Bureau 
believes that using such a broad definition in this larger-participant 
rulemaking would make the Proposed

[[Page 60771]]

Rule difficult to administer. Consistent with the definition of ``motor 
vehicles,'' the proposed definition of ``automobile'' would cover 
vehicles such as cars, sports utility vehicles, light-duty trucks, and 
motorcycles. However, because the proposed definition is limited to 
vehicles primarily used for personal, family, or household purposes, 
heavy-duty trucks, buses, or ambulances are excluded as they are 
designed for and primarily used for commercial purposes.
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    \72\ Under section 1029(f)(1) of the Dodd-Frank Act, the term 
``motor vehicle'' means: (A) Any self-propelled vehicle designed for 
transporting persons or property on a street, highway, or other 
road; (B) recreational boats and marine equipment; (C) motorcycles; 
(D) motor homes, recreational vehicle trailers, and slide-in campers 
as those terms are defined in section 571.3 and 575.103(d) of title 
49, Code of Federal Regulations, or any successor thereto; and (E) 
other vehicles that are titled and sold through dealers. 12 U.S.C. 
5519(f)(1).
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    Certain types of motor vehicles, such as motor homes, recreational 
vehicles (RVs), golf carts and motor scooters, are in markets that 
differ from those of the vehicles captured in the proposed definition 
of ``automobile.'' Although the Bureau does not have sufficient data on 
these other market segments, the Bureau does not believe that financing 
for the types of motor vehicles that are excluded from its proposed 
definition of ``automobile'' is done on the same scale as financing of 
vehicles used by consumers as transportation to work or to carry out 
their errands and other daily activities. Thus, the Bureau believes 
that the vehicles excluded from the definition likely warrant different 
larger-participant criteria and thresholds if they were included in the 
market defined for this Proposed Rule. However, the Bureau seeks 
comment and additional market data related to these assumptions. The 
Bureau also seeks comment on its proposed definition of ``automobile,'' 
specifically whether the proposed definition should address other 
vehicles or types of vehicles, and whether motorcycles should be a 
separately defined term.\73\
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    \73\ The Bureau notes that this larger-participant rule is only 
one in a series of rulemakings and the Bureau could address the 
financing of other vehicles or categories of vehicles not covered 
under this Proposed Rule in a separate rulemaking should it 
determine it appropriate to do so.
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    Automobile financing. Proposed Sec.  1090.108(a) would define the 
term ``automobile financing'' to mean providing the transactions 
enumerated under the definition of the term ``annual originations'' as 
defined in proposed Sec.  1090.108(a). Thus, under the Proposed Rule, 
``automobile financing'' would mean granting credit for the purpose of 
purchasing an automobile; refinancing existing credit obligations or 
previously refinanced credit obligations that had been made for the 
purchase of an automobile; purchasing or acquiring such credit 
obligations (including refinancings); providing automobile leases; and 
purchasing or acquiring automobile lease agreements. The Bureau 
believes this proposed definition reflects the number of consumer loans 
and leases made or facilitated (through purchases of the loans and 
leases) regarding one of the most important nonfinancial assets to 
American households.
    Automobile lease. Proposed Sec.  1090.108(a) would define the term 
``automobile lease'' to mean a lease for the use of an automobile, as 
that term is defined in this Proposed Rule, that is a financial product 
or service under either section 1002(15)(A)(ii) of the Dodd-Frank Act 
or proposed Sec.  1001.2(a). A lease for the use of an automobile is a 
financial product or service under section 1002(15)(A)(ii) if it: (1) 
Is the functional equivalent of a purchase finance arrangement; (2) is 
on a non-operating basis; and (3) has an initial term of at least 90 
days.\74\ As explained above, the Bureau believes that most automobile 
leases meet these requirements. The Bureau also believes that those 
automobile leases that are not the functional equivalent of purchase 
finance arrangements, and therefore do not fall under section 
1002(15)(A)(ii), would nevertheless likely be covered by the proposed 
new category of ``financial product or service'' under proposed Sec.  
1001.2(a). Proposed Sec.  1001.2(a) is guided by the requirements in 12 
CFR 23.2(d)(1), which implement the product-related requirements for 
leases under CEBA. An automobile lease would be a financial product or 
service under proposed Sec.  1001.2(a) as long as (1) the lease 
qualifies as a full-payout lease and a net lease, as required under 12 
CFR 23.3(a); (2) the lease has an initial term of at least 90 days, as 
required under 12 CFR 23.11; and (3) the lease does not meet the 
requirements for a financial product or service under section 
1002(15)(A)(ii).
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    \74\ 12 U.S.C. 5481(15)(A)(ii).
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    Refinancing. The Bureau proposes to define the term ``refinancing'' 
for purposes of this rule by reference to Sec.  1026.20(a) of 
Regulation Z.\75\ Section 1026.20(a) defines ``refinancing'' for 
closed-end credit transactions, including those related to the purchase 
of automobiles. If a transaction is determined to be a ``refinancing'' 
under Sec.  1026.20(a), a ``new transaction'' has occurred and the 
creditor must provide the consumer with disclosures, among other 
things. Under Regulation Z, a refinancing occurs only when an existing 
obligation is satisfied and replaced by the original creditor or a 
holder or servicer of the original obligation, and a new obligation is 
undertaken by the same consumer. It is noted that if a new creditor 
refinances an existing credit obligation, it is considered a new 
transaction rather than a refinancing for purposes of Regulation Z 
without reference to whether satisfaction and replacement occurs.\76\ 
Under Sec.  1026.20(a), whether satisfaction and replacement has 
occurred is determined based on the parties' contract and applicable 
state law. Section 1026.20(a) also provides certain exceptions to the 
requirement for satisfaction and replacement.
---------------------------------------------------------------------------

    \75\ 12 CFR 1026.20.
    \76\ 12 CFR 1026.20, comment 20(a)-5.
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    The definition of ``refinancing'' in proposed Sec.  1090.108(a) 
mirrors the Regulation Z definition except that the nonbank covered 
person is not required to be the original creditor or a holder or 
servicer of the original obligation to fall under the definition.\77\ 
Thus, as applied to this proposal, a nonbank covered person would be 
required to include in its aggregate annual originations any grant of 
credit for the purchase of an automobile that satisfies and replaces an 
existing credit obligation, even if the nonbank covered person is not 
the original creditor, holder or servicer of the existing credit 
obligation. The Bureau believes it is appropriate to include 
refinancing activity conducted by third parties as part of the 
automobile financing market.\78\ As in Regulation Z, proposed Sec.  
1090.108(a) would require that to be a refinancing, both the existing 
and the new grant of credit must involve the same borrower.
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    \77\ See id.
    \78\ By contrast, under Regulation Z, such transactions are 
omitted from the definition of ``refinancing'' but are nevertheless 
subject to disclosure and other requirements as a new transaction. 
Id.
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    As an alternative, the Bureau is considering whether it would be 
preferable to propose a new definition of ``refinancing'' for purposes 
of the Proposed Rule. Auto finance companies that grant credit secured 
by a vehicle are already subject to Sec.  1026.20(a). The Bureau 
believes that using the Regulation Z definition would avoid adding 
regulatory complexity that could arise through the creation of a new 
definition for purposes of this larger-participant rulemaking, but 
invites comments on this approach and whether the Regulation Z 
definition of ``refinancing'' with the modification described above is 
appropriate for purposes of the Proposed Rule.
    Finally, as discussed above, the Bureau does not have a reliable 
data source pertaining to refinancings in the automobile market. 
Although the Bureau is aware that refinancings occur, particularly when 
interest rates are declining, there is no standard reporting available 
that describes what percentage of the total market for automobile

[[Page 60772]]

financing is comprised of refinancings and what part of the automobile 
refinancing market is provided by entities that would be subject to the 
Proposed Rule. Thus, to better understand this segment of the market, 
the Bureau seeks data on refinancing activity in the market and the 
market participants that engage in refinancing. The Bureau also seeks 
comment on its proposal to include refinancings in the proposed 
definition of ``annual originations'' and in the market definition of 
``automobile financing.''
Section 1090.108(b) Test To Define Larger Participants
    Criterion. The Bureau has broad discretion in choosing a criterion 
for assessing whether a nonbank covered person is a larger participant 
of a market. For any specific market, there might be several criteria, 
used alone or in combination, that could be viewed as reasonable 
alternatives. For the automobile financing market, the Bureau is 
considering a number of criteria, including aggregate annual 
originations, dollar volume of originations, and dollar volume of 
outstanding loans. The Bureau invites comment on these three possible 
criteria as well as suggestions for other criteria that commenters 
believe might be superior.
    Among these options, the Bureau proposes to use aggregate annual 
originations as the criterion that establishes which entities are 
larger participants of the automobile financing market. A discussion of 
the definition of ``aggregate annual originations'' is set forth above. 
The Bureau expects that aggregate annual originations will be an 
appropriate criterion, because, among other things, it is a meaningful 
measure of a nonbank covered person's level of participation in the 
automobile financing market and of its impact on consumers. The annual 
number of originations by a particular nonbank entity reflects the 
number of loans and leases it makes or facilitates (through purchases 
of the loans and leases) regarding one of the most important 
nonfinancial assets to American households. Further, because the term 
``aggregate annual originations'' would be defined, in part, in terms 
of how many loans or leases an entity granted or purchased, the 
aggregate annual originations criterion would generally correlate to 
the size of the entity's loan and lease portfolios.
    The Bureau anticipates that nonbank covered persons could calculate 
aggregate annual originations without difficulty, should the occasion 
arise to do so. As a general matter, most market participants generally 
know the number of loans and leases they extend because they handle the 
servicing for these accounts. Further, they know the number of loans 
they make or purchase because they need to execute liens against the 
automobile titles. Also, nonbank covered persons in the automobile 
financing market will readily be able to ascertain aggregate annual 
originations because they are presumably expecting a payment for each 
loan and lease.
    The Bureau has data on a significant portion of annual 
originations, as defined in this Proposed Rule, from Experian 
Automotive's AutoCount database. AutoCount is a vehicle database that 
collects monthly transaction data from State Departments of Motor 
Vehicles (DMVs). In 46 states, DMV title and registration information 
includes the finance source on record.\79\ These finance sources are 
listed either individually or categorized into lender type. The Bureau 
proposes to use the AutoCount Lender Report as its data source for this 
rulemaking because it is based on title and registration information 
filed with State DMVs and, thus, is likely to be objective. It is also 
national in scope. The report covers almost the entire United States 
and includes transactions that in many ways approximate the Bureau's 
proposed definition of ``annual originations.'' The Bureau recognizes, 
however, that estimates of ``annual originations'' based on the 
AutoCount data may be either over- or under inclusive due to 
differences between what is included in the AutoCount data and in the 
Bureau's proposed definitions. For example, the term ``annual 
originations,'' as defined in the Proposed Rule, includes transactions 
not tracked in the AutoCount report. Specifically, the Proposed Rule 
defines ``annual originations'' to include the sum of a nonbank covered 
person's loans, leases, refinancings, and the purchase and acquisition 
of credit obligations (including refinancings) and leases. In contrast, 
the AutoCount data are less inclusive and track only loans and leases 
for which a title and registration is filed with the state DMV. Thus, 
unlike the Proposed Rule, the AutoCount report does not include 
refinancings and may not include all purchases and acquisitions of 
credit obligations and leases. Similar to the Proposed Rule, AutoCount 
excludes vehicles that are designed for and used primarily for 
commercial purposes. However, the exact scope of which commercial 
transactions are excluded in AutoCount may be different than in the 
Proposed Rule. The Bureau invites comments on this data source as well 
as suggestions for other data sources that commenters believe might 
augment the Bureau's understanding and analysis of the market.
---------------------------------------------------------------------------

    \79\ The AutoCount data cover transactions in every state, 
excluding Oklahoma, Wyoming, Rhode Island and Delaware.
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    Threshold. Under the Proposed Rule, a nonbank covered person would 
be a larger participant of the automobile financing market if the 
person has at least 10,000 aggregate annual originations. The Bureau 
estimates that the proposed threshold would bring within the Bureau's 
supervisory authority about 38 entities, roughly 7 percent of all 
nonbank covered persons in the automobile financing market.\80\ Based 
on the number of covered transactions, the Bureau estimates that these 
38 entities are responsible for approximately 91 percent of the 
activity in the nonbank automobile financing market.\81\
---------------------------------------------------------------------------

    \80\ Experian Automotive's AutoCount as adjusted by the CFPB, 
see supra note 61.
    \81\ Id.
---------------------------------------------------------------------------

    The Bureau anticipates that the proposed aggregate annual 
originations threshold of 10,000 would allow the Bureau to supervise 
market participants that represent a substantial portion of the 
automobile financing market and that have a significant impact on 
consumers. In 2013, the 38 entities that the Bureau estimates would be 
larger participants under the proposed threshold provided loans and 
leases to approximately 6.8 million consumers.\82\ At the same time, 
this threshold would likely subject to the Bureau's supervisory 
authority only entities that can reasonably be considered larger 
participants of the market.
---------------------------------------------------------------------------

    \82\ Id. The Bureau assumes that an average consumer only enters 
into one auto loan or lease in a given year.
---------------------------------------------------------------------------

    The Bureau is also considering a lower or higher threshold. For 
example, an aggregate annual originations threshold of 5,000 might 
allow the Bureau to supervise approximately 55 entities, representing 
nearly 93 percent of activity in this market.\83\ While lowering the 
threshold would substantially increase the number of entities subject 
to supervision, the lower threshold would result in only a marginal 
increase in market coverage. The additional entities that would be 
included using this lower threshold are only a fraction of the size of 
the smallest entities that meet the proposed threshold and are mostly 
regional finance companies. In comparison, the Bureau estimates that an 
aggregate

[[Page 60773]]

annual originations threshold of 50,000 would allow the Bureau to 
supervise the 17 very largest participants in the market, representing 
approximately 86 percent of market activity.\84\ However, at this 
higher threshold the Bureau would not be able to supervise as varied a 
mix of nonbank larger participants that have a substantial impact on 
the full spectrum of consumers in the market.
---------------------------------------------------------------------------

    \83\ Id.
    \84\ Id.
---------------------------------------------------------------------------

    The Bureau seeks comment, including suggestions of alternatives on 
the proposed threshold for defining larger participants of the 
automobile financing market.
Section 1090.108(c) Exclusion
    Proposed Sec.  1090.108(c)(1) would provide that those motor 
vehicle dealers that are excluded from the Bureau's authority by 
section 1029 of the Dodd-Frank Act do not qualify as larger 
participants under this section.\85\ Proposed Sec.  1090.108(c)(2) 
would also exclude additional motor vehicle dealers that are not 
subject to the statutory exclusion--specifically, those motor vehicle 
dealers that are identified in section 1029(b)(2) of the Dodd-Frank Act 
and are predominantly engaged in the sale and servicing of motor 
vehicles, the leasing and servicing of motor vehicles, or both. This 
would exclude from the proposed larger-participant rule certain dealers 
that extend retail credit or leases to consumers without routinely 
assigning them to unaffiliated third parties. Although section 
1029(b)(2) provides the Bureau with rulemaking and other authority over 
such dealers, the Bureau has chosen to exclude them from the market 
defined in this Proposed Rule. These entities use a different business 
model, as described above, are typically much smaller in asset size and 
activity level than other entities that the Bureau proposes to include, 
and therefore form part of a separate and distinct market.\86\ However, 
nonbank covered persons that meet the definition of ``motor vehicle 
dealer'' under section 1029(f)(2), but are not predominantly engaged in 
the sale and servicing of motor vehicles, the leasing and servicing of 
motor vehicles, or both would not be excluded from the proposed larger-
participant rule.
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    \85\ 12 U.S.C. 5519.
    \86\ As the Bureau has explained, this larger-participant 
rulemaking is only one in a series of rulemakings, and the Bureau 
could address motor vehicle dealers identified in section 1029(b)(2) 
in a separate larger-participant rulemaking with a criterion and 
threshold that is better tailored to their business model and 
activity levels, should it determine that it is appropriate to do 
so.
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V. Request for Comments

    The Bureau invites comment on all aspects of this notice of 
proposed rulemaking and on the specific issues on which comment is 
solicited elsewhere herein, including on any appropriate modifications 
or exceptions to the Proposed Rule.

VI. Section 1022(b)(2)(A) of the Dodd-Frank Act

A. Overview

    The Bureau is considering potential benefits, costs, and impacts of 
the Proposed Rule.\87\ The Bureau requests comment on the preliminary 
analysis presented below as well as submissions of additional data that 
could inform the Bureau's analysis of the costs, benefits, and impacts 
of the Proposed Rule. In developing the Proposed Rule, the Bureau has 
consulted with or offered to consult with the Federal Trade Commission, 
the Board of Governors of the Federal Reserve System, the Federal 
Deposit Insurance Corporation, the Office of the Comptroller of the 
Currency, and the National Credit Union Administration regarding, among 
other things, consistency with any prudential, market, or systemic 
objectives administered by such agencies.
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    \87\ Specifically, 12 U.S.C. 5512(b)(2)(A) calls for the Bureau 
to consider the potential benefits and costs of a regulation to 
consumers and covered persons, including the potential reduction of 
access by consumers to consumer financial products or services, the 
impact on depository institutions and credit unions with $10 billion 
or less in total assets as described in 12 U.S.C. 5516, and the 
impact on consumers in rural areas. In addition, 12 U.S.C. 
5512(b)(2)(B) directs the Bureau to consult, before and during the 
rulemaking, with appropriate prudential regulators or other Federal 
agencies, regarding consistency with objectives those agencies 
administer. The manner and extent to which the provisions of 12 
U.S.C. 5512(b)(2) apply to a rulemaking of this kind that does not 
establish standards of conduct are unclear. Nevertheless, to inform 
this rulemaking more fully, the Bureau performed the analysis and 
consultations described in those provisions of the Dodd-Frank Act.
---------------------------------------------------------------------------

    The Proposed Rule would define a category of nonbanks that would be 
subject to the Bureau's nonbank supervision program pursuant to section 
1024(a)(1)(B). The proposed category would include ``larger 
participants'' of a market for ``automobile financing'' described in 
the Proposed Rule. Participation in this market would be measured on 
the basis of aggregate annual originations. If a nonbank covered 
person, together with its affiliated companies, has aggregate annual 
originations (measured for the preceding calendar year) of at least 
10,000, it would be a larger participant in the market for automobile 
financing. As prescribed by existing Sec.  1090.102, any nonbank 
covered person that qualifies as a larger participant would remain a 
larger participant until two years after the first day of the tax year 
in which the person last met the larger-participant test.\88\ The 
Proposed Rule would also include in the definition of ``financial 
product[s] or service[s]'' a new category of automobile leases, as 
defined by the Proposed Rule, under authority granted to the Bureau by 
section 1002(15)(A)(xi)(II) of the Dodd-Frank Act.\89\
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    \88\ 12 CFR 1090.102.
    \89\ The Proposed Rule also clarifies how to address aggregation 
of formerly-affiliated companies for purposes of assessing larger-
participant status under the existing Consumer Reporting and 
Consumer Debt Collection Rules, by making changes to the definition 
of ``annual receipts'' in those rules. As explained above, the 
proposed changes to the affiliate aggregation provisions clarify the 
Bureau's methodology for affiliate aggregation. The proposed changes 
would provide marginal benefits for market participants in the 
consumer reporting and consumer debt collection markets by making 
those rules clearer and easier to understand. They may, however, 
result in an additional cost to market participants that are seeking 
to assess whether they are larger participants, but only if they 
would not have collected information relevant to thresholds from 
formerly affiliated companies for the entire preceding calendar year 
when the affiliation ended during the preceding calendar year. The 
Bureau does not know the extent to which participants seeking to 
self-assess currently collect information relevant to thresholds 
from formerly affiliated companies. However, if the proposed 
clarification is finalized, participants seeking to self-assess 
could arrange to obtain the necessary threshold information in 
advance of ending the affiliation, and such arrangements would tend 
to mitigate the costs of obtaining this information. Further, as 
noted above, participants in these markets are not required to 
engage in such self-assessments. Thus, both the benefits and costs 
of these amendments would not be significant.
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B. Potential Benefits and Costs to Consumers and Covered Persons

    This analysis considers the benefits, costs, and impacts of the key 
provisions of the Proposed Rule against a baseline that includes the 
Bureau's existing rules defining larger participants in certain 
markets.\90\ At present, there is no Federal program for supervision of 
nonbank covered persons in the automobile financing market with respect 
to Federal consumer financial law. The Proposed Rule extends the 
Bureau's supervisory authority over larger participants of the defined 
automobile financing market. This includes the authority to supervise 
for compliance with the Equal Credit Opportunity Act (ECOA), the Truth 
in Lending Act (TILA), and the Consumer

[[Page 60774]]

Leasing Act, as well as other Federal consumer financial laws, to the 
extent applicable.
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    \90\ The Bureau has discretion in any rulemaking to choose an 
appropriate scope of analysis with respect to potential benefits and 
costs and an appropriate baseline. The Bureau, as a matter of 
discretion, has chosen to describe a broader range of potential 
effects to inform the rulemaking more fully.
---------------------------------------------------------------------------

    The Bureau notes at the outset that limited data are available with 
which to quantify the potential benefits, costs, and impacts of the 
Proposed Rule. As described above, the Bureau has utilized Experian 
AutoCount database for quantitative information on the number of market 
participants and their number and dollar volume of originations. 
However, the Bureau lacks detailed information about their rate of 
compliance with Federal consumer financial law and about the range of, 
and costs of, compliance mechanisms used by market participants.
    In light of these data limitations, this analysis generally 
provides a qualitative discussion of the benefits, costs, and impacts 
of the Proposed Rule. General economic principles, together with the 
AutoCount data, provide insight into these benefits, costs, and 
impacts. Where possible, the Bureau has made quantitative estimates 
based on these principles and data as well as its experience of 
undertaking similar supervisory activities with respect to depository 
institutions and credit unions.
    The discussion below describes four categories of potential 
benefits and costs. First, the Proposed Rule, if adopted, would 
authorize the Bureau to supervise certain nonbank entities in the 
automobile financing market. These larger participants in the market 
might respond to the possibility of supervision by changing their 
systems and conduct, and those changes might result in costs, benefits, 
or other impacts. Second, if the Bureau undertakes supervisory activity 
at specific larger participants, those companies would incur costs from 
responding to supervisory activity, and the results of the individual 
supervisory activities might also produce benefits and costs.\91\ 
Third, entities might incur certain costs as a result of their efforts 
to assess whether they would qualify as larger participants under the 
Proposed Rule. Fourth, including certain automobile leases in the Dodd-
Frank Act definition of ``financial product or service'' would subject 
those leases to the prohibition on unfair, deceptive, or abusive acts 
or practices (UDAAP) under section 1031 of the Dodd-Frank Act and to 
Bureau authority to prescribe certain rules applicable to a covered 
person or service provider under section 1031(b) of the Dodd-Frank Act. 
The proposed definition would also expand the Bureau's supervisory 
authority, as described below, and these changes might also produce 
benefits and costs, although the Bureau does not expect these effects 
to be significant.
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    \91\ Pursuant to 12 U.S.C. 5514(e), the Bureau also has 
supervisory authority over service providers to nonbank covered 
persons encompassed by 12 U.S.C. 5514(a)(1), which includes larger 
participants. The Bureau does not have data on the number or 
characteristics of service providers to the larger participants of 
the automobile financing market. The discussion herein of potential 
costs, benefits, and impacts that may result from the Proposed Rule 
generally applies to service providers to larger participants.
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    In considering the costs and benefits of the Proposed Rule, it is 
important to note that various products or services are included in the 
proposed automobile financing market. Direct lending, where the 
consumer applies for credit directly to the financial institution, 
makes up a relatively small portion of the total auto loan and sales 
volume. Direct lending is currently dominated by traditional depository 
institutions and credit unions already regulated by the Bureau and 
other governmental agencies. Indirect lending, where a dealer--rather 
than the consumer--finds a lender willing to provide credit to the 
consumer, comprises a significant portion of the automobile financing 
market. In addition, some consumers refinance the credit obligation for 
their automobile after taking out the initial loan. Finally, leasing is 
the other primary way in which consumers can finance the use of a 
vehicle; under this arrangement a financial institution holds the title 
to the vehicle that the consumer leases under a payment plan that 
typically ends with an option to purchase the vehicle.\92\
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    \92\ According to Experian Automotive, of all new and used auto 
financing transactions recorded in the first quarter of 2014, 
approximately 14 percent occurred through leasing arrangements, 
while the remainder used purchase financing. See Zabritski, supra 
note 25.
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1. Benefits and Costs of Responses to the Possibility of Supervision
    The Proposed Rule would subject larger participants of the 
automobile financing market to the possibility of Bureau supervision. 
That the Bureau would be authorized to undertake supervisory activities 
with respect to a nonbank covered person who qualified as a larger 
participant would not necessarily mean the Bureau would in fact 
undertake such activities with respect to that covered entity in the 
near future. Rather, supervision of any particular larger participant 
as a result of this rulemaking would be probabilistic in nature. For 
example, the Bureau would examine certain larger participants on a 
periodic or occasional basis. The Bureau's decisions about supervision 
would be informed, as applicable, by the factors set forth in section 
1024(b)(2), relating to the size and volume of individual participants, 
the risks their consumer financial products and services pose to 
consumers, the extent of State consumer protection oversight, and other 
factors that the Bureau may determine are relevant. Each entity that 
believed it qualified as a larger participant would know that it might 
be supervised and might gauge, given its circumstances, the likelihood 
that the Bureau would initiate an examination or other supervisory 
activity.
    The prospect of potential supervisory activity could create an 
incentive for larger participants to allocate additional resources and 
attention to compliance with Federal consumer financial law, 
potentially leading to an increase in the level of compliance. These 
entities might anticipate that by doing so (and thereby decreasing 
risks to consumers) they could decrease the likelihood of their 
actually being subjected to supervision as the Bureau evaluated the 
factors outlined above. In addition, an actual examination would likely 
reveal any past or present noncompliance, which the Bureau could seek 
to correct through supervisory activity or, in some cases, enforcement 
actions. Larger participants might therefore judge that the prospect of 
supervision increased the potential consequences of noncompliance with 
Federal consumer financial law, and they might seek to decrease that 
risk by curing or mitigating any noncompliance. Larger participants 
might thus be able to catch and address compliance problems at an 
earlier point when the costs of correcting them would be lower.
    The Bureau believes it is likely that many market participants 
would increase compliance in response to the Bureau's supervisory 
activities authorized by the Proposed Rule. However, because the 
Proposed Rule itself would not require any nonbank covered person in 
the automobile financing market to alter its conduct, any estimate of 
the amount of increased compliance would require both an estimate of 
current compliance levels and a prediction of market participants' 
behavior in response to a final rule. The data the Bureau currently has 
do not support a specific quantitative estimate or prediction. But, to 
the extent that nonbank entities allocate resources to increase their 
compliance in response to the Proposed Rule, that response would result 
in both benefits and costs to consumers and covered persons.\93\
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    \93\ Another approach to considering the benefits, costs, and 
impacts of the Proposed Rule would be to focus almost entirely on 
the supervision-related costs for larger participants and omit a 
broader consideration of the benefits and costs of increased 
compliance. As noted above, the Bureau has, as a matter of 
discretion, chosen to describe a broader range of potential effects 
to inform the rulemaking more fully.

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[[Page 60775]]

a. Benefits From Increased Compliance
    Increased compliance with Federal consumer financial law by larger 
participants in the market for automobile financing would be beneficial 
to consumers who either finance the purchase of or lease automobiles, 
or refinance their credit obligation related to the purchase of their 
automobile. The number of individuals who could potentially be affected 
is significant. As noted above, data from the first quarter of 2014 
show auto lenders holding more than 87.4 million outstanding automobile 
loans, totaling almost $900 billion.\94\ The market is even larger when 
taking into account the automobile leasing market, which comprised an 
additional 14 percent of the automobile financing market in the first 
quarter of 2014.\95\ Increasing the rate of compliance with Federal 
consumer financial law would benefit consumers and the consumer 
financial market by providing more of the protections mandated by law.
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    \94\ Supra note 54.
    \95\ See Zabritski, supra note 25, at 20.
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    Several Federal consumer financial laws offer protections to 
consumers in regards to automobile financing as defined in the Proposed 
Rule, including, to the extent applicable, TILA and Regulation Z, the 
Fair Credit Reporting Act and Regulation V, the Consumer Leasing Act 
and Regulation M, ECOA and Regulation B, and the Gramm-Leach-Bliley Act 
and Regulation P.\96\ More broadly, the Bureau would examine whether 
larger participants of the automobile financing market engage in 
UDAAPs.\97\ Conduct that does not violate an express prohibition of 
another Federal consumer financial law may nonetheless constitute a 
UDAAP.\98\ To the extent that any larger participant or service 
provider is currently engaged in any UDAAP in connection with any 
transaction for or the offering of a consumer financial product or 
service, the cessation of the unlawful act or practice would benefit 
consumers. As the Bureau may review a larger participant's conduct in 
relation to any consumer financial product or service during an 
examination, larger participants might improve policies and procedures 
globally in response to possible supervision in order to avoid engaging 
in UDAAPs.
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    \96\ The Bureau recognizes that the nature of a larger 
participant's responsibility for compliance with these laws may vary 
depending on the activity the larger participant engages in. For 
example, under TILA, a larger participant that purchases a credit 
obligation for the purchase of an automobile is likely an assignee, 
not a ``creditor'' under TILA, and as such is generally liable only 
for a violation of TILA that is ``apparent on the face of the 
disclosure statement.'' 15 U.S.C. 1641(a).
    \97\ 12 U.S.C. 5531.
    \98\ The CFPB Supervision and Examination Manual provides 
further guidance on how the UDAAP prohibition applies to supervised 
entities. CFPB, CFPB Supervision and Examination Manual--Version 2.0 
(Oct. 2012), available at http://www.consumerfinance.gov/guidance/supervision/manual.
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    The possibility of supervision also may help make incentives to 
comply with Federal consumer financial law more consistent between the 
likely larger participants and depository institutions and credit 
unions, which are already subject to Federal supervision with respect 
to Federal consumer financial law. Introducing the possibility of 
Federal supervision could encourage entities that would likely qualify 
as larger participants to devote additional resources to compliance. It 
could also help ensure that the benefits of Federal oversight reach 
consumers who do not have ready access to automobile financing through 
depository institutions and credit unions.
b. Costs of Increased Compliance
    The Bureau recognizes that increasing compliance involves costs. 
These costs may be fixed or ongoing. Nonbank entities in the automobile 
financing market might need to hire or train additional personnel to 
effectuate any changes in their practices that would be necessary to 
produce the increased compliance. They might need to invest in changes 
to their systems to carry out their revised procedures. In addition, 
they might need to develop or enhance compliance management systems, to 
ensure awareness of any gaps in compliance. Such changes would also 
require investment and might entail increased operating costs.
    Economic theory predicts that fixed costs will be absorbed by 
providers, here the entities that may qualify as larger participants. 
However, consumers may be adversely affected by increases in these 
costs to the extent these cost increases cause current providers of 
automobile financing to decrease volume, deter providers from 
increasing volume, or deter entry by new providers in the future.\99\ 
This could result in consumers having more restricted choices than they 
would otherwise. In certain situations, a decrease in the number of 
market participants could better enable those remaining providers to 
exercise market power, resulting in higher prices for consumers or 
decreased product or service quality, or both.
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    \99\ Alexei Alexandrov & Xiaoling Ang, Identifying a Suitable 
Control Group Based on Microeconomic Theory: The Case of Escrows in 
the Subprime Market (July 3, 2014) (finding consumers not adversely 
affected by policy changes that implement a fixed cost), available 
at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2462128.
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    An entity that incurs ongoing costs in support of increasing 
compliance might try to recoup these costs by attempting to pass those 
costs directly through to consumers; for example, in the case of the 
indirect channel, this could occur through lowering fees or other forms 
of compensation paid to dealers and other entities. Whether and to what 
extent either change would occur depends on the relative elasticities 
of supply and demand in the automobile financing market. These 
elasticities can vary across products or services that would be covered 
by the Proposed Rule and may be influenced by the presence of 
substitute products or services as well as the availability of 
information, which would influence the perceived availability of 
substitute products or services. For example, larger participants of 
the automobile financing market may be in competition with depository 
institutions or credit unions (or affiliates thereof) that are already 
subject to supervision by the Bureau and/or Federal prudential 
regulators with respect to Federal consumer financial law. To the 
extent the Proposed Rule would result in an increase in the costs faced 
by larger participants, that increase would be a competitive benefit to 
banks and credit unions with sufficient liquidity to expand their 
financing operations. Competition from banks and credit unions might 
reduce the ability of larger participants to pass through cost 
increases to consumers, dealers, or other entities as they may instead 
seek alternate sources of financing. Moreover, consumers might respond 
to such a cost increase by reducing the amounts they are willing to pay 
in other aspects of the automobile purchase transaction, while dealers 
could respond to decreased levels of financing revenues shared with 
them by larger participants by either attempting to increase revenues 
derived from other areas of the automobile purchase transaction, such 
as the stated price of the vehicle or costs of accessories, or bearing 
the loss of revenue.
    In considering any potential price effect of the Proposed Rule, it 
is important to take into account the fact

[[Page 60776]]

that nonbank covered persons below the larger participant threshold 
would not be subject to supervision as a result of this rule. The costs 
of these nonbank covered persons would therefore be unaffected by the 
definition of larger participants in the Proposed Rule and so their 
pricing should also not be affected. To the extent that nonbank larger 
participants raise their prices in response to this rule, nonbank 
entities that are not larger participants, along with banks and credit 
unions that already compete in the market while bearing the cost of 
supervision, could potentially offer more attractive transaction terms 
relative to larger participants and thus deter larger participants from 
increasing prices. While a shift in transactions from larger 
participants toward nonbank entities that are not larger participants 
would mitigate some of the benefits to consumers of supervision of 
larger participants, the prospect of this shift might also reduce the 
likelihood that larger participants would choose to increase their 
prices in response to the Proposed Rule.
2. Benefits and Costs of Individual Supervisory Activities
    In addition to the responses of market participants anticipating 
supervision, the possible consequences of the Proposed Rule would 
include the responses to and effects of individual examinations or 
other supervisory activities that the Bureau might conduct in the 
automobile financing market.
a. Benefits of Supervisory Activities
    Supervisory activity could provide several types of benefits. For 
example, as a result of supervisory activity, the Bureau and an entity 
might uncover deficiencies in the entity's policies and procedures. The 
Bureau's examination manual calls for the Bureau generally to prepare a 
report of each examination, to assess the strength of the entity's 
compliance mechanisms, and to assess the risks the entity poses to 
consumers, among other things. The Bureau would share examination 
findings with the examined entity because one purpose of supervision is 
to inform the entity of problems detected by examiners. Thus, for 
example, an examination might find evidence of widespread noncompliance 
with Federal consumer financial law, or it might identify specific 
areas where an entity has inadvertently failed to comply. These 
examples are only illustrative of the kinds of information an 
examination might uncover.
    Detecting and informing entities about such problems should be 
beneficial to consumers. When the Bureau notifies an entity about risks 
associated with an aspect of its activities, the entity is expected to 
adjust its practices to reduce those risks. That response may result in 
increased compliance with Federal consumer financial law, with benefits 
like those described above. Or it may avert a violation that would have 
occurred had Bureau supervision not detected the risk promptly. The 
Bureau may also inform entities about risks posed to consumers that 
fall short of violating the law. Action to reduce those risks would 
also be a benefit to consumers.
    Given the obligations nonbank covered persons in the automobile 
financing market have under Federal consumer financial law and the 
existence of efforts to enforce such law, the results of supervision 
also may benefit entities under supervision by detecting compliance 
problems early. When an entity's noncompliance results in litigation or 
an enforcement action, the entity must face both the costs of defending 
its actions and the penalties for noncompliance, including potential 
liability for damages to private plaintiffs. The entity must also 
adjust its systems to ensure future compliance. Changing practices that 
have been in place for long periods of time can be expected to be 
relatively difficult because the practices may be severe enough to 
represent a serious failing of an entity's systems. Supervision may 
detect flaws at a point when correcting them would be relatively 
inexpensive. Catching problems early can, in some situations, forestall 
costly litigation. To the extent early correction limits the amount of 
consumer harm caused by a violation, it can help limit the cost of 
redress. In short, supervision might benefit larger participants by, in 
the aggregate, reducing the need for other more expensive activities to 
achieve compliance.\100\
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    \100\ Further potential benefits to consumers, covered persons, 
or both might arise from the Bureau's gathering of information 
during supervisory activities. The goals of supervision include 
informing the Bureau about activities of market participants and 
assessing risks to consumers and to markets for consumer financial 
products and services. The Bureau may use this information to 
improve regulation of consumer financial products and services and 
to improve enforcement of Federal consumer financial law, in order 
to better serve its mission of ensuring consumers' access to fair, 
transparent, and competitive markets for such products and services. 
Benefits of this type would depend on what the Bureau learns during 
supervision and how it uses that knowledge. For example, because the 
Bureau would examine a number of covered persons in the automobile 
financing market, the Bureau would build an understanding of how 
effective compliance systems and processes function in that market.
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b. Costs of Supervisory Activities
    The potential costs of actual supervisory activities would arise in 
two categories. The first would involve any costs to larger 
participants of increasing compliance in response to the Bureau's 
findings during supervisory activity and to supervisory actions. These 
costs would be similar in nature to the possible compliance costs, 
described above, that larger participants in general might incur in 
anticipation of possible supervisory actions. This analysis will not 
repeat that discussion. The second category would be the cost of 
supporting supervisory activity.
    Supervisory activity may involve requests for information or 
records, on-site or off-site examinations, or some combination of these 
activities. For example, in an on-site examination, Bureau examiners 
generally contact the entity for an initial conference with management. 
That initial contact is often accompanied by a request for information 
or records. Based on the discussion with management and an initial 
review of the information received, examiners determine the scope of 
the on-site exam. While on-site, examiners spend some time in further 
conversation with management about the entity's policies, procedures, 
and processes. The examiners also review documents, records, and 
accounts to assess the entity's compliance and evaluate the entity's 
compliance management system. As with the Bureau's other examinations, 
examinations of nonbank larger participants of the automobile financing 
market could involve issuing confidential examination reports and 
compliance ratings. The Bureau's examination manual describes the 
supervision process and indicates what materials and information an 
entity could expect examiners to request and review, both before they 
arrive and during their time on-site.
    The primary cost an entity would face in connection with an 
examination would be the cost of employees' time to collect and provide 
the necessary information. If the Proposed Rule is adopted, the 
frequency and duration of examinations of any particular entity would 
depend on a number of factors, including the size of the entity, the 
compliance or other risks identified, whether the entity has been 
examined previously, and the demands on the Bureau's supervisory 
resources imposed by other entities and markets. Nevertheless, some 
rough estimates may be useful to provide a sense of the magnitude of 
potential staff costs that entities might incur.

[[Page 60777]]

    The cost of supporting supervisory activity may be calibrated using 
prior Bureau experience in supervision. The Bureau considers its auto 
financing examinations at depository institutions and credit unions as 
a reasonable proxy for the duration and labor intensity of potential 
nonbank larger participant examinations. This belief arises from the 
similar role these institutions play in the market for automobile 
financing, where they frequently coexist as direct competitors to one 
another.
    The average duration of the on-site portion of Bureau bank auto 
financing examinations is approximately 9 weeks.\101\ Assuming that 
each exam requires 2 weeks of preparation time by a larger 
participant's staff prior to the exam as well as on-site assistance by 
staff throughout the duration of the exam, the Bureau assumes that the 
typical examination in this nonbank market would require 11 weeks of 
staff time. The Bureau has not suggested that counsel or any particular 
staffing level is required during an examination. However, for purposes 
of this analysis, the Bureau assumes, conservatively, that an entity 
might dedicate the equivalent of one full-time compliance officer and 
one-tenth of a full-time attorney to the exam. The average hourly wage 
of a compliance officer in a nonbank entity that operates in activities 
related to installment lending is $33.97, and the average hourly wage 
of a lawyer in the same industry is $83.88.\102\ Assuming that wages 
account for 67.5 percent of total compensation, the total labor cost of 
an examination would be about $27,611.\103\ The Bureau estimates that 
the cost for an entity with 10,000 aggregate annual originations per 
year, with an average amount financed of $21,750 per loan 
origination,\104\ would be approximately 0.013 percent of total revenue 
from originations for that year. This is a conservative estimate in 
several respects because it reflects revenue only from this line of 
business and uses an average amount financed in combination with the 
minimum number of transactions that a larger participant would provide.
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    \101\ This estimate was derived using confidential supervisory 
Bureau data on the duration of on-site auto financing examinations 
at depository institutions and credit unions. For purposes of this 
calculation, the Bureau counted its auto financing examinations for 
which the on-site portion had been completed, while excluding the 
shortest and longest examinations to minimize the influence of 
outliers. Additionally, the Bureau counted only the on-site portion 
of an examination, which included time during the on-site period of 
the examination that examiners spent off-site for holiday or other 
travel considerations. However, the Bureau did not count time spent 
scoping an examination before the on-site portion of the examination 
or summarizing findings or preparing reports of examination 
afterwards.
    \102\ Bureau of Labor Statistics (BLS), Occupational Employment 
Statistics, available at http://data.bls.gov/oes/. (BLS data for 
``Nondepository Credit Intermediation'' (North American Industry 
Classification System (NAICS) code 522200)). Dividing the hourly 
wage of a full-time compliance officer by 67.5 percent yields a 
total mean hourly cost (including total costs, such as salary, 
benefits, and taxes) rounded to the nearest dollar of $50 per hour.
    \103\ BLS, Employer Costs for Employee Compensation Database, 
Series ID CMU2025220000000D, available at http://data.bls.gov/timeseries/CMU2025220000000D?data_tool=XGtable (providing wage and 
salary percent of total compensation in the credit intermediation 
and related activities private industry for the second quarter of 
2013). All figures assume 40 hours of work per week.
    \104\ The estimated average amount financed uses 2013 
origination data from AutoCount for entities with 360 or greater 
loans and leases on an annual basis. The dollar value listed is 
based solely on loans, as the Bureau was unable to obtain data on 
the average amount financed in lease transactions. That said, the 
Bureau believes it is unlikely that the estimated revenue from 
leasing transactions, including both the stream of payments over the 
course of the lease as well as the option value of purchase or 
resale price of the vehicle at the end of the lease, would differ in 
a way that materially impacts the relationship between the cost of 
supervision and revenues.
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    The Bureau declines to predict, at this point, precisely how many 
examinations in the automobile financing market it would undertake in a 
given year. If the Proposed Rule is adopted, the Bureau would be able 
to undertake supervisory activity in the identified market; however, 
neither the Dodd-Frank Act nor the Proposed Rule specifies a particular 
level or frequency of examinations. Given the Bureau's finite 
supervisory resources, and the range of industries over which it has 
supervisory responsibility for consumer financial protection, when and 
how often a given larger participant would be supervised is uncertain. 
The frequency of examinations would depend on a number of factors, 
including the Bureau's understanding of the conduct of market 
participants and the specific risks they pose to consumers; the 
responses of larger participants to prior examinations; and the demands 
that other markets make on the Bureau's supervisory resources. These 
factors can be expected to change over time, and the Bureau's 
understanding of these factors may change as it gathers more 
information about the market through its supervision and by other 
means.
3. Costs of Assessing Larger-Participant Status
    The larger-participant rule does not require nonbank entities to 
assess whether they are larger participants. However, the Bureau 
acknowledges that in some cases they might decide to incur costs in 
assessing whether they qualify as larger participants and potentially 
disputing their status.
    Larger-participant status depends on a nonbank's aggregate annual 
originations, as defined in the Proposed Rule. An estimate of this 
number should be readily extractible from company records, as market 
participants likely evaluate the components of aggregate annual 
originations as part of their regular business practices. In addition, 
information on originations can be derived from title records that 
market participants maintain and publicly record.
    To the extent that some nonbank covered persons in the automobile 
financing market do not already know whether their aggregate annual 
originations exceed the threshold, such entities might, in response to 
the Proposed Rule, develop new systems to count their aggregate annual 
originations in accordance with the definition in the Proposed Rule. 
The data the Bureau currently has do not support a detailed estimate of 
how many nonbank entities would engage in such development or how much 
they might spend. Regardless, nonbank entities would be unlikely to 
spend significantly more on specialized systems to count aggregate 
annual originations than it would cost them to be supervised by the 
Bureau as larger participants. It bears emphasizing that even if 
expenditures on an accounting system successfully proved that a nonbank 
covered person in the automobile financing market was not a larger 
participant, it would not necessarily follow that this entity could not 
be supervised. The Bureau can supervise a nonbank entity whose conduct 
the Bureau determines, pursuant to section 1024(a)(1)(C), poses risks 
to consumers. Thus, a nonbank entity choosing to spend significant 
amounts on an accounting system directed toward the larger-participant 
test could not be sure it would not be subject to Bureau supervision 
notwithstanding those expenses. The Bureau therefore believes it is 
unlikely that any but a very few nonbank entities would undertake such 
expenditures.
4. Benefits and Costs of Adding Certain Automobile Leases to the 
Definition of ``Financial Product or Service''
    Finally, the Bureau is proposing to define the term ``financial 
product or service'' to include automobile leases that (1) meet the 
requirements of section 108 of CEBA, as implemented by 12 CFR part 23, 
and are thus, permissible for banks to offer or provide; and (2) are 
not currently defined as a financial

[[Page 60778]]

product or service under section 1002(15)(A)(ii) of the Dodd-Frank Act. 
As explained below, the Bureau believes that the benefits, costs, and 
impacts to consumers and covered persons of the proposed definition 
would likely be small. First, the proposed definition would not 
extensively alter the substantive obligations of covered persons. 
Second, the proposed definition would not substantially expand the 
market participants brought under supervision as a result of the 
Proposed Rule, or for entities already subject to supervision, the 
scope of supervisory examinations. The Bureau lacks data about the 
range of, and costs of, compliance mechanisms used by banks or nonbank 
entities in the automobile financing market. In light of these data 
limitations, the Bureau's analysis generally provides a qualitative 
discussion of the benefits, costs, and impacts of the proposed 
definition.
a. Benefits of the Proposed Definition
    Benefits of the proposed definition would stem from enhanced 
consumer protections relating to automobile leases that would fall 
under the definition. As financial products or services under the Dodd-
Frank Act, such leases would become subject to the UDAAP prohibition 
under section 1031 of the Dodd-Frank Act. These leases are already 
subject to a similar prohibition against unfair or deceptive acts or 
practices (UDAP) in or affecting commerce under section 5 of the 
Federal Trade Commission Act (FTC Act).\105\ The prohibitions set forth 
in section 5 of the FTC Act and section 1031 of the Dodd-Frank Act, 
however, are not precisely co-extensive. Most notably, section 5 of the 
FTC Act does not include a prohibition on abusive acts or practices 
similar to that under section 1031 of the Dodd-Frank Act. Accordingly, 
consumers would benefit from the expanded scope of consumer protection 
under section 1031 of the Dodd-Frank Act in connection with 
transactions involving these leases.
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    \105\ 15 U.S.C. 45. This prohibition is enforced by the Federal 
Trade Commission with respect to nonbanks under section 5 and by the 
prudential regulators with respect to banks under section 8 of the 
Federal Deposit Insurance Act, 12 U.S.C. 1818.
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    The proposed definition also has the potential to expand 
supervisory activities in two distinct ways. First, the proposed 
definition, as incorporated into the larger participant rule proposal, 
could bring certain nonbank entities under Bureau supervision by 
expanding the activities counted in determining whether participants of 
the automobile financing market qualify as larger participants and are 
thus subject to supervision under the Proposed Rule. To the extent that 
nonbank entities in the automobile financing market would be brought 
under supervision as a result of the proposed definition, both 
consumers and covered persons would benefit. The nature of these 
benefits, including from both the possibility of supervision and actual 
individual supervisory activities, are discussed above.
    Second, the proposed definition could affect the scope of 
supervision for other nonbank entities and certain banks and credit 
unions.\106\ For nonbank entities in the automobile financing market 
that would be subject to supervision as a larger participant even 
absent the proposed definition, the proposed definition would not 
expand the leasing activities of such entities subject to supervision. 
However, the proposed definition would expand the scope of supervision 
for leasing covered by the proposed definition to include compliance 
with section 1031 of the Dodd-Frank Act.
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    \106\ With respect to nonbanks, the Bureau currently supervises 
mortgage companies, payday lenders, and private student lenders, as 
well as larger participants of the consumer reporting, consumer debt 
collection, and student loan servicing markets, and will soon have 
authority to supervise larger participants of the international 
money transfer market. The Bureau is not aware of any significant 
automobile leasing activity by these entities. Thus, the Bureau 
believes that the proposed definition in itself would have at most a 
marginal impact on the scope of examinations for these entities.
---------------------------------------------------------------------------

    With respect to banks and credit unions, the Bureau has supervisory 
authority over large banks with total assets of more than $10 billion 
(and their affiliates) for compliance with Federal consumer financial 
laws, and the prudential regulators exercise primary supervisory 
authority over other banks with total assets of $10 billion or less for 
compliance with Federal consumer financial laws. As noted above, 
although the proposed definition would not expand the leasing 
activities of banks subject to supervision, for leasing covered under 
the proposed definition, it would expand the scope of that supervision 
to include compliance with section 1031 of the Dodd-Frank Act. Again, 
the benefits to consumers of that expanded supervision authority would 
be similar to the general benefits of supervision discussed above.
    Although the Bureau has identified the above potential consumer 
benefits from the expanded supervision authority that could result from 
the proposed definition, the Bureau believes such benefits would be 
limited in extent. Most significantly, as discussed above, the Bureau 
believes that most automobile leases currently qualify as a financial 
product or service under section 1002(15)(A)(ii) of the Dodd-Frank Act. 
Thus, the Bureau believes that few, if any, nonbank participants in the 
automobile financing market will be subject to the Bureau's supervision 
under the Proposed Rule as a result of the proposed definition. 
Further, for bank and nonbank entities that would be subject to 
supervision even absent the proposed definition, the Bureau believes 
that the proposed definition would expand only the scope of supervision 
of the leasing activities of such entities. Notably, even absent the 
proposed definition, all leasing activities of such entities would be 
subject to supervision by the Bureau or the prudential regulators for 
compliance with the ``enumerated consumer laws'' as defined in section 
1002(12) of the Dodd-Frank Act, including the Consumer Leasing 
Act.\107\ And under the existing regulatory framework, the prudential 
regulators are authorized to supervise banks for compliance with 
section 5 of the FTC Act. Thus, for entities that would be subject to 
supervision even absent the proposed definition, the expanded 
supervision resulting from the proposed definition would be focused on 
the entity's compliance with section 1031 of the Dodd-Frank Act in 
connection with the activities covered by the proposed definition.
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    \107\ With respect to the enumerated consumer laws, the scope of 
the Bureau's authority is defined by the scope of those laws, not by 
the activities listed under section 1002(15)(A) of the Dodd-Frank 
Act.
---------------------------------------------------------------------------

    Finally, under section 1031(b) of the Dodd-Frank Act, the Bureau 
has authority to prescribe rules applicable to a covered person or 
service provider identifying as unlawful unfair, deceptive, or abusive 
acts or practices in connection with any transaction with a consumer 
for a consumer financial product or service, or the offering of a 
consumer financial product or service. Thus, if the proposed definition 
is finalized, the Bureau could promulgate such rules in connection with 
transactions for the leases that would fall under the proposed 
definition. The Bureau would consider the benefits, costs, and impacts 
of any such rulemaking as part of its analysis under section 1022 for 
that rulemaking. The Bureau notes that any such rulemaking would likely 
aim to provide consumers and covered persons with additional clarity in 
regard to identifying unfair, deceptive or abusive acts or practices. 
It is not possible, however, to identify

[[Page 60779]]

with any greater specificity here the potential benefits to consumers 
or covered persons from the proposed definition as a result of an 
unspecified future rulemaking.\108\
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    \108\ The proposed definition would also benefit consumers by 
expanding the scope of certain other Bureau authorities under title 
X of the Dodd-Frank Act. Perhaps most significantly, the proposed 
definition would expand the Bureau's rulemaking authority under 
section 1032 of the Dodd-Frank Act, which authorizes the Bureau to 
prescribe rules to ensure that the features of any consumer 
financial product or service are fully, accurately, and effectively 
disclosed to consumers in a manner that permits consumers to 
understand the costs, benefits, and risks associated with the 
product or service. In addition, the proposed definition would 
expand the scope of the Bureau's authority under section 1022(c) of 
the Dodd-Frank Act to ``monitor for risks to consumers in the 
offering or provision of consumer financial products or services, 
including developments in markets for such products or services,'' 
and the scope of the Bureau's authority under section 1033 of the 
Dodd-Frank Act to prescribe rules for covered persons with respect 
to consumer rights to access information concerning consumer 
financial products or services that the consumer received from such 
person. As with respect to section 1031(b) of the Dodd-Frank Act, it 
is not possible for the Bureau to identify with specificity here the 
benefits to consumers that might result from the Bureau's potential 
future exercise of these authorities. The Bureau, however, notes 
that it would consider the benefits, costs, and impacts of any 
rulemakings under sections 1032 or 1033 of the Dodd-Frank Act as 
part of the section 1022 analysis for such rulemakings.
---------------------------------------------------------------------------

b. Costs of the Proposed Definition
    The proposed definition would impose compliance costs on covered 
persons by subjecting leasing activities that fall under the proposed 
definition to the UDAAP prohibitions in section 1031 of the Dodd-Frank 
Act. Those entities would incur some cost of compliance because, as 
laid out above, the prohibitions under section 1031 of the Dodd-Frank 
Act and section 5 of the FTC Act are not co-extensive: In particular, 
section 5 of the FTC Act does not include a prohibition on abusive acts 
or practices similar to that under section 1031 of the Dodd-Frank Act. 
However, given the fact that, as interpreted by the Bureau, section 
1002(15)(A)(ii) covers most automobile leases and the substantial 
overlap of the prohibited conduct under section 1031 of the Dodd-Frank 
Act and section 5 of the FTC Act, in the Bureau's judgment, the 
compliance costs to covered persons of this new prohibition would be 
limited in extent.
    Regarding supervision, the proposed definition, as incorporated 
into the larger participant rule proposal, could also bring certain 
nonbank entities under Bureau supervision and would affect the scope of 
supervision for other nonbank entities, banks, and credit unions. With 
respect to nonbanks, the proposed definition would, as discussed above, 
expand the activities counted in determining whether participants of 
the automobile financing market qualify as larger participants and are 
thus subject to supervision under the Proposed Rule. To the extent that 
larger participants in the automobile financing market are brought 
under supervision as a result of the proposed definition, such entities 
would incur costs. The nature of these costs, including from the 
possibility of supervision as well as from actual individual 
supervisory activities, are discussed above. For participants of the 
automobile financing market that would be subject to supervision under 
the proposed larger-participant rule even absent the proposed 
definition, the proposed definition would impose costs by expanding the 
leasing activities of such entities subject to supervision for 
compliance with section 1031 of the Dodd-Frank Act. With respect to 
banks and credit unions, by expanding the leasing activities subject to 
the section 1031 UDAAP prohibition, as discussed above, the proposed 
definition would correspondingly expand the activities subject to 
supervision by either the Bureau or the prudential regulators, as 
applicable, for compliance with that prohibition.
    For both banks and nonbanks, the Bureau believes that the increased 
costs of supervision identified above would be small. As discussed 
above, the Bureau believes that most auto leases currently qualify as a 
financial product or service under section 1002(15)(A)(ii) of the Dodd-
Frank Act. Thus, the Bureau believes that few, if any, nonbank 
participants in the automobile financing market will be brought under 
Bureau supervision under the Proposed Rule as a result of the proposed 
definition. Similarly, for banks and nonbank entities that would be 
subject to supervision even absent the proposed definition, the Bureau 
believes that the proposed definition would only subject the leasing 
activities of such entities to slightly expanded supervision. Notably, 
even absent the proposed definition, all leasing activities of such 
entities would be subject to supervision by the Bureau or the 
prudential regulators for compliance with the enumerated consumer laws, 
including the Consumer Leasing Act.\109\ And under the existing 
regulatory framework, the prudential regulators are authorized to 
supervise banks for compliance with section 5 of the FTC Act. Thus, for 
entities that would be subject to supervision even absent the Proposed 
Rule, the scope of expanded supervision for the limited activities that 
would fall under the proposed definition would be further limited to 
compliance with section 1031 of the Dodd-Frank Act. The Bureau believes 
that the additional cost to entities already subject to supervision of 
being supervised for compliance with section 1031 of the Dodd-Frank Act 
would be minimal.
---------------------------------------------------------------------------

    \109\ With respect to the enumerated consumer laws, the scope of 
the Bureau's authority is defined by the scope of those laws, not by 
the activities listed under section 1002(15)(A) of the Dodd-Frank 
Act.
---------------------------------------------------------------------------

    Finally, under section 1031(b) of the Dodd-Frank Act, the Bureau 
has authority to prescribe rules applicable to a covered person or 
service provider identifying as unlawful unfair, deceptive, or abusive 
acts or practices in connection with any transaction with a consumer 
for a consumer financial product or service, or the offering of a 
consumer financial product or service. Thus, if the proposed definition 
is finalized, the Bureau could promulgate such rules in connection with 
transactions for the leases that would fall under the proposed 
definition. Such a rule may impose costs on covered persons or service 
providers. It is not possible to identify with any greater specificity 
here the potential costs to covered persons or service providers of any 
such hypothetical future rulemaking. The Bureau notes, however, that it 
would consider the benefits, costs, and impacts of any such rulemaking 
as part of its analysis under section 1022 for that rulemaking.\110\
---------------------------------------------------------------------------

    \110\ The proposed definition would also impose costs on covered 
persons by expanding the scope of certain other Bureau authorities 
under title X of the Dodd-Frank Act. Specifically, the proposed 
definition would expand the Bureau's rulemaking authority under 
section 1032 of the Dodd-Frank Act, which authorizes the Bureau to 
prescribe rules to ensure that the features of any consumer 
financial product or service are fully, accurately, and effectively 
disclosed to consumers in a manner that permits consumers to 
understand the costs, benefits, and risks associated with the 
product or service. In addition, the proposed definition would 
expand the scope of the Bureau's authority under section 1022(c) of 
the Dodd-Frank Act to ``monitor for risks to consumers in the 
offering or provision of consumer financial products or services, 
including developments in markets for such products or services,'' 
and the scope of the Bureau's authority under section 1033 of the 
Dodd-Frank Act, to prescribe rules for covered persons with respect 
to consumer rights to access information concerning consumer 
financial products or services that the consumer received from such 
person. As with respect to section 1031(b) of the Dodd-Frank Act, it 
is not possible for the Bureau to identify with specificity here the 
costs to covered persons that may result from the Bureau's potential 
future exercise of these authorities. The Bureau, however, notes 
that it would consider the benefits, costs, and impacts of any 
rulemakings under sections 1032 or 1033 of the Dodd-Frank Act as 
part of the section 1022 analysis for such rulemakings.
---------------------------------------------------------------------------

5. Consideration of Alternatives
    The Bureau is considering different thresholds for larger-
participant status

[[Page 60780]]

in the market for automobile financing. One alternative the Bureau is 
considering is a larger threshold of, for example, 50,000 aggregate 
annual originations. Under such an alternative, the benefits of 
supervision to both consumers and covered persons would likely be 
substantially reduced because some firms impacting a large portion of 
consumers in important market segments, such as captive, subprime, and 
BHPH lending, would be omitted. On the other hand, the overall 
potential costs across all nonbank covered persons would of course be 
reduced if fewer firms were defined as larger participants and thus 
fewer were subject to the Bureau's supervision authority on that basis. 
Similarly, the Bureau is also considering lower thresholds, such as 
5,000 aggregate annual originations, but believes this would only 
marginally increase the proportion of market activity that the Bureau 
could supervise while potentially exposing a greater number of nonbank 
covered persons to the costs listed above. However, the total direct 
costs for actual supervisory activity might not change substantially 
because the Bureau conducts exams on a risk basis and would not 
necessarily examine more or fewer entities if the rule's coverage were 
broader or narrower.
    The Bureau is also considering various other criteria for assessing 
larger-participant status, including dollar volume of originations and 
total unpaid principal balances. Calculating either of these metrics 
might be more involved than calculating the number of originations for 
a given nonbank entity. If so, then a given entity might face greater 
costs for evaluating or disputing whether it qualified as a larger 
participant should the occasion to do so arise. Additionally, as some 
nonbank entities might, for example, specialize in sectors featuring 
higher average loan amounts or different prepayment and default rates 
than others, using aggregate annual originations more directly captures 
the number of consumers impacted by the Proposed Rule. For each 
criterion, the Bureau expects that it could choose a suitable threshold 
for which the set of larger participants, among those entities 
participating in the market today, would be similar to those expected 
to qualify under the Proposed Rule. Consequently, the costs, benefits, 
and impacts of this Proposed Rule should not depend on which criterion 
the Bureau uses.

C. Potential Specific Impacts of the Proposed Rule

1. Depository Institutions and Credit Unions With $10 Billion or Less 
in Total Assets, As Described in Section 1026 of the Dodd-Frank Act
    No depository institutions or credit unions of any size would 
become larger participants in the market for automobile leases under 
the Proposed Rule. Further, as explained above, the proposed change in 
the definition of financial product or service would not in itself have 
any significant effect on depository institutions and credit unions 
with $10 billion or less in total assets. Nevertheless, the Proposed 
Rule might, as discussed above, have some impact on depository 
institutions or credit unions that provide financing for automobile 
transactions. The Proposed Rule might therefore alter market dynamics 
in a market in which some depository institutions and credit unions 
with less than $10 billion in assets may be active. For example, if 
nonbanks' price of credit for loan acquisitions or leases were to 
increase, or similarly were the compensation for selling those same 
products to decrease due to increased costs related to supervision, 
then depository institutions or credit unions of any size might benefit 
by the relative change in competitors' costs.
2. Impact of the Provisions on Consumer Access to Credit and on 
Consumers in Rural Areas
    Because the rule applies uniformly to automobile financing 
transactions of both rural and non-rural consumers, the rule should not 
have a unique impact on rural consumers. The Bureau is not aware of any 
evidence suggesting that rural consumers have been disproportionately 
harmed by nonbank entities' failure to comply with Federal consumer 
financial law. The Bureau would welcome any comments that may provide 
information related to how automobile financing transactions affect 
rural consumers.

VII. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), as amended by the Small 
Business Regulatory Enforcement Fairness Act of 1996,\111\ requires 
each agency to consider the potential impact of its regulations on 
small entities, including small businesses, small governmental units, 
and small not-for-profit organizations.\112\ The RFA defines a ``small 
business'' as a business that meets the size standard developed by the 
Small Business Administration (SBA) pursuant to the Small Business 
Act.\113\
---------------------------------------------------------------------------

    \111\ The RFA, Public Law 96-354, 94 Stat. 1164 (1980) (codified 
as amended at 5 U.S.C. 601-12).
    \112\ The term ```small organization' means any not-for-profit 
enterprise which is independently owned and operated and is not 
dominant in its field, unless an agency establishes [an alternative 
definition after notice and comment].'' 5 U.S.C. 601(4). The term 
```small governmental jurisdiction' means governments of cities, 
counties, towns, townships, villages, school districts, or special 
districts, with a population of less than fifty thousand, unless an 
agency establishes [an alternative definition after notice and 
comment].'' Id. at 601(5). The Bureau is not currently aware of any 
small governmental units or small not-for-profit organizations to 
which the Proposed Rule would apply.
    \113\ 5 U.S.C. 601(3). The Bureau may establish an alternative 
definition after consultation with SBA and an opportunity for public 
comment. Id.
---------------------------------------------------------------------------

    The RFA generally requires an agency to conduct an initial 
regulatory flexibility analysis (IRFA) of any proposed rule subject to 
notice-and-comment rulemaking requirements, unless the agency certifies 
that the proposed rule would not have a significant economic impact on 
a substantial number of small entities.\114\ The Bureau also is subject 
to certain additional procedures under the RFA involving the convening 
of a panel to consult with small entity representatives prior to 
proposing a rule for which an IRFA is required.\115\
---------------------------------------------------------------------------

    \114\ 5 U.S.C. 605(b).
    \115\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    The undersigned certifies that the Proposed Rule, if adopted, would 
not have a significant economic impact on a substantial number of small 
entities and that an IRFA is therefore not required.
    The Proposed Rule would define a class of nonbank covered persons 
as larger participants of the automobile financing market and thereby 
would authorize the Bureau to undertake supervisory activities with 
respect to those nonbank covered persons. The Proposed Rule would also 
define the term ``financial product[s] or service[s]'' to include 
automobile leases that (1) meet the requirements of section 108 of 
CEBA, as implemented by 12 CFR part 23, and are thus permissible for 
banks to offer or provide; and (2) are not currently defined as a 
financial product or service under section 1002(15)(A)(ii) of the Dodd-
Frank Act. The Proposed Rule would not affect a substantial number of 
small businesses.
    Regarding insured depositories and credit unions, these entities 
are small businesses only if their assets are below $550 million. The 
proposed definition of larger participants of the automobile financing 
market applies only to nonbank entities, so it would have no impact on 
depository institutions or

[[Page 60781]]

credit unions of any size. The proposed definition of the term 
financial product or service to include certain automobile leases would 
have little impact on compliance and supervision costs for insured 
depositories and credit unions. The leasing activities covered under 
the proposed definition would become subject to the UDAAP prohibition 
under section 1031 of the Dodd-Frank Act. Although the two are not co-
extensive, as discussed above, a similar prohibition on UDAP in or 
affecting commerce under section 5 of the FTC Act already applies to 
these activities. Similarly, small banks are already subject to 
supervision for compliance with section 5 of the FTC Act, as well as 
with the enumerated consumer laws. In addition, most small banks have a 
very low share of leases relative to loans, and most of this leasing 
activity already qualifies as a financial product or service under 
section 1002(15)(A)(ii) of the Dodd-Frank Act. Accordingly, the Bureau 
estimates that very few to no small banks would experience a 
significant impact due to the proposed change to the definition of a 
financial product or service.
    Regarding nonbank entities, the Proposed Rule adopts a threshold 
for larger-participant status of at least 10,000 aggregate annual 
originations.\116\ Under the size standard for the most relevant SBA 
classification, i.e., NAICS code 522220, an entity engaged in 
automobile financing is a small business if its annual receipts are 
below $38.5 million.\117\ The Bureau used AutoCount data for 2013 
combined with public financial statements, securitization filings, and 
additional market research to estimate annual receipts for each of the 
potential larger participants.\118\ Based on this review, it appears 
that few, if any, of the approximately 38 potential larger participants 
identified by the Bureau's analysis meet the small business threshold 
classification.\119\ The Bureau therefore estimates that no or very few 
small businesses would be classified as larger participants of the 
automobile financing market under the Proposed Rule.\120\
---------------------------------------------------------------------------

    \116\ As noted above, if a nonbank covered person meets the 
larger-participant test, it would remain a larger participant until 
two years from the first day of the tax year in which it last met 
the larger-participant test.
    \117\ 13 CFR 121.201 (NAICS code 522220) (as amended by 79 FR 
33647, 33655 (June 12, 2014)). The Bureau believes that larger 
participants in the proposed nonbank automobile financing market are 
likely to be classified under NAICS code 522220, sales financing. 
NAICS lists ``automobile financing'' and ``automobile finance 
leasing companies'' as index entries corresponding to this code. See 
U.S. Census Bureau, North American Industry Classification System, 
2012 NAICS Definition 522220 Sales Financing, available at http://www.census.gov/cgi-bin/sssd/naics/naicsrch.
    \118\ To generate these estimates, the Bureau first calculated 
an estimate of the average stream of interest income the 38 
potential larger participants would receive over a 12-month period 
for all loans originated in 2013, as well as the income each entity 
would receive during the same period for loans made in previous 
years if the number of originations were identical to 2013 levels. 
This initial calculation excludes leases that also generate income. 
It also assumes no prepayment, which would increase receipts; no 
defaults, which would decrease receipts; and no other income 
generated from any other sources. The Bureau then analyzed public 
financial statements to verify any potential outliers. Using this 
methodology, the Bureau found six potential larger participants with 
receipts from loans that fall below the $38.5 million size standard 
in 2013; however, three of these entities hold a substantial number 
of leases and therefore likely have over $38.5 million in combined 
receipts from loans and leases, assuming lease terms similar in 
payment size to loans. Further market research indicates the 
remaining three entities likely generate additional revenue from 
other sources, suggesting that their annual receipts also exceed the 
relevant size standard.
    \119\ The Bureau's analysis concluding that few, if any, 
potential larger participants meet the relevant size standard is 
described in supra note 118. The Bureau also believes that it is 
unlikely that any small entities would be rendered larger 
participants of the consumer reporting or consumer debt collection 
markets by the proposed technical amendments to Sec.  1090.104(a) 
and Sec.  1090.105(a), since very few entities in those markets are 
likely to have annual receipts that are so close to the larger-
participant threshold that inclusion of additional receipts from a 
formerly-affiliated company would affect their larger-participant 
status.
    \120\ According to the 2007 Economic Census, more than 2,000 
small firms are encompassed under the most applicable NAICS code 
(522220). U.S. Census Bureau, American FactFinder Database, Estab 
and Firm Size: Summary Statistics by Revenue Size of Establishments 
for the United States: 2007, available at http://
factfinder2.census.gov/bkmk/table/1.0/en/ECN/2007_US/52SSSZ4//
naics~522220. Thus, even if a few small firms were classified as 
larger participants, they would constitute less than one percent of 
the small firms in the industry under that NAICS code.
---------------------------------------------------------------------------

    Finally, the proposed definition of the term financial product or 
service to include certain automobile leases would have little impact 
on small nonbank entities engaged in automobile leasing. As mentioned 
above, the vast majority of automobile leases likely already qualify as 
a financial product or service under section 1002(15)(A)(ii) of the 
Dodd-Frank Act, and so the change in definition is unlikely to affect 
the larger-participant status of any small business. With respect to 
costs related to compliance, if the proposed definition is finalized, 
small nonbanks would have to comply with the UDAAP prohibition under 
section 1031 of the Dodd-Frank Act when providing automobile leases 
covered under the proposed definition. However, as with small banks, 
small nonbanks that provide automobile leases must already comply with 
similar UDAP prohibitions under section 5 of the FTC Act as well as the 
applicable enumerated consumer laws, such as the Consumer Leasing Act. 
Additionally, as explained above, there are likely to be few, if any, 
small nonbank businesses in the automobile financing market that would 
be subject to supervision irrespective of the proposed definition. To 
the extent that any small nonbanks are larger participants under the 
Proposed Rule, the Bureau believes that the proposed definition would 
expand the scope of leasing activities of such entities subject to 
supervision for compliance with section 1031. The economic impact of 
this expansion in scope would not be significant. Notably, even absent 
the proposed definition, all leasing activities of such entities would 
be subject to supervision by the Bureau for compliance with the 
enumerated consumer laws, including the Consumer Leasing Act.\121\
---------------------------------------------------------------------------

    \121\ As noted above, with respect to the enumerated consumer 
laws, the scope of the Bureau's authority is defined by the scope of 
those laws, not by the activities listed under section 1002(15)(A) 
of the Dodd-Frank Act.
---------------------------------------------------------------------------

    Considering the limited public information available for several of 
the smallest potential larger participants, the Bureau requests comment 
on the impact of the Proposed Rule on small nonbank entities and 
solicits data that may be relevant to this analysis. The Bureau also 
solicits comments on whether NAICS code 522220 or any other NAICS code 
is more appropriate for this market.
    Additionally, if a larger participant's annual receipts fell below 
the $38.5 million SBA size standard, the Proposed Rule would not result 
in a ``significant impact'' on the entity. The Proposed Rule would not 
itself impose any business conduct obligations beyond those described 
above regarding the automobile leases defined under the Proposed Rule 
as financial products or services. Furthermore, the Bureau's 
supervisory activity would have very little economic impact on a 
supervised entity. When and how often the Bureau would in fact engage 
in supervisory activity, such as an examination, with respect to a 
larger participant (and, if so, the extent of such activity) would 
depend on a number of considerations, including the Bureau's allocation 
of resources and the application of the statutory factors set forth in 
section 1024(b)(2) of the Dodd-Frank Act. Given the Bureau's finite 
supervisory resources, and the range of industries over which it has 
supervisory responsibility for consumer financial protection, when and 
how often a given a larger participant would be supervised is 
uncertain. Moreover, if supervisory activity occurred, the costs that 
would result from such activity are expected to

[[Page 60782]]

be minimal in relation to the overall activities of a larger 
participant.\122\ Hence, the Proposed Rule would not have a significant 
economic impact on a substantial number of small entities because the 
Proposed Rule would not impose any significant business conduct 
obligations on the defined class of larger participants and the cost of 
supervisory activities would be nominal in relation to the revenue of a 
larger participant whose annual revenue fell below the $38.5 million 
SBA size standard.\123\
---------------------------------------------------------------------------

    \122\ As noted in part VI.B.2.b above, the Bureau estimates that 
the cost of participation in an examination would be approximately 
0.013 percent of the annual revenue generated from originations for 
an entity at the threshold of 10,000 aggregate annual originations.
    \123\ Because the Proposed Rule aggregates the activities of 
affiliated companies in part by adding together annual originations, 
two companies that are small businesses might, together, have 
aggregate annual originations over 10,000. The Bureau anticipates no 
more than a very few such cases, if any, in the automobile financing 
market.
---------------------------------------------------------------------------

    Finally, section 1024(e) of the Dodd-Frank Act authorizes the 
Bureau to supervise service providers to nonbank covered persons 
encompassed by section 1024(a)(1), which includes larger participants. 
Because the Proposed Rule does not specifically address service 
providers, effects on service providers need not be discussed for 
purposes of this RFA analysis. Even were such effects relevant, the 
Bureau believes that it would be very unlikely that any supervisory 
activities with respect to the service providers to the approximately 
38 potential larger participants of the proposed market for automobile 
financing would result in a significant economic impact on a 
substantial number of small entities.\124\
---------------------------------------------------------------------------

    \124\ As noted above, according to the 2007 Economic Census, 
more than 2,000 small firms are encompassed under NAICS code 522220, 
and the number of those firms that are service providers for the 38 
potential larger participants will be only a small fraction of that 
number. Other service providers may be classified under NAICS code 
522320 for financial transactions processing, reserve, and clearing 
house activities, which also includes more than 2,000 small firms. 
U.S. Census Bureau, American FactFinder Database, Estab and Firm 
Size: Summary Statistics by Revenue Size of Establishments for the 
United States: 2007, available at http://factfinder2.census.gov/
bkmk/table/1.0/en/ECN/2007_US/52SSSZ4//naics~522320. Still other 
service providers are likely to be considered in other NAICS codes 
corresponding to the service provider's primary business activities. 
As noted above with respect to larger participants themselves, the 
frequency and duration of examinations that would be conducted at 
any particular service provider would depend on a variety of 
factors. However, it is implausible that in any given year the 
Bureau would conduct examinations of a substantial number of the 
more than 4,000 small firms in NAICS code 522220 and 522320, or the 
small firm service providers that happen to be in any other NAICS 
code. Moreover, the impact of supervisory activities, including 
examinations, at such small firm service providers can be expected 
to be less, given the Bureau's exercise of its discretion in 
supervision, than at the larger participants themselves.
---------------------------------------------------------------------------

    Accordingly, the undersigned certifies that the Proposed Rule would 
not have a significant economic impact on a substantial number of small 
entities.

VIII. Paperwork Reduction Act

    The Bureau has determined that this Proposed Rule would not impose 
any new recordkeeping, reporting, or disclosure requirements on covered 
entities or members of the public that would constitute collections of 
information requiring approval under the Paperwork Reduction Act, 44 
U.S.C. 3501, et seq.

List of Subjects in 12 CFR Part 1000 and 12 CFR Part 1090

    Consumer protection, Credit.

Authority and Issuance

    For the reasons set forth in the preamble, the Bureau proposes to 
add 12 CFR part 1001 and proposes to amend 12 CFR part 1090, subpart B, 
to read as follows:
PART 1001--FINANCIAL PRODUCTS OR SERVICES
Sec.
1001.1 Authority and purpose.
1001.2 Definitions.

0
1. The authority citation for part 1001 is to read:

    Authority:  12 U.S.C. 5481(15)(A)(xi); and 12 U.S.C. 5512(b)(1).

0
2. Add part 1001 to Chapter X in Title 12 of the Code of Federal 
Regulations to read as follows:

PART 1001--FINANCIAL PRODUCTS OR SERVICES


Sec.  1001.1  Authority and purpose.

    Under 12 U.S.C. 5481(15)(A)(xi), the Bureau is authorized to define 
certain financial products or services for purposes of title X of the 
Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376 (2010) (Title X) in 
addition to those defined in 12 U.S.C. 5481(15)(A)(i)-(x). The purpose 
of this part is to implement that authority.


Sec.  1001.2  Definitions.

    Except as otherwise provided in Title X, in addition to the 
definitions set forth in 12 U.S.C. 5481(15)(A)(i)-(x), the term 
``financial product or service'' means, for purposes of Title X:
    (a) Extending or brokering leases of an automobile, as defined by 
12 CFR 1090.108(a), where the lease:
    (1) Qualifies as a full-payout lease and a net lease, as provided 
by 12 CFR 23.3(a), and has an initial term of not less than 90 days, as 
provided by 12 CFR 23.11; and
    (2) Is not a financial product or service under 12 U.S.C. 
5481(15)(A)(ii).

PART 1090--DEFINING LARGER PARTICIPANTS OF CERTAIN CONSUMER 
FINANCIAL PRODUCT AND SERVICE MARKETS

0
3. The authority citation for part 1090 continues to read as follows:

    Authority:  12 U.S.C. 5514(a)(1)(B); 12 U.S.C. 5514(a)(2); 12 
U.S.C. 5514(b)(7)(A); and 12 U.S.C. 5512(b)(1).

0
4. Section 1090.101 is amended by revising the definition of ``Nonbank 
covered person'' to read as follows:


Sec.  1090.101  Definitions.

* * * * *
    Nonbank covered person means, except for persons described in 12 
U.S.C. 5515(a) and 5516(a):
    (1) Any person that engages in offering or providing a consumer 
financial product or service; and
    (2) Any affiliate of a person that engages in offering or providing 
a consumer financial product or service if such affiliate acts as a 
service provider to such person.
* * * * *
0
5. Section 1090.104 is amended by revising paragraph (a)(iii)(D) of the 
definition ``annual receipts'' to read as follows:


Sec.  1090.104  Consumer reporting market.

    (a) * * *
    (iii) * * *
    (D) The annual receipts of a formerly affiliated company are not 
included if the affiliation ceased before the applicable period of 
measurement as set forth in paragraph (ii) of this definition. The 
annual receipts of a nonbank covered person and its formerly affiliated 
company are aggregated for the entire period of measurement if the 
affiliation ceased during the applicable period of measurement as set 
forth in paragraph (ii) of this definition.
* * * * *
0
6. Section 1090.105 is amended by revising paragraph (a)(iii)(D) of the 
definition ``annual receipts'' to read as follows:


Sec.  1090.105  Consumer debt collection market.

    (a) * * *
    (iii) * * *
    (D) The annual receipts of a formerly affiliated company are not 
included if the affiliation ceased before the applicable period of 
measurement as set forth in paragraph (ii) of this definition. The 
annual receipts of a nonbank

[[Page 60783]]

covered person and its formerly affiliated company are aggregated for 
the entire period of measurement if the affiliation ceased during the 
applicable period of measurement as set forth in paragraph (ii) of this 
definition.
* * * * *
0
7. Add Sec.  1090.108 to subpart B to read as follows:


Sec.  1090.108  Automobile financing market.

    (a) Market-related definitions. As used in this section:
    Aggregate annual originations means the sum of the number of annual 
originations of a nonbank covered person and the number of annual 
originations of each of the nonbank covered person's affiliated 
companies, calculated as follows:
    (i) Annual Originations.
    (A) Annual originations means the sum of the following transactions 
for the preceding calendar year:
    (1) Credit granted for the purpose of purchasing an automobile;
    (2) Automobile leases;
    (3) Refinancings of obligations described in (1) above, and any 
subsequent refinancings thereof; and
    (4) Purchases or acquisitions of obligations described in (1) or 
(3) above or of automobile lease agreements.
    (B) The term annual originations does not include investments in 
asset-backed securities.
    (ii) Aggregating the annual originations of affiliated companies. 
The annual originations of a nonbank covered person must be aggregated 
with the annual originations of any person (other than an entity 
described in paragraph (c)) that was an affiliated company of the 
nonbank covered person at any time during the preceding calendar year. 
The annual originations of a nonbank covered person and its affiliated 
companies are aggregated for the entire preceding calendar year, even 
if the affiliation did not exist for the entire calendar year.
    Automobile means any self-propelled vehicle primarily used for 
personal, family, or household purposes for on-road transportation. The 
term does not include motor homes, recreational vehicles (RVs), golf 
carts, and motor scooters.
    Automobile financing means providing the transactions identified 
under the term ``annual originations'' as defined in this section.
    Automobile lease means a lease that is for the use of an 
automobile, as defined in this section, and that meets the requirements 
of 12 U.S.C. 5481(15)(A)(ii) or 12 CFR 1001.2(a).
    Refinancing has the same meaning as in 12 CFR 1026.20(a), except 
that the nonbank covered person need not be the original creditor or a 
holder or servicer of the original obligation.
    (b) Test to define larger participants. Except as provided in 
paragraph (c), a nonbank covered person that engages in automobile 
financing is a larger participant of the automobile financing market if 
the person has at least 10,000 aggregate annual originations.
    (c) Exclusion for dealers. The following entities do not qualify as 
larger participants under this section:
    (1) persons excluded from the authority of the Bureau by 12 U.S.C. 
5519; and
    (2) persons who meet the definition in 12 U.S.C. 5519(f)(2); are 
identified in 12 U.S.C. 5519(b)(2); and are predominantly engaged in 
the sale and servicing of motor vehicles, the leasing and servicing of 
motor vehicles, or both.

    Dated: September 16, 2014.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2014-23115 Filed 10-7-14; 8:45 am]
BILLING CODE 4810-AM-P