Federal Register, Volume 80 Issue 125 (Tuesday, June 30, 2015)

[Federal Register Volume 80, Number 125 (Tuesday, June 30, 2015)]
[Rules and Regulations]
[Pages 37496-37527]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-14630]

[[Page 37495]]

Vol. 80

Tuesday,

No. 125

June 30, 2015

Part VI

Bureau of Consumer Financial Protection

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12 CFR Parts 1001 and 1090

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

Federal Register / Vol. 80 , No. 125 / Tuesday, June 30, 2015 / Rules
and Regulations

[[Page 37496]]

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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: Final rule.

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SUMMARY: The Bureau of Consumer Financial Protection (Bureau or CFPB)
amends 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 defines a market that includes: grants of credit for the
purchase of an automobile; refinancings of such obligations (and
subsequent refinancings thereof) that are secured by an automobile;
automobile leases; and purchases or acquisitions of any of the
foregoing obligations. The Bureau issues 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. This final rule identifies a market for
automobile financing and defines as larger participants of this market
certain nonbank covered persons that will be subject to the Bureau's
supervisory authority. It also defines certain automobile leases as a
``financial product or service'' under section 1002(15)(A)(xi)(II) of
the Dodd-Frank Act. Finally, this final rule makes certain technical
corrections to existing larger-participant rules.

DATES: Effective August 31, 2015.

FOR FURTHER INFORMATION CONTACT: Dania Ayoubi or Jolina Cuaresma,
Counsels; or Amanda Quester, Senior Counsel, Office of Regulations,
Consumer Financial Protection Bureau, 1700 G Street, NW., Washington,
DC 20552, at (202) 435-7700.

SUPPLEMENTARY INFORMATION:

I. Summary of Final Rule

The Dodd-Frank Act authorizes the Bureau to define by regulation
larger participants of certain markets for financial products or
services.\1\ On September 17, 2014, the Bureau proposed a rule to
define larger participants of a market for automobile financing and to
make certain technical amendments to its rules defining larger
participants of other consumer financial product and service markets
(Proposed Rule).\2\ Pursuant to authority granted by the Dodd-Frank
Act, the Proposed Rule also defines the term ``financial product or
service'' for purposes of title X of the Dodd-Frank Act to include
certain automobile leases that are not currently defined as a financial
product or service under section 1002(15)(A)(ii) of the Dodd-Frank Act.
The Bureau is now issuing this final rule (Final Rule) largely as
proposed.
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\1\ Public Law 111-203, section 1024, 124 Stat. 1376, 1987
(2010) (codified at 12 U.S.C. 5514).
\2\ 79 FR 60762 (Oct. 8, 2014).
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The Final Rule defines a market for automobile financing that
covers specific activities and sets forth a test to determine whether a
nonbank covered person is a larger participant of that market. The
Final Rule defines ``automobile'' to mean any self-propelled vehicle
primarily used for personal, family, or household purposes for on-road
transportation, with certain exclusions (motor homes, recreational
vehicles (RVs), golf carts, and motor scooters). The Final Rule defines
``annual originations'' to mean the sum of the following transactions
for the preceding calendar year:
credit granted for the purchase of an automobile;
refinancings of such obligations (and any subsequent
refinancings thereof) that are secured by an automobile;
automobile leases; and
purchases or acquisitions of any of the foregoing
obligations.
For purposes of the Final Rule, refinancing has the same meaning as it
does in Regulation Z, except that, for a refinancing to be considered
an annual origination under this Final Rule, the nonbank covered person
need not be the original creditor or a holder or servicer of the
original obligation. The term ``automobile lease'' means a lease that
is for the use of an automobile and that meets the requirements of
section 1002(15)(A)(ii) of the Dodd-Frank Act or of new Sec.
1001.2(a), which is discussed below.
As in the Proposed Rule, the term ``annual originations'' in the
Final Rule does not include investments in asset-backed securities. The
Final Rule also excludes certain purchases or acquisitions by special
purpose entities that are established for the purpose of facilitating
asset-backed securities transactions.
Under the Final Rule, a nonbank covered person that engages in
automobile financing \3\ is a larger participant of the automobile
financing market if it has at least 10,000 aggregate annual
originations. To determine a nonbank covered person's aggregate annual
originations, the Final Rule provides that the annual originations of a
nonbank covered person must be aggregated with the annual originations
of any person (other than a dealer that is excluded from larger-
participant status under the Final Rule \4\) that was an affiliated
company of the nonbank covered person at any time during the preceding
calendar year.
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\3\ For purposes of the Final Rule, ``automobile financing''
means providing or engaging in any annual originations as defined in
the rule. The terms ``automobile'' and ``automobile financing'' are
used in this Supplementary Information in a manner consistent with
how they are defined in the Final Rule. The terms ``auto'' and
``auto financing'' are used more generically.
\4\ The Final Rule provides that certain auto dealers do not
qualify as larger participants. 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 final
larger-participant rule also excludes certain dealers that extend
retail credit or retail leases directly to consumers without
routinely assigning them to unaffiliated third party finance or
leasing sources, even though such dealers are not subject to the
statutory exclusion of section 1029.
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As noted above, the Bureau is including automobile leases in the
criterion it uses 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) of the Dodd-
Frank Act, and therefore count toward the aggregate annual originations
threshold for the larger-participant test in this Final Rule. For the
reasons explained below, the Bureau believes that the purpose of the
Final Rule and the Bureau's overall mission are best served by covering
automobile leasing more broadly. Accordingly, under its authority
granted by section 1002(15)(A)(xi)(II) of the Dodd-Frank Act, the
Bureau is adding Sec. Sec. 1001.1 and 1001.2 in new part 1001 to title
12 of the Code of Federal Regulations. Section 1001.1 states 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'' for purposes of title
X of the

[[Page 37497]]

Dodd-Frank Act to include certain financial products or services in
addition to those defined in section 1002(15)(A)(i)-(x). Section
1001.2(a) defines the term ``financial product or service'' under that
same authority to include certain automobile leases that national banks
are authorized to offer and that do not fall under the definition in
section 1002(15)(A)(ii).
The Final Rule also makes certain technical corrections to existing
larger-participant rules. Specifically, the Final Rule inserts the word
``financial'' before the term ``product or service'' in the definition
of ``nonbank covered person'' in Sec. 1090.101. The Final Rule also
amends Sec. Sec. 1090.104(a) and 1090.105(a) to 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 for purposes of the
consumer reporting and consumer debt collection larger-participant
rules.

II. Background

Section 1024 of the Dodd-Frank Act gives the Bureau supervisory
authority over all nonbank covered persons \5\ 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.\6\ 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.\7\
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\5\ 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).
\6\ 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).
\7\ 12 U.S.C. 5514(a)(1)(B), (a)(2); see also 12 U.S.C. 5481(5)
(defining ``consumer financial product or service''). 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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Subpart A of the Bureau's existing larger-participant rule, 12 CFR
part 1090, prescribes various procedures, definitions, standards, and
protocols that apply to all markets in which the Bureau defines larger
participants.\8\ Those generally applicable provisions also apply to
the automobile financing market described by this Final Rule.
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\8\ 12 CFR 1090.100-.103.
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As prescribed by existing Sec. 1090.102, any nonbank covered
person that qualifies as a larger participant remains a larger
participant until two years after the first day of the tax year in
which the person last met the applicable test. Pursuant to existing
Sec. 1090.103, a person will be able to dispute whether it qualifies
as a larger participant in the automobile financing market. The Bureau
will notify an entity when the Bureau intends to undertake supervisory
activity; the entity will then have an opportunity to submit
documentary evidence and written arguments in support of its claim that
it is not a larger participant.\9\ 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; this authority will 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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\9\ 12 CFR 1090.103(a).
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The Bureau includes relevant market descriptions and larger-
participant tests, as it develops them, in subpart B. The Final Rule is
the fifth in a series of rulemakings to define larger participants of
markets for other consumer financial products or services within
subpart B. The first four rules define larger participants of markets
for consumer reporting, consumer debt collection, student loan
servicing, and international money transfers.\10\
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\10\ 77 FR 42874 (July 20, 2012) (Consumer Reporting Rule)
(codified at 12 CFR 1090.104); 77 FR 65775 (Oct. 31, 2012) (Consumer
Debt Collection Rule) (codified at 12 CFR 1090.105); 78 FR 73383
(Dec. 6, 2013) (Student Loan Servicing Rule) (codified at 12 CFR
1090.106); 79 FR 56631 (Sept. 23, 2014) (International Money
Transfer Rule) (codified at 12 CFR 1090.107).
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This Final Rule describes a market for consumer financial products
or services, which the Final Rule labels ``automobile financing.'' The
definition does 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 Final Rule.
The Final Rule defining larger participants of a market for
automobile financing does 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.
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.\11\ 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.\12\
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\11\ 12 U.S.C. 5514(b)(1).
\12\ 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

[[Page 37498]]

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.\13\ 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. In connection
with this Final Rule, the Bureau is releasing examination procedures
related to automobile finance originations and servicing.\14\ These
procedures are a component of the CFPB's general Supervision and
Examination Manual and provide guidance on how the Bureau will be
conducting its monitoring in the automobile financing market.
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\13\ CFPB Supervision and Examination Manual (Oct. 1, 2012),
available at http://files.consumerfinance.gov/f/201210_cfpb_supervision-and-examination-manual-v2.pdf.
\14\ CFPB Automobile Finance Examination Procedures (June 10,
2015), available at http://www.consumerfinance.gov/guidance/supervision/manual/.
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III. Summary of Rulemaking Process

On September 17, 2014, the Bureau issued a notice of proposed
rulemaking \15\ and requested public comment. The Bureau received
approximately 30 comments from consumer advocates, civil rights groups,
industry participants, trade associations, individual consumers,
members of Congress, and others. The Bureau has considered these
comments in adopting this Final Rule.
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\15\ 79 FR 60762 (Oct. 8, 2014).
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IV. Legal Authority and Procedural Matters

A. Rulemaking Authority

The Bureau is issuing this Final Rule pursuant to its authority
under the following provisions of 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; \16\ (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; \17\
(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; \18\ 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.\19\
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\16\ 12 U.S.C. 5514(a)(1)(B), (a)(2).
\17\ 12 U.S.C. 5514(b)(7).
\18\ 12 U.S.C. 5512(b)(1).
\19\ 12 U.S.C. 5481(15)(A)(xi).
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B. Effective Date of Final Rule

The Administrative Procedure Act generally requires that rules be
published not less than 30 days before their effective dates.\20\ The
Bureau proposed that the Final Rule would be effective 60 days after
publication and received no comments relating to the effective date.
The Bureau has decided that the Final Rule will be effective 60 days
after publication in the Federal Register.
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\20\ 5 U.S.C. 553(d).
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V. Section-by-Section Analysis

A. 12 CFR Part 1001--Financial Product or Service

Section 1001.1 Authority and Purpose
Proposed Sec. 1001.1 stated the authority and purpose for proposed
new part 1001. It explained 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 section 1002(15)(A)(i)-(x). Proposed Sec.
1001.1 explained that the purpose of proposed part 1001 was to
implement that authority.
The Bureau received no comments on proposed Sec. 1001.1. Section
1001.1 is finalized as proposed.
Section 1001.2 Definitions
Proposed Sec. 1001.2(a) defined the term ``financial product or
service'' under section 1002(15)(A)(xi)(II) of the Dodd-Frank Act to
include extending or brokering certain leases of an automobile that (1)
meet the requirements of leases authorized under section 108 of the
Competitive Equality Banking Act of 1987 (CEBA),\21\ 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 proposal
explained that under section 1002(15)(A)(xi), for purposes of title X
of the Dodd-Frank Act, the Bureau may define as a financial product or
service, by regulation:
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\21\ Public Law 100-86, section 108, 101 Stat. 552, 579 (1987)
(codified at 12 U.S.C. 24(Tenth)).

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
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material impact on consumers.

The Bureau proposed Sec. 1001.2 pursuant to this authority. For the
reasons discussed below, the Bureau adopts Sec. 1001.2 as proposed
with one technical change that has no substantive effect.\22\
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\22\ The Final Rule includes a minor clarifying change in the
wording of Sec. 1001.2(a).
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The Bureau proposed 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) of the Dodd-Frank Act defines the term ``financial
product or service'' to include certain leases that, among other
things, are the functional equivalent of purchase finance arrangements.
The proposal set forth the Bureau's belief that the phrase
``functional equivalent of purchase finance arrangements''--which is
not defined in the Dodd-Frank Act \23\--is reasonably interpreted to
encompass most automobile leases. Specifically, the Bureau explained
that in light of the Bureau's purpose and mandate, the phrase
``functional equivalent of purchase finance arrangements'' is best
interpreted from the perspective of the consumer.
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\23\ The Bureau is not aware of any Federal or State statute or
regulation that defines the term.
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The proposal explained that, for consumers, the leasing process
functions in ways that are equivalent to a financed purchase. For
example, leasing a vehicle requires an application process and an
ongoing contractual obligation that are both financial in

[[Page 37499]]

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.\24\ 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.\25\ The consumer must consider how much
cash to use, if any, for a capitalized cost reduction (similar to a
down payment),\26\ the preferred lease term, and the affordability of
monthly payments and other costs including maintenance, insurance, and
State registration fees.
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\24\ See Fed. Trade Comm'n, Consumer Information: Understanding
Vehicle Financing (Jan. 2014), available at http://www.consumer.ftc.gov/articles/0056-understanding-vehicle-financing.
\25\ 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. Reserve Bd., Key to
Vehicle Leasing Consumer Guide (Mar. 13, 2013), available at http://www.federalreserve.gov/pubs/leasing/.
\26\ See id.
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The proposal further noted that automobile leasing shares many
other features with automobile 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
automobile 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 automobile with a loan, a consumer who leases an automobile bears
the responsibility for the vehicle's upkeep and must maintain, repair,
and service the vehicle during the lease term.\27\ The consumer must
also insure the vehicle and bears the risk should the vehicle become
damaged or totaled.\28\ Similarly, if a consumer fails to make loan or
lease payments, the vehicle must be returned to the automobile finance
company, and fees or penalties may apply.\29\ Also, regardless of
whether consumers seek to purchase or lease a vehicle, they must
negotiate the price and terms. For all the foregoing reasons, the
Bureau reasoned in the proposal that automobile leases carry similar
obligations and risks to consumers as automobile loans.
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\27\ See id.
\28\ See id.
\29\ See id. Also, if a consumer terminates a lease early, early
termination fees may apply. See id.
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As the Bureau further observed in the proposal, in an automobile
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.\30\ 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.
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\30\ 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 used in
calculating 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.
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Moreover, the proposal explained that automobiles 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 automobiles for their transportation needs. From a
consumer's standpoint, whether a vehicle is leased or financed through
a loan, any act or practice 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. Based on these factors, the
Bureau reasoned in the proposal that, from the perspective of the
consumer, most automobile leases are the functional equivalent of
purchase finance arrangements.
The Bureau also noted in the proposal that typical automobile
leases meet the remaining two requirements of section 1002(15)(A)(ii)
of the Dodd-Frank Act. First, automobile leases are generally ``non-
operating.'' Consistent with the definition in Regulation Y, which
governs bank holding companies and changes in bank control, ``non-
operating,'' as interpreted by the Bureau in the proposal, means that
the lease provider is not, directly or indirectly, engaged in
operating, servicing, maintaining, or repairing the leased property
during the lease term.\31\ Under most automobile leases, the consumer,
rather than the lessor, is responsible for ensuring the care and
maintenance of the vehicle.\32\ Second, most leases have terms well
beyond 90 days. Lease terms for automobiles typically range from 12 to
48 months, with the majority of leases ranging from 25 to 48
months.\33\ Thus, the Bureau observed that the extending or brokering
of most automobile leases readily falls under section 1002(15)(A)(ii)
as a financial product or service.
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\31\ 12 CFR 225.28(b)(3)(i) n.6 (``The requirement that the
lease be on a non-operating 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 non-operating 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.'').
\32\ See Fed. Reserve Bd., Key to Vehicle Leasing Consumer Guide
(Mar. 13, 2013), available at http://www.federalreserve.gov/pubs/leasing/.
\33\ See Melinda Zabritski, Experian Automotive, State of the
Automotive Finance Market Fourth Quarter 2014, at 20 (Feb. 19,
2015), available at http://www.experian.com/assets/automotive/white-papers/experian-auto-2014-q4-presentation.pdf?WT.srch=Auto_Q42014FinanceTrends_PDF; see also Fed. Reserve Bd., supra note 32.
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However, as the Bureau explained in the proposal, the requirement
that leases that fall under section 1002(15)(A)(ii) (``category (ii)
leases'') be the functional equivalent of purchase finance arrangements
means that coverage of leases under that section will necessarily
depend on a number of factors and circumstances that may vary among
particular leases and institutions. Given this potential variance, the
Bureau expressed concern in the proposal 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. Accordingly, to
further the mandate of protecting consumers and for ease of
administering the automobile financing larger-participant rule, the
Bureau proposed 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).
As discussed above, 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 other financial products or services that
are permissible

[[Page 37500]]

for a bank or for a financial holding company to offer, and have, or
likely will have, a material impact on consumers. To implement this
provision, the Bureau proposed to define the term ``financial product
or service'' under section 1002(15)(A)(xi)(II) to include automobile
leases that: (1) meet the requirements of leases authorized under
section 108 of CEBA, as implemented by 12 CFR part 23, and therefore
are permissible for national banks to offer or provide; and (2) are not
the functional equivalent of purchase finance arrangements under
section 1002(15)(A)(ii).
As explained in the proposal, 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,'' as long as such
investment does not exceed 10 percent of its assets.\34\ Neither CEBA
nor its implementing regulations require that such leases be the
functional equivalent of loans, credit, or purchase finance
arrangements.\35\ Similarly, under Regulation Y, banks 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.\36\
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\34\ 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).
\35\ 12 U.S.C. 24(Tenth); 12 CFR 23.2, 23.3.
\36\ 12 CFR 225.28(b)(3). Bank holding companies are limited to
leases that are non-operating, as described above, and have an
initial term of at least 90 days. Id.
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Additionally, in the proposal, the Bureau expressed its belief
that, whether or not a particular automobile lease qualifies as a
category (ii) lease, all leasing covered by the proposed definition has
a material impact on consumers. The Bureau noted that access to a
vehicle is critical for consumers, automobile leasing is a significant
financial obligation, and consumers are increasingly turning to leasing
as a means to obtain a vehicle. The Bureau further stated in the
proposal that 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 proposed 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 \37\
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).\38\ The
Bureau asserted that the proposed definition met the requirements of
section 1002(15)(A)(xi)(II) of the Dodd-Frank Act because 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.
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\37\ 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).
\38\ For purposes of this definition, ``automobile'' is defined
as proposed in Sec. 1090.108(a).
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The Bureau explained that the proposed definition would also ensure
that leases falling under the definition are subject to the 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.\39\ The Bureau further expressed its belief that
because leases that are not the functional equivalent of purchase
finance arrangements can raise the same consumer protection concerns as
category (ii) leases, it was appropriate to subject these additional
leases to the Dodd-Frank Act provisions that apply to ``financial
product[s] or service[s].'' The Bureau also noted that comprehensive
coverage of automobile leasing would make the larger-participant rule
easier to administer by eliminating uncertainty about which types of
leasing activities are counted towards the larger-participant
threshold.
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\39\ 12 U.S.C. 5531. The proposed definition also would affect
the scope of certain other Bureau authorities under title X of the
Dodd-Frank Act. For example, the proposed definition would have an
impact on: (1) 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;
(2) 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 (3) 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.
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The Bureau received a number of comments relating to its
interpretation of leases that fall within section 1002(15)(A)(ii) of
the Dodd-Frank Act and to the proposed new definition under section
1002(15)(A)(xi)(II). A consumer group agreed with the Bureau's
interpretation that, from the perspective of the consumer, certain
leases are the ``functional equivalent of purchase finance
arrangements'' under section 1002(15)(A)(ii). The commenter reasoned
that whether or not the transaction results in owning a car, consumers
likely experience leases much in the same way as they do purchase
loans. The commenter also noted that both are financial transactions
paid by the consumer over a certain period of time, and both grant the
consumer exclusive use and possession of an automobile. The commenter
also supported the Bureau's inclusion under section 1002(15)(A)(xi)(II)
of certain other leases because those leases also have a material
impact on consumers.
Other commenters including several trade associations suggested
that the Bureau erred in interpreting the phrase ``functional
equivalent of purchase finance arrangements'' from the perspective of
the consumer. These commenters argued that: (1) the Bureau's
interpretation is inconsistent with prior judicial and prudential
regulator interpretations that leases are only functionally equivalent
to loans and/or credit where the residual value of the leased asset
falls below a specified threshold; (2) contrary to the Bureau's
interpretation, the term ``functional equivalent of purchase

[[Page 37501]]

finance arrangements'' requires that the lease result in the transfer
of ownership; (3) the Bureau's interpretation is inconsistent with
lease recharacterization provisions under the Truth in Lending Act
(TILA), the Uniform Commercial Code (UCC), and certain State laws; and
(4) the Bureau's interpretation would confuse consumers. According to
these commenters, under a correct interpretation of the term, most
automobile leases would not qualify as functionally equivalent to
purchase finance arrangements under section 1002(15)(A)(ii). The Bureau
has considered each of these arguments and concludes that its
interpretation of category (ii) leases, as laid out in the proposal, is
reasonable and best fulfills the relevant purposes of the Dodd-Frank
Act. The Bureau therefore adheres to that interpretation. Under that
interpretation, most automobile leases qualify as section
1002(15)(A)(ii) financial products or services.
Commenters are correct in pointing out that the prudential
regulators, as well as at least one court decision, have interpreted
regulatory requirements that a lease offered by a financial institution
be the ``functional equivalent'' of a loan and/or credit to impose
limits on the residual value \40\ that the lessor may rely on for the
return of its full investment.\41\ Notwithstanding this regulatory
history, the Bureau does not believe that the phrase ``functional
equivalent of purchase financing arrangements'' in section
1002(15)(A)(ii) must be interpreted to impose a limit on the residual
value of leased assets for category (ii) leases, and, thus (assuming
most leases would exceed such limit), to exclude most automobile
leases.\42\ It is not clear that Congress intended the interpretation
of the phrase ``functional equivalent of purchase finance
arrangements'' in section 1002(15)(A)(ii) to be controlled by the
prudential regulators' and judicial interpretations raised by
commenters and discussed above.\43\ Instead, the Bureau believes that
the phrase ``functional equivalent of purchase finance arrangements''
is ambiguous and--in light of the Bureau's unique mission--is
reasonably interpreted, from the perspective of the consumer, not to
incorporate a limitation on the residual value of the leased item.
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\40\ As noted above, the residual value is the projected market
value of the vehicle at the end of the lease. See CFPB, Ask CFPB:
What Is Residual Value? (June 24, 2012), available at http://www.consumerfinance.gov/askcfpb/737/what-residual-value.html.
\41\ See M &M Leasing Corp. v. Seattle First Nat'l Bank, 563
F.2d 1377, 1382 (9th Cir. 1977) (holding that, for a lease to be
``functionally interchangeable'' with a loan, and thus permissible
for a national bank to engage in as the ``business of banking''
under 12 U.S.C. 24(Seventh), the residual value of the item must
``contribute[] insubstantially to the bank's recovery''); see also
Fed. Reserve Bd., Revision of Regulation Y, 49 FR 794, 827 (Jan. 5,
1984) (permitting bank holding companies to engage in leases that
are the ``functional equivalent of an extension of credit'' and
setting a residual value limit of 20 percent for those leases);
Office of the Comptroller of the Currency (OCC), Lease Financing
Transactions, 56 FR 28314 (June 20, 1991) (adopting provision that
permits national banks to engage in leasing with a residual value of
25 percent or less as ``consistent with the parameters set forth in
M & M Leasing''); 12 CFR 160.41 (OCC regulation for Federal savings
associations setting a 25 percent residual value limit for leasing
that is ``the functional equivalent of a loan''); Nat'l Credit Union
Admin. Interpretive Rule and Policy Statement 83-3, 48 FR 52568
(Nov. 21, 1983) (indicating that leases that, among other
requirements, meet a 25 percent residual value limit are ``the
functional equivalent of secured lending''); cf. Fed. Reserve Bd.,
Final Rule-Amendment to Regulation Y, 78 Fed. Reserve Bull. 548-49
(July 1992) (permitting bank holding companies to invest up to 10
percent of their assets in certain ``high residual value leasing,''
in which the residual value could be up to 100 percent and
increasing the residual value limit for other leases to 25 percent);
Fed. Reserve Bd., Amendment to Regulation Y, 62 FR 9290 (Feb. 28,
1997) (eliminating functional equivalence and residual value
requirements and noting that ``permissible high residual value
leasing may not be the functional equivalent of an extension of
credit'').
\42\ Commenters assert that most auto leases would not be
considered functionally equivalent to purchase finance arrangements
if that term were interpreted to incorporate the residual value
limits set by prudential regulators as discussed above. They also
assert that vehicle residual values are typically in the range of 30
to 50 percent of the Manufacturer's Suggested Retail Price, which
they describe as close to the adjusted capitalized cost in the
lease.
\43\ To support their argument that the Bureau should model its
interpretation on that of the Federal banking regulators, commenters
pointed to the Senate Report for the Senate bill that was the
precursor to the Dodd-Frank Act. Commenters note that the report
states that the definition of the phrase ``financial product or
service'' in the Senate bill was ``modeled on the activities that
are permissible for a bank or a bank holding company, such as under
section 4(k) of the Bank Holding Company Act and implementing
regulations.'' S. Rept. 111-176, at 159-60 (2010). Notably, the
current regulation authorizing leasing activities for bank holding
companies does not have a residual value requirement. See Fed.
Reserve Bd., Amendment to Regulation Y, 62 FR 9290 (Feb. 28, 1997)
(eliminating functional equivalence and residual value
requirements).
---------------------------------------------------------------------------

First, the phrase used in section 1002(15)(A)(ii)--``functional
equivalent of purchase financing arrangements''--does not appear in any
of the other statutes or regulations pertaining to the leasing
activities of financial institutions. The prudential regulators and
courts have consequently never addressed the meaning of that specific
language. That Congress chose a phrase different from the language
utilized by other regulators (e.g., the Office of the Comptroller of
the Currency's ``functional equivalent of a loan'' \44\ or the Federal
Reserve Board's ``functional equivalent of an extension of credit''
\45\) weighs against the contention that Congress intended for those
specific interpretations to control the meaning of the term
``functional equivalent of finance purchase arrangements'' in section
1002(15)(A)(ii).
---------------------------------------------------------------------------

\44\ 12 CFR 160.41.
\45\ As noted above, the Federal Reserve Board's leasing
regulations included this language until 1997. See 62 FR 9290, 9306
(1997).
---------------------------------------------------------------------------

Even if the ``functional equivalent'' language in section
1002(15)(A)(ii) were identical to the language interpreted by the
prudential regulators and judicial precedent to impose a residual value
limit, the Bureau believes that the difference in the roles of the
prudential regulators and the Bureau, and the different purposes of the
provisions at issue, would make it reasonable for the Bureau to
interpret the same language differently from those prior
interpretations. In interpreting what leases might be the ``functional
equivalent'' of a purchase finance arrangement, a key question is how
the leases function and with respect to whom. The prudential
regulators' primary role is to ensure safety and soundness of financial
institutions by, among other things, serving as the gatekeepers of
permissible banking activity. In light of this role, it made sense for
prudential regulators to focus on how leases function vis-a-vis the
financial institution and thus to consider primarily the risk posed to
the financial stability of the institution when delineating permissible
leasing activity. Accordingly, the prudential regulators deemed leases
``functionally equivalent'' to credit transactions only when the lease
and the loan created a similar level of risk to the institution, such
as in the case of low residual value leasing.
By contrast, Congress charged the Bureau with a different mission
than the prudential regulators, and, accordingly, the Bureau believes
that the ``functional equivalent'' language in section 1002(15)(A)(ii)
of the Dodd-Frank Act should play a different role from the language
governing the prudential regulators' leasing provisions. As set forth
in the Dodd-Frank Act, the Bureau's purpose is to ``ensur[e] 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.'' \46\ The Bureau's objectives,
moreover, include working to ensure that consumers are

[[Page 37502]]

provided with timely and understandable information to make responsible
decisions about financial transactions and that they are protected from
unfair, deceptive, or abusive acts and practices and from
discrimination.\47\ Given the Bureau's responsibility to protect
consumers in markets for financial products and services, the Bureau
believes that its interpretation of section 1002(15)(A)(ii) of the
Dodd-Frank Act should focus on the similar ways in which leases and
loans function for consumers. Placing limits on the interpretation of
leasing activity that qualifies as a consumer financial product or
service unrelated to the impact of that activity on consumers would
create artificial barriers to consumer protection and would hinder the
Bureau's ability to accomplish its purpose and objectives. The Bureau
does not interpret the plain text of section 1002(15)(A)(ii) to impose
such limits. For these reasons, the Bureau believes that analyzing
whether leases are the ``functional equivalent of purchase finance
arrangements'' from the perspective of the consumer, as set forth in
the proposal, remains an appropriate inquiry and is a reasonable
approach to interpreting an ambiguous statutory provision, as well as
the approach best suited to the Bureau's purpose and objectives.
---------------------------------------------------------------------------

\46\ 12 U.S.C. 5511(a).
\47\ 12 U.S.C. 5511(b).
---------------------------------------------------------------------------

Commenters also asserted that, even from the perspective of the
consumer, a lease cannot be the ``functional equivalent of [a] purchase
finance arrangement'' unless the lease agreement actually results in
the acquisition or ownership of the leased item by the lessee at the
end of the lease term. They argued that for a product to be
functionally equivalent to a ``purchase finance arrangement'' it must
necessarily result in a ``purchase.'' They further stated that the core
function of a purchase finance arrangement is to finance the
acquisition of ownership, and that any product or service that lacks
this specific function, cannot be said to be functionally equivalent to
such an arrangement. Along similar lines, commenters maintained that
the Bureau's approach is in fundamental conflict with provisions under
the UCC \48\ and TILA \49\ that respectively provide that a lease
creates a security interest or is a credit sale where the lessee has
the option to become the owner of the property for nominal or no
consideration upon compliance with the contract.\50\ Commenters
maintained that, for consistency with these analogous standards, most
automobile leases should not be treated as the functional equivalent of
purchase finance arrangements.
---------------------------------------------------------------------------

\48\ See UCC Sec. 1-203 (stating that ``[a] transaction in the
form of a lease creates a security interest'' if, among other
things, ``the lessee has an option to become the owner of the goods
for no additional consideration or for nominal additional
consideration upon compliance with the lease agreement'').
\49\ See 15 U.S.C. 1602(h) (defining ``credit sale'' to include
a lease if, among other things, ``it is agreed that the bailee or
lessee will become, or for no other or a nominal consideration has
the option to become, the owner of the property upon full compliance
with his obligations under the contract'').
\50\ Commenters also invoked similar provisions under State
laws. See California Automobile Sales Finance Act, Cal. Civ. Code
Sec. 2981(a) (defining ``conditional sale'' to include ``[a]
contract for the bailment of a motor vehicle between a buyer and a
seller, with or without accessories, by which the bailee or lessee
agrees to pay as compensation for use a sum substantially equivalent
to or in excess of the aggregate value of the vehicle and its
accessories, if any, at the time the contract is executed, and by
which it is agreed that the bailee or lessee will become, or for no
other or for a nominal consideration has the option of becoming, the
owner of the vehicle upon full compliance with the terms of the
contract''); New York Motor Vehicle Retail Instalment Sales Act,
N.Y. Pers. Prop. Law Sec. 301(5); Texas Motor Vehicle Installment
Sales Provisions, Tex. Fin. Code Sec. 348.002.
---------------------------------------------------------------------------

The Bureau does not disagree with commenters that the phrase
``purchase finance arrangement'' suggests financing used for a
purchase. However, the touchstone of the relevant requirement of
section 1002(15)(A)(ii) is not whether a lease is a ``purchase finance
arrangement,'' but rather whether the two are functionally equivalent.
The Bureau does not believe that transfer of ownership or the option to
acquire a vehicle for nominal or no consideration is a necessary
hallmark of functional equivalence under section 1002(15)(A)(ii) or
that most automobile leases therefore do not qualify as functionally
equivalent to purchase finance arrangements.\51\ With respect to real
property leases, section 1002(15)(A)(ii)(III) imposes an additional
condition necessary to qualify as a financial product or service on top
of the functional equivalence test applicable to all leases: That such
leases be intended to result in ownership of the leased property to be
transferred to the lessee. If the functional equivalence standard were
only met where a lease resulted in a transfer of ownership at the end
of the lease term, there would have been no reason for Congress to
impose this separate requirement with respect to real property leases.
Likewise, that Congress chose to impose such a requirement only with
respect to real property leases suggests that Congress did not intend
to impose a similar ownership requirement on other leases.
---------------------------------------------------------------------------

\51\ Notably, none of the prudential regulators' provisions
discussed above pertaining to leases that are the functional
equivalent of credit require that the lease result in the transfer
of ownership.
---------------------------------------------------------------------------

Nor are the UCC, TILA, and other similar provisions invoked by
commenters instructive. These provisions seek to identify financial
arrangements that are labeled as leases but are in fact disguised
security interests or credit sales.\52\ Section 1002(15)(A)(ii) by
contrast is appropriately understood to encompass leases that are
``functional[ly] equivalent'' to, though in fact distinct from,
purchase finance arrangements. As noted in the proposal, the Bureau
believes that one feature of most leases that makes them functionally
equivalent to purchase finance arrangements is that 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. This feature provides the opportunity for ownership, which
from the consumer's perspective contributes to making a lease
``functionally equivalent'' to a purchase finance arrangement even if
the consumer chooses not to acquire the vehicle (and a transfer of
ownership therefore does not result) and even though more than nominal
consideration must be paid for the purchase.\53\
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\52\ Commenters relying on these provisions pointed to
legislative history characterizing the TILA provision as intended to
``include leases, only if they are, in essence, disguised sale
arrangements.'' See H. Rept. No. 90-1040, at 23 (1967).
\53\ Commenters point out that, under the UCC provision, aspects
of leases such as the option to purchase for market value or higher,
the assumption of risk of loss, and the payment of maintenance and
other costs, are not sufficient to create a security interest. See
UCC Sec. 1-203(c). They therefore argue that the Bureau's reliance
on such similarities for its functional equivalence analysis is
flawed. For the reasons discussed above, the Bureau does not find
the UCC provision to be instructive of the correct interpretation of
section 1002(15)(A)(ii).
---------------------------------------------------------------------------

Commenters further suggested that interpreting an automobile lease
to be functionally equivalent to a purchase finance arrangement may
cause consumer confusion about the difference between an automobile
lease and an automobile loan. The Bureau does not think that these
concerns are warranted. Consumers are unlikely to rely on this rule as
a source of information on automobile leases. However, even if
consumers do so, the Bureau does not take the position here that
automobile leases and purchase finance arrangements are identical.
Rather, the discussion above specifically explains that the two are
``functionally equivalent'' for the reasons identified, though they
remain distinct products.\54\
---------------------------------------------------------------------------

\54\ In the unlikely event that consumer confusion arises as a
result of this rule, the Bureau believes that it can resolve this
confusion through appropriate consumer-facing documents.

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[[Page 37503]]

Having considered the comments discussed above, the Bureau adheres
to its position in the proposal that it is reasonable, and best suited
to the Bureau's purpose and objectives, to assess the functional
equivalence requirement from the perspective of the consumer. For the
reasons set forth in the proposal and relayed above, the Bureau
believes that, from the consumer's perspective, most automobile leases
are therefore functionally equivalent to purchase finance
arrangements.\55\ Accordingly, the Bureau believes that interpreting
the phrase ``functional equivalent of purchase finance arrangements''
in section 1002(15)(A)(ii) from the perspective of the consumer to
include most automobile leases is both a reasonable interpretation of
the statutory language and the interpretation that best fulfills the
relevant purposes of the Dodd-Frank Act.
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\55\ The Federal Reserve Board noted similarities between auto
leases and loans in its 1976 statement Automobile Leasing as an
Activity for Bank Holding Companies, 62 Fed. Reserve Bull. 928 (Nov.
1976). The Board discussed advocates' arguments about the
similarities:
Those parties to the proceeding in favor of the performance of
the activity by bank holding companies (generally hereafter
``proponents'') argued that leasing is essentially a financial
transaction since it is an alternate method of financing the
purchase of an automobile without the necessity of a large initial
down payment. Thus, to the customer it is a means of obtaining the
possession and use of an automobile through deferred payment. To the
bank it is another in a spectrum of methods of new car financing
that includes instalment credit transactions, floor planning and
commercial lending to independent lessors.
Id. at 931-32. The Board also separately recognized ``many''
other similarities between leases and loans: In each case there is a
sum certain in amount. This sum includes the acquisition cost of the
vehicle and the cost of financing and is recovered through a
schedule of noncancellable deferred payments. The term of the
payment period in both cases is 24 to 36, or recently to 48 months.
The vehicle serves as a type of collateral to guarantee payment on
both the instalment loan and the lease. Both forms of financing are
applied to a specific automobile that is chosen prior to preparation
of the document . . . All attributes of ownership pass to the lessee
who is responsible for servicing, insurance, and depreciation.
Id. at 932.
---------------------------------------------------------------------------

The Bureau received no comments challenging its assertion that most
automobile leases meet the other two requirements of section
1002(15)(A)(ii) for personal property leases--that is, that they have
terms longer than 90 days and are non-operating. The Bureau adheres to
its position that most automobile leases meet these requirements. For
the foregoing reasons, the Bureau continues to believe that most
automobile leases qualify as financial products or services under
section 1002(15)(A)(ii).
The Bureau also received a number of comments regarding its
decision to define certain leases as financial products or services
under section 1002(15)(A)(xi)(II) of the Dodd-Frank Act. Commenters did
not dispute the Bureau's assertion that national banks may offer or
provide such leases under CEBA. Commenters also did not dispute the
Bureau's assertion that invoking authority under section
1002(15)(A)(xi)(II) to define CEBA leases as financial products or
services would make the larger-participant rule easier to administer.
However, the Bureau received comments stating that the Bureau may
not or should not rely on its authority under section
1002(15)(A)(xi)(II) with respect to automobile leases that are not the
functional equivalent of purchase finance arrangements. Those comments
argued that: (1) The Bureau failed to provide a proper record for its
definition of automobile leases as financial products or services under
section 1002(15)(A)(xi)(II); (2) the Bureau underestimated the number
of leases that would be covered by that definition; (3) the Bureau has
not demonstrated that leases covered by the definition will have a
material impact on consumers as a whole; (4) because Congress already
defined some leases as financial products or services under section
1002(15)(A)(ii), the Bureau lacks authority under section
1002(15)(A)(xi)(II) to define additional leases as financial products
or services; and (5) expansion of the Bureau's authority over
automobile leasing is unnecessary because automobile leases are
sufficiently regulated.\56\ The Bureau has considered each of these
arguments.
---------------------------------------------------------------------------

\56\ One commenter also stated that the Bureau has not provided
an accurate statement of its definition. As noted in the proposal
and reiterated above, the Bureau is defining as financial products
or services extending or brokering any automobile leases 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 section 1002(15)(A)(ii).
---------------------------------------------------------------------------

With regard to the comment that the Bureau has failed to provide a
proper record to support its definition of certain automobile leases as
financial products or services under section 1002(15)(A)(xi)(II), the
Bureau believes that it has appropriately met the two-part showing
required under section 1002(15)(A)(xi)(II): That the financial product
or service may be offered by banks and has (or likely will have) a
material impact on consumers.
For the reasons set forth in the proposal, the Bureau finds that
the leases falling within proposed and final Sec. 1001.2(a) may be
offered by banks under Federal law. As noted above and in the proposal,
CEBA allows banks to offer certain automobile leases even when they are
not the functional equivalent of purchase finance arrangements.\57\
Section 1001.2(a) defines as a financial product or service extending
or offering only those leases that banks may offer under CEBA and that
are not financial products or services under section 1002(15)(A)(ii).
---------------------------------------------------------------------------

\57\ The purpose of section 1002(15)(A)(xi)(II) is to help
ensure that the Bureau has jurisdiction over consumer financial
products or services that banks may offer (if they have or likely
will have a material impact on consumers). It thus bears noting that
banks have long had authority to offer automobile leases regardless
of whether they are the functional equivalent of purchase finance
arrangements. As discussed in the proposal, in 1987, Congress passed
CEBA, which allows national banks to invest up to 10 percent of
their assets in personal property leases, including vehicle leases,
without regard to the residual value of the leased asset and without
a functional equivalence requirement. Public Law 100-86, 101 Stat.
552 (1987); see also 12 CFR 23.2(c). For its part, the Federal
Reserve Board (Board), in 1997, amended its leasing provisions under
Regulation Y to eliminate the ``functional equivalent of an
extension of credit'' requirement as well as any limitations on the
residual value of the leased item for permissible leasing
activities. 62 FR 9290 (Feb. 28, 1997). Even before this amendment,
which eliminated the functional equivalence test, beginning in 1992,
Board regulations permitted bank holding companies to invest up to
10 percent of their assets in certain ``high residual value
leasing,'' in which the residual value could be up to 100 percent.
Final Rule-Amendment to Regulation Y, 78 Fed. Reserve Bull. 548-49
(July 1992). Board regulations now allow bank holding companies to
issue any non-operating leases of personal property with terms
greater than 90 days. 12 CFR 225.28(b)(3). Accordingly, to the
extent that certain automobile leases that may be offered by banks
are not already covered by section 1002(15)(A)(ii), it nonetheless
is appropriate for them to be covered by section
1002(15)(A)(xi)(II).
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The Bureau also finds that all CEBA automobile leases have a
material impact on consumers even if they are not the functional
equivalent of purchase finance arrangements. Access to a vehicle is
critical for consumers, and consumers are increasingly turning to
leasing as a means to obtain possession and use of a vehicle. For
consumers who choose to lease an automobile, the lease is a significant
financial obligation. The average monthly payment for new leases as of
the fourth quarter of 2014 was $408, and the average lease term was 35
months (with nearly two-thirds of lease terms between 25 and 36
months).\58\ Furthermore, an automobile lease can have significant
consequences for a consumer's financial well-being. Because consumers
rely on automobiles for their transportation needs and because--as
explained above--automobile leases carry significant risks

[[Page 37504]]

to and obligations of the consumer, any act or practice that impedes
access to a vehicle or otherwise creates problems related to the
leasing arrangement can have a critical impact on consumers.
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\58\ Zabritski, supra note 33, at 20.
---------------------------------------------------------------------------

Indeed, Congress, in enacting the Consumer Leasing Act of 1976
(CLA),\59\ recognized the impact that automobile leases have on
consumers. In issuing the statute nearly 30 years ago, Congress noted
that ``there has been a recent trend toward leasing automobiles and
other durable goods for consumer use as an alternative to installment
credit sales and that these leases have been offered without adequate
cost disclosures.'' \60\ Given the recent growth of automobile leasing
and the importance of automobile leases to a consumer's financial well-
being, Congress' finding in the CLA that automobile leases can pose
risks to consumers is even truer today. The CLA establishes, among
other things, disclosure requirements pertaining to lease costs and
terms, limitations on the size of penalties for delinquency or default
and on the size of lessee's residual liabilities, and disclosure
requirements for lease advertising.\61\ These consumer protections
further highlight Congress' recognition of the many ways in which
leases can significantly impact consumers' financial well-being. For
these reasons, the Bureau finds that all automobile leases under
proposed and final Sec. 1001.2(a) have a material impact on consumers
irrespective of whether they are the functional equivalent of purchase
finance arrangements.\62\
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\59\ Public Law 94-240, 90 Stat. 257 (codified as amended at 15
U.S.C. 1667-1667f).
\60\ 15 U.S.C. 1601(b).
\61\ 15 U.S.C. 1667a-1667c.
\62\ Section 1002(A)(xi)(II) requires the Bureau to find that a
financial product or service ``has, or likely will have, a material
impact on consumers.'' For the same reasons that support the
Bureau's finding above that all automobile leases under Sec.
1001.2(a) have a material impact on consumers, the Bureau also finds
that all automobile leases under Sec. 1001.2(a) likely will have a
material impact on consumers.
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Commenters also suggested that the Bureau overestimated the number
of leases that are financial products or services under section
1002(15)(A)(ii) and that, as a result, section 1002(15)(A)(xi)(II)
would have to be the primary basis for defining automobile leases as
financial products or services. The Bureau does not agree with the
premise of this comment. As explained above, the Bureau believes that
section 1002(15)(A)(ii) should be interpreted from the perspective of
the consumer and would thus cover most consumer automobile leases.
However, even if the commenter were correct that section
1002(15)(A)(ii) covered no or very few automobile leases, the Bureau
believes that its definition under Sec. 1001.2(a) would nevertheless
be authorized under section 1002(15)(A)(xi)(II). As noted above, the
Bureau has found that banks may offer automobile leases under CEBA even
if they are not the functional equivalent of purchase finance
arrangements. This is true irrespective of the number of leases that
fall under section 1002(15)(A)(ii). The Bureau has also found that all
CEBA automobile leases--regardless of whether they are the functional
equivalent of purchase finance arrangements--have a material impact on
consumers. The need for the Bureau's definition under section
1002(15)(A)(xi)(II) would only be magnified if the Bureau
overestimated, as the commenter suggested, the number of leases that
already qualify as financial products or services under section
1002(15)(A)(ii). Therefore, even if the Bureau's interpretation that
section 1002(15)(A)(ii) covers most automobile leases were erroneous,
the Bureau's findings and exercise of its authority under section
1002(15)(A)(xi)(II) in this rulemaking would be sufficient to define
all automobile leases that banks may offer under CEBA, and that are not
already covered under section 1002(15)(A)(ii), as financial products or
services.
A commenter also suggested that because the Bureau's proposed
definition under section 1002(15)(A)(xi)(II) would apply to a small
number of automobile leases, the Bureau has not demonstrated that these
leases will have a material impact on consumers as a whole. As the
Bureau understands it, the premise of this comment is that section
1002(15)(A)(xi)(II) requires the Bureau to find that a financial
product or service has a ``material impact'' on consumers in the
aggregate rather than on individual consumers. The Bureau believes that
it appropriately demonstrated material impact as required under section
1002(15)(A)(xi)(II). Nothing in section 1002(15)(A)(xi)(II) requires
the Bureau, in defining a financial product or service, to find that it
has a material impact on consumers in the aggregate.\63\ The provision
does not define the term ``material impact on consumers,'' nor does it
state how the Bureau must assess a financial product or service's
``material impact on consumers.'' The ordinary meaning of the term
``material impact'' is also vague.\64\ In light of these ambiguities,
the Bureau believes that a product may have a ``material impact on
consumers'' in the aggregate, individually, or both. In the Bureau's
view, this interpretation of the applicable standard is essential to
provide comprehensive coverage of financial products or services
offered or provided by banks that could materially affect the financial
well-being of consumers, either individually or in the aggregate.
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\63\ At any rate, the Bureau notes that leasing is, as a general
matter, an important and growing part of the automobile financing
market for consumers. While the automobile financing market is
largely comprised of purchase loans, in recent years consumers have
begun to migrate more towards leasing agreements. As of the fourth
quarter of 2014, leases comprised approximately 30 percent of new
vehicle automotive financing transactions, which is up from about 20
percent at the end of 2009. See Zabritski, supra note 33, at 16.
Furthermore, of all new and used automobile financing transactions
recorded in the fourth quarter of 2014, approximately 14 percent
occurred through leasing arrangements, while the remainder used
purchase financing. See id.
\64\ For instance, the Oxford English Dictionary includes
several definitions of the word ``material,'' including ``of serious
or substantial import; significant, important, of consequence.''
Oxford University Press, OED Online (2015), available at http://www.oed.com. It also defines ``impact'' as ``the effective action of
one thing or person upon another; the effect of such action;
influence; impression.'' Id.
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A commenter suggested that because Congress already defined some
leases as financial products or services under section 1002(15)(A)(ii),
the Bureau lacks authority under section 1002(15)(A)(xi)(II) to define
additional leases as financial products or services. However, there is
no indication that Congress intended for the categories of financial
products or services defined in section 1002(15)(A)(i)-(x) to serve as
a limit on the types of other financial products or services that the
Bureau may define under section 1002(15)(A)(xi)(II). Congress itself
decided to define a number of specific financial products or services
as areas of special interest to Congress for regulation and oversight
by the Bureau, but it also vested the Bureau with broad discretionary
rulemaking authority to define ``other'' financial products or services
to fill any gaps left by Congress where the two conditions of section
1002(15)(A)(xi)(II) are met. The Bureau believes that, in order to best
fulfill the purposes of the Dodd-Frank Act and to provide comprehensive
protections for consumers, its authority in section 1002(15)(A)(xi)(II)
should allow it to define a new financial product or service even if it
is within the same category as a product or service defined in section
1002(15)(A)(i)-(x). In other words, although Congress defined certain
leases as financial products or services in section 1002(15)(A)(ii),
the Bureau is free to define ``other'' leases as financial products or
services under

[[Page 37505]]

section 1002(15)(A)(xi)(II), as long as it makes the requisite
findings. The Bureau believes that a contrary interpretation would
artificially limit the scope of section 1002(15)(A)(xi)(II) and would
leave some financial activities that are important to consumers under-
regulated for purposes of the Dodd-Frank Act.
As further discussed above, those conditions are met with respect
to the automobile leasing activities described under Sec. 1001.2(a).
And the Bureau is not seeking to define under section
1002(15)(A)(xi)(II) activities that already qualify as financial
products or services under section 1002(15)(A)(i)-(x) or to modify the
definition of leasing activities described under section
1002(15)(A)(ii). To the contrary, the Bureau is defining ``other''
financial products or services and has expressly carved out from its
definition in Sec. 1001.2(a) financial products or services already
covered under section 1002(15)(A)(ii).
Finally, one commenter generally suggested that expansion of the
Bureau's authority over automobile leasing is unnecessary because, in
the commenter's view, automobile leases are sufficiently regulated.
This commenter noted that the Bureau administers and enforces the CLA
and its implementing Regulation M, which cover automobile leases. The
commenter also noted that automobile leases are subject to section 5 of
the Federal Trade Commission Act, which prohibits unfair or deceptive
acts or practices. The commenter further highlighted that the Federal
prudential regulators may supervise banks for compliance with section 5
with respect to automobile leasing activities.
The Bureau agrees that the existing regulatory framework governing
automobile leasing is important, but the Bureau believes this framework
would best protect consumers when applied in conjunction with the
Bureau's particular authorities under title X. Those authorities
include authority to supervise nonbank ``larger participant[s]'' in
markets for consumer financial products or services, 12 U.S.C.
5514(a)(1)(B); to prohibit unfair, deceptive, and abusive acts or
practices; to monitor markets for a consumer financial product or
service, 12 U.S.C. 5512(c)(1); to require disclosures regarding the
features of a consumer financial product or service, 12 U.S.C. 5532(a);
and to prescribe rules for consumers to seek information concerning a
consumer financial product or service they have obtained, 12 U.S.C.
5533(a). The Bureau believes that these title X-specific authorities
are necessary to ensure a fair, transparent, and competitive market for
consumer automobile leasing. The Bureau further notes that the
existence of the complementary regulatory framework noted by the
commenter is not unique to automobile leasing. Numerous products that
qualify as financial products or services under title X and are thus
subject to the Bureau's title X authorities also fall under one or more
``enumerated consumer laws'' \65\ and are subject to section 5 of the
Federal Trade Commission Act. Title X requires the Bureau to coordinate
with other Federal regulators to ``promote consistent regulatory
treatment,'' \66\ and sets forth specific procedures for coordination
between the Bureau and the Federal Trade Commission.\67\ The Bureau
takes these coordination obligations seriously and believes that they
will ensure optimal synergies between the Bureau's authorities and the
existing regulatory structure. For all these reasons, the Bureau adopts
Sec. 1001.2(a) essentially as proposed with one minor clarificatory
addition.\68\
---------------------------------------------------------------------------

\65\ 12 U.S.C. 5481(12).
\66\ 12 U.S.C. 5495.
\67\ See, e.g., 12 U.S.C. 5493(b)(3), 5512(c)(6)(C), 5514(a)(2),
5514(c)(3).
\68\ The Final Rule also includes a clarifying change in the
wording of Sec. 1001.2(a). This change from the proposal does not
have any substantive effect.
---------------------------------------------------------------------------

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

Section 1090.101--Definitions
The Bureau proposed 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. The Bureau did not
receive any comments on this change and is finalizing Sec. 1090.101 as
proposed.
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 proposed 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. The
correction clarifies 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 proposed 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. For the reasons explained below,
the Bureau is finalizing these changes as proposed.\69\
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\69\ The Final Rule also includes a clarifying change in the
wording of the first sentence of paragraph (iii)(D) of the
definition of ``annual receipts'' in Sec. 1090.104(a). This change
from the proposal does not have any substantive effect.
---------------------------------------------------------------------------

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 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.\70\ The Bureau 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.\71\
---------------------------------------------------------------------------

\70\ 12 CFR 1090.104(a), .105(a).
\71\ 12 CFR 1090.106(a), .107(a).
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The affiliate aggregation provisions of each of the larger-
participant rules address circumstances where a company becomes
affiliated with a nonbank covered person or ceases to be affiliated
with the nonbank covered person during the relevant measurement
period.\72\ 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.
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\72\ 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

[[Page 37506]]

international money transfers.'' \73\ 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.\74\ To clarify the operation of those
paragraphs, the Bureau proposed to replace the final sentence of
paragraph (iii)(D) of the definition of ``annual receipts'' in Sec.
1090.104(a) and Sec. 1090.105(a).
---------------------------------------------------------------------------

\73\ 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.
\74\ Paragraph (iii)(D) 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.
---------------------------------------------------------------------------

Only one commenter addressed this proposed technical correction. An
industry trade association urged the Bureau not to use this rulemaking
to make changes to the larger-participant rules for the consumer
reporting and consumer debt collection markets. It stated that doing so
would undermine transparency and public participation in the rulemaking
process. This commenter acknowledged that the proposed change may be
simpler for the Bureau but suggested that it may be difficult for
companies to secure necessary financial records from entities with
which they are no longer affiliated.
The Bureau believes that when companies have been affiliated at any
time during the measurement period it is simplest and most appropriate
to aggregate annual receipts corresponding to the entire measurement
period. As explained above, doing so will promote consistency across
the larger-participant rules and will make the handling of formerly
affiliated companies more consistent with the approach taken for newly
affiliated companies in the Consumer Reporting and Consumer Debt
Collection Rules. It may also avoid administrative difficulties
associated with part-year calculations of annual receipts in some
instances.
The Bureau provided the public with notice of these proposed
changes and an opportunity to comment in the proposal that was
published in the Federal Register on October 8, 2014. The proposal
described the changes in the summary and discussed them in full in the
section-by-section analysis. In addition, the amended regulation was
provided for commenters to review. In suggesting that this change will
burden companies by requiring them to obtain information from their
former affiliates, the commenter may have been assuming that companies
will need to calculate whether they are larger participants. However,
as the Bureau has explained in prior larger-participant rulemakings,
the larger-participant rules do not require such a calculation.
Generally, an entity will need to calculate its annual receipts only if
it decides to dispute that it is a larger participant when the Bureau
initiates supervision activity, such as an examination or a requirement
that the company provide reports to the Bureau. Under rare
circumstances such as this, the Bureau does not believe it would be
difficult for a nonbank covered person to obtain information regarding
the annual receipts of companies with which it was recently
affiliated.\75\
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\75\ Participants seeking to self-assess could also arrange to
obtain information relevant to the threshold in advance of ending
such an affiliation.
---------------------------------------------------------------------------

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''
The Bureau proposed to amend the final sentence of paragraph
(iii)(D) of Sec. 1090.105(a)'s definition of ``annual receipts'' to
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. For the same reasons
described above with respect to Sec. 1090.104(a), the Bureau is
finalizing the changes to Sec. 1090.105(a) as proposed.\76\
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\76\ The Final Rule also includes a clarifying change in the
wording of the first sentence of paragraph (iii)(D) of the
definition of ``annual receipts'' in Sec. 1090.105(a). This change
from the proposal does not have any substantive effect.
---------------------------------------------------------------------------

Section 1090.108 Automobile Financing Market
Section 1090.108 relates to automobile financing. Autos have become
indispensable for most working individuals, with nearly 90 percent of
the workforce commuting to work by car, truck, or van, and most driving
alone.\77\ Autos are also commonly used for other purposes that are
important to consumers, such as transportation to school or healthcare
providers, travel, and recreation. 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.\78\ Auto loans are the third largest category of outstanding
household debt, behind mortgage and student loans. In the fourth
quarter of 2014, Experian Automotive estimated that consumers in the
United States had auto loans valued at roughly $886 billion.\79\
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\77\ See Brian McKenzie & Melanie Rapino, U.S. Census Bureau,
Commuting in the United States: 2009, at 2 (2011), http://www.census.gov/prod/2011pubs/acs-15.pdf.
\78\ See TransUnion, 2014 Payment Hierarchy Study (2014),
available at http://media.marketwire.com/attachments/201403/233081_PaymentHierarchyInfographic2014FINAL.jpg & http://www.transunioninsights.com/studies/behaviorstudy.
\79\ Zabritski, supra note 33, at 6. An Equifax report estimated
that the total number of outstanding loans exceeded 65 million in
2014 and that the total balance of outstanding auto loans was $924.2
billion in August 2014. See Equifax, Auto Market Revels in Record
Vehicle Loan Totals: A Breakdown of the Recent National Consumer
Credit Trends Report (Nov. 10, 2014), available at http://insight.equifax.com/auto-market-revels-in-record-vehicle-loan-totals-a-breakdown-of-the-recent-national-consumer-credit-trends-report/. The Federal Reserve Bank of New York estimated that
consumers in the United States had 87.4 million outstanding auto
loans valued at nearly $900 billion as of the first quarter of 2014.
Fed. Reserve Bank of N.Y., Quarterly Report on Household Debt and
Credit (May 2014), available at http://www.newyorkfed.org/householdcredit/2014-q1/data/pdf/HHDC_2014Q1.pdf & http://www.ny.frb.org/householdcredit/2014-q4/data/xls/HHD_C_Report_2014Q4.xlsx. For purposes of these statistics, the
Federal Reserve Bank of New York defines ``auto loans'' as ``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.'' In a technical
comment, one industry trade association noted that the proposal's
Supplementary Information refers to dealers giving ``loans'' and
asserted that dealers in fact sell a vehicle through an installment
contract rather than giving loans. Unless otherwise indicated, the
term ``auto loan'' is used throughout this preamble to include
credit extended through installment sales contracts as well as other
types of financing.
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While a significant number of consumers obtain credit to purchase

[[Page 37507]]

their autos,\80\ in recent years, consumers have begun to migrate more
toward leasing agreements. Leasing is growing quickly as a proportion
of new vehicle financing.\81\
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\80\ In addition to financing the initial acquisition of an
auto, some consumers refinance their existing auto loans. Consumers
typically refinance their auto loans to lower their interest rates
in order 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.
\81\ As stated above, at the end of the fourth quarter of 2014,
leases comprised approximately 30 percent of new vehicle automotive
financing transactions, which is up from about 21 percent five years
earlier. See Zabritski, supra note 33, at 16.
---------------------------------------------------------------------------

Recognizing the significant impact that automobile financing has on
consumers' lives, the Bureau proposed to identify a market for
automobile financing. Commenters generally supported the Bureau's
identification of an automobile financing market, although some raised
specific concerns regarding the scope of the market that are discussed
in the section-by-section analysis of Sec. 1090.108(a) and (b) below.
Because automobile financing is an important activity that affects
millions of consumers, the Bureau believes that supervision will be
beneficial to both consumers and the market as a whole. Supervision of
larger participants in the automobile financing market will help the
Bureau ensure that these market participants are complying with
applicable Federal consumer financial law and thereby will further the
Bureau's mission to ensure consumers' access to fair, transparent, and
competitive markets for consumer financial products and services.
The automobile financing market identified by the Final Rule
includes: (1) Specialty finance companies; (2) ``captive'' nonbanks
(commonly referred to as ``captives''); and (3) Buy Here Pay Here
(BHPH) finance companies.\82\ 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.
---------------------------------------------------------------------------

\82\ 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.
Some BHPH finance companies are similar to captives in that they
are associated with certain dealers. BHPH dealers 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. Unlike captives,
these BHPH finance companies do not focus on a particular auto
manufacturer.\83\
---------------------------------------------------------------------------

\83\ Typically, only after the BHPH dealer assesses a consumer's
creditworthiness and determines the maximum monthly payment based on
that creditworthiness does the dealer present auto options.
---------------------------------------------------------------------------

According to the Bureau's estimates based on 2013 data from
Experian Automotive's AutoCount[supreg] database,\84\ the automobile
financing market defined in this Final Rule includes over 500 nonbank
automobile lenders.\85\ The Bureau estimates that fewer than 40
entities comprise over 90 percent of the auto loan and lease
transactions in the nonbank market, as measured by the number of
transactions identified in the AutoCount Lender Report\SM\.\86\ Large
captives dominate the top tier of this market. 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.
---------------------------------------------------------------------------

\84\ Experian Automotive's AutoCount database is a vehicle
database that collects monthly transaction data from State
Departments of Motor Vehicles. See also infra notes 116-117 and
accompanying text.
\85\ To reach this estimate, the Bureau considered data on
nonbanks 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 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.
\86\ These estimates were derived using the same methodology
described in note 85 above.
---------------------------------------------------------------------------

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 enters into a retail installment sales contract that it then
sells to a third-party finance company.\87\ 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 auto
use the indirect channel.
---------------------------------------------------------------------------

\87\ Such sources include depository institutions, nonbank
affiliates of a depository institution, independent nonbanks, and
captives.
---------------------------------------------------------------------------

With indirect lending, dealers rather than consumers typically
select the lender that 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 auto 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.\88\
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\88\ 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 sales
contract executed with the dealer. Dealer reserve is one method
lenders use to compensate dealers for the value they add by
originating retail installment sales contracts 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 in arranging credit for a consumer. 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.
With the relevant eligibility criteria and stipulations, the dealer
then selects the indirect lender that will provide the financing and
extends the credit through a retail installment sales

[[Page 37508]]

contract that the indirect lender purchases or acquires. The dealer is
typically compensated for arranging indirect financing. In the indirect
model, the indirect auto lender typically becomes responsible for
servicing the retail installment sales contract, and consumers will
then make payments to the lender.
Leases can also be obtained through direct or indirect channels. To
purchase an auto 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 can be used to determine the rent charge
portion of the monthly payment, and the length or term of the
lease.\89\ However, in a lease, a finance source will also quote a
residual value, which is the projected market value of the vehicle at
the end of the lease. 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 that will purchase the retail installment
sales contract or leasing contract.\90\
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\89\ Fed. Reserve Bd., Glossary, Keys to Vehicle Leasing (Mar.
13, 2013), available at http://www.federalreserve.gov/pubs/leasing/glossary.htm.
\90\ This does not apply to those auto dealers, such as BHPH
dealers, that 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. According to Experian Automotive, the average auto loan
term as of the fourth quarter of 2014 was around 66 months for new
vehicles and around 62 months for used vehicles.\91\ 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, only limited data on
refinancing volume are available because, among other things, publicly
traded market participants generally tend to consolidate refinancing
activity within origination activity for financial reporting purposes.
---------------------------------------------------------------------------

\91\ Zabritski, supra note 33, at 34.
---------------------------------------------------------------------------

108(a) Market-Related Definitions
Unless otherwise specified, the definitions in Sec. 1090.101
should be used when interpreting terms in this Final Rule.\92\ The
Proposed Rule defined additional terms relevant to the proposed
automobile financing market. These terms include ``aggregate annual
originations,'' which the Proposed Rule used as the criterion for
assessing larger-participant status; ``annual originations'';
``automobile''; ``automobile financing''; ``automobile lease''; and
``refinancing.'' The Bureau is adopting the Proposed Rule's definitions
largely as proposed, with certain modifications that are discussed
below.
---------------------------------------------------------------------------

\92\ Some commenters suggested that the Bureau should provide a
definition of ``affiliate.'' However, Sec. 1090.101 already
provides a definition of ``affiliated company,'' which should be
used when interpreting terms in this Final Rule.
---------------------------------------------------------------------------

Aggregate Annual Originations
The Bureau proposed 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) defined 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, calculated according to instructions set
forth in the Proposed Rule. The Bureau is finalizing this definition as
proposed, except that the Final Rule: (1) Counts refinancings as
``annual originations'' only if they meet the requirements set forth in
the Proposed Rule and are also secured by an automobile, and (2)
excludes certain purchases or acquisitions by special purpose entities
that are made for the purpose of facilitating asset-backed
securitizations. The Bureau has also made some technical changes to
proposed Sec. 1090.108(a) for clarity.
Annual originations. Proposed Sec. 1090.108(a) defined the term
``annual originations'' to mean the sum of the following transactions
for the preceding calendar year: Credit granted for the purchase of an
automobile, refinancings of such obligations and any subsequent
refinancings thereof, automobile leases, and purchases or acquisitions
of any of the foregoing obligations. The Bureau proposed to exclude
from annual originations any investments in asset-backed securities.
The Bureau received a number of comments relating to this proposed
definition of ``annual originations,'' which are discussed below. For
the reasons that follow, the Bureau is finalizing the definition of
``annual originations'' largely as proposed, with modifications related
to refinancings and asset-backed securities and technical changes for
clarity.\93\
---------------------------------------------------------------------------

\93\ The Bureau has adjusted the wording of paragraph (i)(A)(4)
of the definition of ``aggregate annual originations'' for clarity.
This change from the proposal does not have any substantive effect.
---------------------------------------------------------------------------

Purchases of retail installment contracts. Two trade association
commenters expressed concern that the proposed definition of ``annual
originations'' may fail to adequately capture purchases of retail
installment sales contracts by indirect automobile lenders from
dealers. These commenters indicated that while the proposed definition
includes, among other things, ``[c]redit granted for the purpose of
purchasing an automobile,'' the indirect automobile lender is not
itself granting credit. One of the commenters explained that it is the
dealer that offers credit to consumers in this scenario rather than the
indirect lender.
Purchases of retail installment contracts are included in paragraph
(i)(A)(4) of the proposed definition of ``aggregate annual
originations,'' which includes ``purchases or acquisitions'' of
``[c]redit granted for the purpose of purchasing an automobile.''
Therefore, originations that are made indirectly are captured by the
proposed definition, and the Final Rule does not modify this aspect of
the proposed definition.
Inclusion of refinancings. The Bureau proposed to include
refinancings of credit granted for the purpose of purchasing an
automobile and any subsequent refinancings thereof in the term ``annual
originations.'' A number of consumer advocacy and civil rights
organizations supported the Bureau's inclusion of refinancings in
``annual originations.'' However, two trade associations and an
industry commenter suggested that covered persons would not have the
information necessary to determine whether they are refinancing credit
granted for the purpose of purchasing an automobile.\94\
---------------------------------------------------------------------------

\94\ These commenters also argued that the proposed definition
of ``refinancing'' is too broad and suggested that the Bureau should
not include refinancing activity conducted by third parties in the
definition. Their comments relating to the definition of
``refinancing'' are discussed in the section-by-section analysis of
that definition below.
---------------------------------------------------------------------------

The Bureau continues to believe that it is appropriate to include
refinancing activity in the automobile financing market defined in this
rule, and is therefore finalizing this element of the proposed
definition of ``annual originations'' as proposed. Like purchase-money
loans, the refinancings that are included in the proposed definition
involve debt arising from the purchase of an automobile. The creditors
that offer such refinancings are in competition with other creditors in
the automobile financing market for the right to hold and service such
debt. Although refinancing activity is limited

[[Page 37509]]

at present, it could become more prevalent in the future should
conditions change (for example, in a rapidly declining interest rate
environment).
The Bureau considered the concern raised by some commenters that
covered persons may not have the information necessary to determine
whether they are refinancing an obligation subject to the proposed
definition. As explained above, the Final Rule does not require
automobile finance companies to calculate whether they are larger
participants. In any event, most auto loans are purchase-money loans,
and the Bureau believes that covered persons that refinance vehicle-
secured loans generally know whether the debt they are refinancing was
originally incurred for the purpose of purchasing the vehicle.\95\
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\95\ The Bureau recognizes that some loans secured by a vehicle
such as title loans are not purchase-money loans or refinancings of
purchase-money debt. However, such loans typically have very
different terms, interest rates, and loan amounts than the
automobile lending covered in this rule, making it unlikely that a
company would be in the business of refinancing covered loans
without knowing that it was doing so.
---------------------------------------------------------------------------

The Bureau recognizes, however, that in rare cases a purchase-money
loan could be refinanced without the refinancing creditor taking a
security interest in the automobile, making the original purpose of the
debt less obvious. To address such circumstances and for ease of
administration, the Bureau has included language in paragraph (i)(A)(3)
of the definition of ``aggregate annual originations'' to clarify that
a refinancing must be secured by an automobile to be included in the
definition. The Bureau is otherwise finalizing paragraph (i)(A)(3) of
the definition of ``aggregate annual originations'' as proposed.
Exclusion related to asset-backed securities. Proposed paragraph
(i)(B) of the definition of ``aggregate annual originations'' excluded
investments in asset-backed securities. As the Bureau explained in the
proposal, 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. The Bureau sought comment on
whether the proposed exclusion for asset-backed securities was
appropriate and whether the Bureau should define the term ``asset-
backed securities'' in proposed Sec. 1090.108(a).
The Bureau received comments from industry trade associations and
an industry participant in support of the proposed exclusion and no
comments opposing it. However, several of these commenters stated that
the final rule should also exclude purchases or acquisitions of
obligations by securitization trusts and other special purpose entities
that are created to facilitate securitization transactions. They
indicated that without this change, many securitization entities would
be considered larger participants, which would negatively impact the
securitization process. Some of these commenters stated that if the
Bureau did not exclude these transactions, the rule would lead to
double or triple counting of the same automobile loan or lease
contract.
Raising similar concerns, an industry trade association requested
that the Bureau clarify the exclusion to expressly exclude all
securitization activities from the definition of annual originations.
It stated that securitization activities are not a consumer financial
product or service and have no impact on consumers.
Another trade association commented that the language does not
clearly exclude the various transactions creating those securities, and
requested that the Bureau clarify that any purchases or acquisitions of
credit obligations for securitization purposes and transfers of credit
obligations among affiliated entities do not fall within the scope of
the rule. This commenter also requested that the Bureau not define the
term ``asset-backed securities.'' No commenter urged the Bureau to
define the term ``asset-backed securities.''
For the same reasons expressed in the proposal, the Bureau believes
that it is appropriate to exclude investments in asset-backed
securities from ``annual originations'' and is therefore finalizing
that element of the proposal in paragraph (i)(B)(1) of the definition
of ``aggregate annual originations.'' In addition, the Final Rule
excludes certain purchases or acquisitions of obligations by special
purpose entities established for the purpose of facilitating asset-
backed securities in paragraph (i)(B)(2) of the definition of
``aggregate annual originations.'' In light of the limited role that
these special purpose entities play, the Bureau does not believe that
their purchases or acquisitions should be included in the definition of
``annual originations'' if they are made for the purpose of
facilitating an asset-backed securities transaction.\96\
---------------------------------------------------------------------------

\96\ The Final Rule does not, however, exclude all transfers
among affiliated entities, as one commenter suggested. The Bureau
believes that the types of purchases or acquisitions included in the
definition of ``aggregate annual originations'' reflect
participation in the automobile finance market, even if they are
made or received from an affiliated entity, and has therefore
limited the exclusion in paragraph (i)(B) of the definition to
transactions relating to asset-backed securitizations.
---------------------------------------------------------------------------

Title loans. The Bureau proposed to define a market for automobile
financing that would not include title loans, in which a lender extends
credit to a consumer that is secured by the title to an automobile that
the consumer owns free and clear prior to the loan. The Bureau
explained that title loans may be better analyzed separately from the
automobile financing market as a part of a future larger-participant
rulemaking because the Bureau believes that title loans are
substantially different from the automobile financing activities
included in the Proposed Rule. However, the Bureau solicited feedback
on whether it should define the market for automobile financing and
annual originations to include title loans and other types of loans
secured by automobiles, and if so, whether it would be appropriate to
use the same criterion and threshold as in the proposal. For the
reasons stated below, the Bureau has decided not to include title
lending in this larger-participant rulemaking.
Most commenters supported the Bureau's proposal to exclude title
loans from the automobile financing market. Several trade associations
and an industry commenter urged the Bureau not to expand the scope to
include loans that are not made for the purpose of purchasing or
refinancing an automobile.\97\ One of these trade associations stated
that title loans are a separate consumer financial product or service,
and that the nature, purpose, and timing of title loans distinguish
them from financing for the acquisition of an automobile. This
commenter noted that title loans are given to consumers who already
have an ownership interest in their car and wish to obtain money for a
purpose other than acquiring the vehicle. By contrast, it noted that
automobile financing occurs for the purpose of obtaining a vehicle, and
refinancing occurs generally to secure better terms related to the
acquisition of that vehicle.
---------------------------------------------------------------------------

\97\ Some of these commenters also suggested that the Bureau use
Delaware's definition of ``title loan'' as a basis for defining
title lending. The Bureau has not, however, attempted to define
title lending in this rulemaking and does not need to do so for
purposes of the Final Rule.
---------------------------------------------------------------------------

A number of individuals and consumer advocacy groups also

[[Page 37510]]

supported the Bureau's decision to exclude title loans from the scope
of this automobile financing market. Many of these commenters
encouraged the Bureau to cover title lending as soon as possible in a
future rulemaking.
On the other hand, a few commenters recommended that the Bureau
include title loans in the market defined in this rulemaking. Citing
the potential consumer harms stemming from title lending, one consumer
group encouraged the Bureau to include title lenders that made more
than 25 extensions of credit during the preceding calendar year.
A trade association representing title lenders also encouraged the
Bureau to include title loans.\98\ The commenter stated that title
loans are more similar to automobile financing than they are to payday
loans and asserted that the Proposed Rule presents a more appropriate
framework of regulation than any rulemaking that the Bureau may issue
for the payday lending industry. The commenter also noted that the
proposed rule amending Regulation C, which implements the Home Mortgage
Disclosure Act,\99\ would impose reporting requirements on both closed-
end mortgage loans and home equity lines of credit. The commenter
suggested that it would be consistent with the proposed revisions to
Regulation C for the Bureau to include both automobile purchase-money
loans and title loans within the scope of this rule.
---------------------------------------------------------------------------

\98\ While encouraging the Bureau to include title loans in this
larger-participant rule, this commenter also challenged the Bureau's
authority to regulate the title lending industry. The Bureau does
not agree with the commenter's assertions regarding the scope of the
Bureau's rulemaking authority but does not need to address them in
this rulemaking because it has chosen, for the reasons stated below,
to exclude title lending from the scope of the market defined in
this larger-participant rule.
\99\ 12 U.S.C. 2801-10.
---------------------------------------------------------------------------

After considering all of these comments, the Bureau has decided to
exclude title loans from the Final Rule. Loans provided by title
lenders are not used for the same purposes as the types of financing
included within the proposed market (i.e., to purchase or lease an
automobile or to adjust the terms of debt incurred to purchase an
automobile). As the Bureau noted in the proposal, title loans are
generally provided by companies that do not compete with lenders that
finance the acquisition of a vehicle. Further, 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.\100\ These differences may warrant a different criterion and
threshold than is appropriate for the automobile financing market
defined in this rule. In light of all of these factors, the Bureau
believes that title loans are best addressed through a future larger-
participant rulemaking.
---------------------------------------------------------------------------

\100\ Title loans are also generally significantly shorter in
term than leases used to finance an automobile.
---------------------------------------------------------------------------

There is no need for the Bureau to address in this rulemaking the
assertion by one commenter that title loans are more similar to
automobile financing transactions than to payday loans because payday
lending is not a part of this larger-participant rulemaking.\101\
Regulation C's handling of dwelling-secured loans is also not relevant
here because Regulation C and this larger-participant rule serve
different purposes and involve different financial products or
services.\102\ For the reasons set forth above, the Bureau believes
that title loans are sufficiently different from the automobile
financing transactions covered by this rule that they should not be
included in the market defined in this larger-participant rulemaking.
---------------------------------------------------------------------------

\101\ No larger-participant rulemaking is required to establish
supervisory authority over payday lenders because the Bureau already
has supervisory authority over the offering or providing of payday
loans pursuant to section 1024(a)(1)(E) of the Dodd-Frank Act, 12
U.S.C. 5514(a)(1)(E).
\102\ The purpose of Regulation C is to implement the Home
Mortgage Disclosure Act, which provides the public with loan data
that can be used for the purposes set forth in 12 CFR 1003.1(b).
---------------------------------------------------------------------------

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 Final Rule--to determine larger participants in particular markets
for consumer products or services under section 1024(a)(1).\103\ The
Proposed Rule therefore defined ``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, and laid out specifics on
how this aggregation should be done. For the reasons set forth below,
the Bureau is finalizing this aggregation method as proposed.
---------------------------------------------------------------------------

\103\ 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.'').
---------------------------------------------------------------------------

For purposes of computing the covered person's aggregate annual
originations, the Proposed Rule provided that the annual originations
of each affiliated company were first to be calculated separately and
then aggregated with the originations of the covered entity. Paragraph
(ii) of the proposed definition of ``aggregate annual originations''
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 provided
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 were to be aggregated for the
entire preceding calendar year, even if the affiliation did not exist
for the entire calendar year. The aggregation provision would not
apply, however, if the affiliated company was a dealer excluded by
proposed Sec. 1090.108(c), which is discussed below.
Several commenters supported the Bureau's proposal to aggregate
annual originations of all affiliated companies in the previous
calendar year for the purpose of calculating aggregate annual
originations. One trade association objected to the Bureau's proposal
to count ``annual originations'' in a manner that includes an
affiliate's annual originations during a calendar year, regardless of
whether an affiliation existed during the entire calendar year. This
commenter suggested that it may be difficult for a company to secure
necessary financial records from an unaffiliated company.
Because the criterion for the rule is aggregate annual
originations, the Bureau believes that it is simplest and most
appropriate to aggregate originations for the entire calendar year when
companies have been affiliated at any time during that calendar year.
This approach is similar to the approach taken with respect to other
larger-participant rules, including in Sec. Sec. 1090.104(a) and
1090.105(a) as described above, and will avoid the administrative
difficulties associated with part-year calculations of annual
originations. As noted above, the larger-participant rules do not
impose a record-keeping requirement and do not require nonbank covered
persons to keep track of their annual originations. Moreover, the
Bureau does not believe it would be difficult to gather this type of
information from current or former affiliates should a nonbank have

[[Page 37511]]

occasion to do so.\104\ For the reasons described above and in the
Proposed Rule, the Bureau adopts the aggregation method as proposed.
---------------------------------------------------------------------------

\104\ Participants seeking to self-assess could also arrange to
obtain information relevant to the threshold in advance of ending
the affiliation.
---------------------------------------------------------------------------

Automobile
The Bureau proposed to define ``automobile'' to mean any self-
propelled vehicle primarily used for personal, family, or household
purposes for on-road transportation.\105\ The proposed definition of
``automobile'' expressly excluded motor homes, RVs, golf carts, and
motor scooters. The Bureau has considered the comments on the
definition of ``automobile'' and, for the reasons set forth below, is
finalizing the definition as proposed.
---------------------------------------------------------------------------

\105\ The proposed definition applies to both new and used
vehicles.
---------------------------------------------------------------------------

The proposed definition of ``automobile'' was informed by the
definition of ``motor vehicle'' in section 1029(f) of the Dodd-Frank
Act,\106\ but included modifications to limit its application to
vehicles primarily used for personal, family, or household purposes for
on-road transportation. In the proposal, the Bureau explained that the
``motor vehicle'' definition in the Dodd-Frank Act encompasses a wide
range of vehicles, and that the use of such a broad definition in a
larger-participant rulemaking would make the rule difficult to
administer. Consistent with the definition of ``motor vehicle,'' the
proposed definition of ``automobile'' covered vehicles such as cars,
sports utility vehicles, light-duty trucks, and motorcycles. However,
other vehicles such as heavy-duty trucks, buses, and ambulances were
not included because the proposed definition was limited to vehicles
primarily used for personal, family, or household purposes.
---------------------------------------------------------------------------

\106\ 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 sections 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).
---------------------------------------------------------------------------

The Bureau also proposed expressly to exclude certain types of
motor vehicles, such as motor homes, RVs, golf carts, and motor
scooters, from the definition of ``automobile.'' The Bureau did not
have extensive data on the financing activity associated with these
types of vehicles, and indicated that the vehicles excluded from the
definition might warrant different larger-participant criteria and
thresholds if they were included in the market defined for the Proposed
Rule. The Bureau sought comment and additional market data related to
its assumptions. The Bureau also sought comment on its proposed
definition of ``automobile,'' including whether the proposed definition
should address other vehicles or types of vehicles and whether
motorcycles should be a separately defined term.
Industry participants, two trade associations, and several members
of Congress urged the Bureau to exclude motorcycles from the definition
of ``automobile,'' maintaining that motorcycles are more akin to the
types of recreational vehicles excluded from the proposed definition
than to cars and light trucks. These commenters stated that motorcycles
are largely discretionary purchases and are not commonly used for
commuting. They also stated that motorcycles are significantly less
expensive than cars and that the overall volume of motorcycle sales is
equal to only a small fraction of car sales.
These commenters urged the Bureau to follow the approach taken by
six other Federal regulators (the Agencies) that recently excluded
motorcycle loans from the definition of ``automobile loan'' in the
Credit Risk Retention Rule.\107\ That rule implements the credit risk
retention requirements for asset-backed securities under section 941 of
the Dodd-Frank Act.\108\ Pursuant to section 941, securitizers of
asset-backed securities are generally required to retain not less than
5 percent of the credit risk of the assets collateralizing the asset-
backed securities. In the Credit Risk Retention Rule, the Agencies
exempted, among other things, securitizations consisting solely of
``automobile loans'' that meet specific underwriting standards, but did
not include motorcycle loans in the definition of ``automobile loan.''
\109\ The Agencies reasoned that motorcycle loans should not be exempt
because the ``overall risk profile of motorcycles as a class remains
distinct from that of automobiles and, like other recreational
vehicles, [motorcycles] exhibit overall a higher risk profile.'' \110\
---------------------------------------------------------------------------

\107\ Office of the Comptroller of the Currency, Fed. Reserve
Bd., Fed. Deposit Ins. Corp., U.S. Sec. & Exch. Comm'n, Fed. Hous.
Fin. Agency, & Dep't of Hous. & Urban Dev., Credit Risk Retention,
79 FR 77602 (Dec. 24, 2014).
\108\ Section 941 of the Dodd-Frank Act amends the Securities
Exchange Act of 1934 (the Exchange Act) and adds a new section 15G
to the Exchange Act, 15 U.S.C. 78o-11. Specifically, section 941 of
the Dodd-Frank Act requires the Securities Exchange Commission, the
Federal banking agencies, and, with respect to residential
mortgages, the Secretary of Housing and Urban Development and the
Federal Housing Finance Agency to prescribe rules to require that a
securitizer retain an economic interest in a portion of the credit
risk for any asset that it transfers, sells, or conveys to a third
party through the issuance of an asset-backed security.
\109\ 79 FR 77602, 77683 (Dec. 24, 2014).
\110\ Id.
---------------------------------------------------------------------------

The Bureau has considered these comments but believes that
similarities in the financing process, relevant compliance
requirements, pricing, and how the vehicles may be used support
inclusion in the same market for supervisory purposes. Similar to cars
and light-duty trucks, motorcycles are often purchased at a dealership
where the price is negotiated, add-ons may be sold, and financing is
arranged through an application and credit check.\111\ Compliance
issues also appear to be very similar and would likely involve the same
requirements of Federal consumer financial law, the same examination
procedures, and the same potential consumer harms. While motorcycles
are generally less expensive than cars, average prices of cars and
motorcycles are not that far apart.\112\
---------------------------------------------------------------------------

\111\ Indeed, some companies that offer motorcycle financing
operate as captives for affiliated manufacturers in the same manner
as described above.
\112\ One industry commenter reported that the average
Manufacturer's Suggested Retail Price of a new on-road motorcycle in
2013 was $15,366, according to data compiled by the Motorcycle
Industry Council. This is similar to the average price of a used car
in 2013, which was $15,900 according to one report. See Greg
Gardner, Average Used Car Price Hits Record High in 2014, USA Today,
Feb. 18, 2015, available at http://www.usatoday.com/story/money/cars/2015/02/18/record-used-car-prices-in-2014/23637775/. According
to Kelley Blue Book, the average transaction price of a light
vehicle as of December 2013 was roughly double that, $33,525. Kelley
Blue Book, New-Car Transaction Prices Reach New Record, Up Nearly 3
Percent in December 2014, According to Kelley Blue Book (Jan. 5,
2015), available at http://mediaroom.kbb.com/2015-01-05-New-Car-Transaction-Prices-Reach-New-Record-Up-Nearly-3-Percent-In-December-2014-According-To-Kelley-Blue-Book.
---------------------------------------------------------------------------

Unlike many of the vehicles excluded from the proposal, motorcycles
are commonly used for on-road transportation and can be used for many
of the same purposes as automobiles, such as daily errands and long-
distance trips. They can also be used for transportation to work, even
if that is uncommon. Although the proposal noted that automobiles are
important to many consumers as a means of transportation to work, the
Bureau did not intend to suggest that the rule would only cover
vehicles that are used for that purpose or that the financing of
vehicles used for recreational purposes is unimportant. The proposed
definition includes, for example, cars or light-duty trucks that are
not used for commuting.

[[Page 37512]]

Although some commenters suggested that the Bureau should follow
the approach taken in the Credit Risk Retention Rule, the Agencies'
exclusion of motorcycles from the exemption provided in that rule was
based on their assessment that motorcycles--like other vehicles that
are used for recreational purposes--as a class have a riskier profile
than the vehicles that are included in the Agencies' definition of
``automobile loans.'' \113\ The Agencies' decision to exclude
motorcycle loans from ``automobile loans'' was for the purpose of
determining whether a securitizer should be exempt from retaining any
risk on vehicle loans. In this rule, the Bureau is defining larger
participants of a market in order to carry out the Bureau's consumer
protection mission through its supervisory function. In light of the
different purposes of the two rulemakings, the Bureau continues to
believe that including motorcycle loans in ``annual originations'' is
appropriate.
---------------------------------------------------------------------------

\113\ See 79 FR 77602, 77683 (Dec. 24, 2014).
---------------------------------------------------------------------------

One industry trade association expressed support for the Bureau's
decision to exclude RVs from the definition of ``automobile'' in this
rule, while emphasizing that RVs should still be considered motor
vehicles as defined in the Dodd-Frank Act. This commenter believed that
using the broad definition of ``motor vehicle'' found in the Dodd-Frank
Act would make this rule difficult to administer. It also stated that
there are no significant nonbank financial institutions in the RV
industry and that including motor homes and RVs in the Final Rule would
thus have little if any impact. No other commenters addressed the
Proposed Rule's exclusions for specific categories of motor vehicles.
The Bureau is finalizing the specific exclusions to the definition
of ``automobile'' as proposed. These exclusions will promote clarity
and ease of administration by providing bright lines regarding which
vehicles are covered. The Bureau also recognizes that the uses of the
excluded vehicles are either different or more limited than those of
the vehicles that are included in the definition. For example, motor
scooters generally are not suitable for long-distance trips or highway
driving, while RVs and motor homes generally cannot be used for
commuting or daily errands due to parking limitations. On average, the
categories of vehicles excluded in the Proposed Rule are also either
substantially more or less expensive than the vehicles that qualify as
automobiles under the proposed definition.\114\ As noted in the
proposal, including the financing of these vehicles in this market
could warrant a different criterion or threshold given the differences
in scale and nature of financing, and the Bureau has limited data about
the financing of the excluded vehicles. As the Bureau gathers more
information about financing for the types of vehicles that it is
excluding from this Final Rule, it can evaluate whether it is
appropriate to cover them in a future larger-participant rulemaking.
Accordingly, the Bureau is finalizing the definition of ``automobile''
as proposed.
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\114\ For example, the Recreation Vehicle Industry Association
indicates that type A, B, and C new motorhomes typically cost
between $43,000 and $500,000. Recreation Vehicle Indus. Ass'n, RV
Types, Terms & Prices (Aug. 28, 2013), available at http://www.rvia.org/UniPop.cfm?v=2&OID=1004&CC=1120. According to Consumer
Reports, small motor scooters begin at about $1,000, while large
scooters range up to about $10,000. Consumer Reports, Motorcycle &
Scooter Buying Guide 2 (Apr. 2015), available at http://www.consumerreports.org/cro/motorcycles-scooters/buying-guide.htm.
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Automobile Financing
Proposed Sec. 1090.108(a) defined the term ``automobile
financing'' to mean providing the transactions identified under the
term ``annual originations'' as defined in proposed Sec. 1090.108(a).
The Bureau intended this proposed definition to reflect the number of
consumer loans and leases made or facilitated (through purchases of the
loans and leases) regarding one of the most important assets of
American households. The comments that the Bureau received relating to
the definition of ``automobile financing'' were similar to those
relating to the definition of ``annual originations.'' For the same
reasons discussed above in the section-by-section analysis of the
definition of ``aggregate annual originations,'' the Bureau is
finalizing the definition of ``automobile financing'' as proposed, with
one minor clarifying change that does not have any substantive effect.
Automobile Lease
Proposed Sec. 1090.108(a) defined the term ``automobile lease'' to
mean a lease for the use of an automobile, as defined in the 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
number of consumer groups, civil rights groups, and individual
commenters supported the proposal to include automobile leasing in the
market for automobile financing. However, as discussed above, two
industry trade associations and an industry commenter suggested that
the Bureau should include only a narrower category of leases that meet
certain residual value limits and, in their view, are the functional
equivalent of a purchase finance arrangement. Because of the
similarities between automobile leases and automobile loans described
above and the importance of leases to consumers, the Bureau believes
that it is important to maintain broad coverage of automobile leases in
this larger-participant rule. The Bureau therefore is not narrowing the
scope of leases included in the manner suggested by some commenters and
is finalizing the definition of ``automobile lease'' as proposed.
Refinancing
The Proposed Rule defined ``refinancing'' by reference to the
definition contained in Regulation Z Sec. 1026.20(a), except that the
Proposed Rule indicated that a refinancing need not be by the original
creditor, holder, or servicer of the original obligation. Section
1026.20(a) provides that ``[a] refinancing occurs when an existing
obligation that was subject to this subpart is satisfied and replaced
by a new obligation undertaken by the same consumer'' and identifies
certain transactions that are not treated as a refinancing. The Bureau
sought comment on whether the Regulation Z definition of refinancing as
modified is appropriate, and whether the Bureau should consider a new
definition of refinancing for purposes of this larger-participant
rulemaking. The Bureau also sought data on refinancing activity in the
market and its participants.
Two trade associations and an industry commenter suggested that the
Bureau should adopt a narrower definition of ``refinancing'' that is
fully consistent with the definition in Regulation Z. These commenters
stated that the proposed definition should be modified so as not to
include refinancing activity conducted by third parties.
The definition of ``refinancing'' in Regulation Z Sec. 1026.20(a)
serves a different purpose than the concept of refinancing in this
larger-participant rule. Section 1026.20(a) addresses when the original
creditor, holder, or servicer of an existing consumer credit obligation
must provide new cost disclosures and other protections that that same
creditor already provided to the consumer before initial credit was
extended. As comment 20(a)-5 to Sec. 1026.20(a) explains, a third
party that refinances an existing obligation must generally provide
disclosures and protections to the consumer, and such

[[Page 37513]]

transactions are thus excluded from the definition of a ``refinancing''
under section 1026.20(a).\115\ In contrast, the term ``refinancing'' is
used in this rulemaking to identify transactions that should be counted
as ``annual originations,'' which in turn are used to determine whether
a covered person is a larger participant in the automobile financing
market.
---------------------------------------------------------------------------

\115\ 12 CFR 1026.20, comment 20(a)-5 (``Section 1026.20(a)
applies only to refinancings undertaken by the original creditor or
a holder or servicer of the original obligation. A `refinancing' by
any other person is a new transaction under the regulation, not a
refinancing under this section.'').
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Given the purpose of this rulemaking, it would not be appropriate
to exclude third-party refinancings from the term ``refinancing.''
Refinancings by the original creditor and a third party are
sufficiently similar so as to be considered part of the same market for
automobile financing. Therefore, consistent with the proposal, the
Bureau is finalizing the rule to include refinancings by nonbank
covered persons that were not the original creditor, holder, or
servicer of the obligation. In addition, as explained in the discussion
of the definition of ``aggregate annual originations'' above, the
Bureau has added a requirement in paragraph (i)(A)(3) of the definition
of ``aggregate annual originations'' that a refinancing must be secured
by a vehicle to be counted as an ``annual origination'' in order to
facilitate application of the criterion.
108(b) Test To Define Larger Participants
Criterion
The Bureau proposed to use aggregate annual originations as the
criterion that establishes which entities are larger participants of
the automobile financing market. A discussion of the comments received
relating to the definition of ``aggregate annual originations'' and the
adjustments the Bureau has made to that proposed definition is set
forth above. For the reasons stated there and below, the Bureau is
finalizing ``aggregate annual originations'' as the criterion as
proposed.
The Final Rule uses aggregate annual originations 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. A particular nonbank entity's annual number of
originations reflects the number of loans and leases it makes or
facilitates (through purchases of the loans and leases) regarding one
of the most important assets of American households. Further, because
the Final Rule defines the term ``aggregate annual originations,'' in
part, in terms of how many loans or leases an entity granted or
purchased, the Bureau expects that aggregate annual originations
criterion will generally correlate to the size of the entity's loan and
lease portfolios.
The Bureau anticipates that nonbank covered persons will be able to
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 and are presumably expecting a
payment for each loan and lease. Further, they generally know the
number of loans they make or purchase because they execute liens
against the automobile titles.
In the proposal, the Bureau relied on Experian Automotive's
AutoCount database for data on a significant portion of annual
originations. 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.\116\ These finance sources are listed either
individually or categorized into lender type. The proposal invited
comments on this data source as well as suggestions for other data
sources that commenters believed might augment the Bureau's
understanding and analysis of the market.
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\116\ The AutoCount data cover transactions in every State,
excluding Oklahoma, Wyoming, Rhode Island, and Delaware.
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Two industry trade associations and an industry commenter urged the
Bureau to provide more detail on why the Experian AutoCount database
was chosen and how the data in the database was gathered. These
commenters asked if the Bureau would be using the same definitions as
Experian, and expressed concern that the use of the database could
misidentify larger participants due to differences in the Experian
dataset and the Bureau's criterion. No commenter suggested an
alternative national source of data.
The Bureau recognizes 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 definitions. For example, the term ``annual
originations,'' as defined in this Final Rule, includes transactions
not tracked in the AutoCount data. Specifically, the Final Rule defines
``annual originations'' to include the sum of a nonbank covered
person's credit granted for the purchase of an automobile, refinancings
of such obligations (and any subsequent refinancings thereof) that are
secured by an automobile, automobile leases, and purchases or
acquisitions of any of the foregoing obligations. In contrast, the
AutoCount data track only loans and leases for which a title and
registration is filed with the State DMV and are less inclusive than
the Final Rule in a number of respects. For example, the AutoCount data
may not include certain refinancings and purchases and acquisitions of
credit obligations and leases that are included in the Final Rule
definition of ``annual originations.'' \117\ Similar to the Final 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
Final Rule.
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\117\ The AutoCount data analyzed by the Bureau also do not
include motorcycle transactions. However, given the relative size of
the motorcycle segment as compared to the car and light-duty truck
segments of the market, the Bureau does not believe that this
limitation will substantially undermine the accuracy of its estimate
of the number of larger participants. According to the U.S.
Department of Transportation, there were approximately 234 million
light-duty vehicles registered in the United States in 2012, as
compared to only 8.45 million motorcycles. U.S. Department of
Transportation Bureau of Transportation Statistics, National
Transportation Statistics tbl. 1-11 (2015), available at http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transportation_statistics/html/table_01_11.html.
---------------------------------------------------------------------------

Notwithstanding the differences between AutoCount and the Final
Rule definitions, AutoCount data provide a reasonable proxy for the
Bureau's definition of ``annual originations'' for rulemaking purposes.
The dataset covers almost the entire United States and is relatively
reliable because it is based on title and registration information
filed with State DMVs. AutoCount is therefore the most comprehensive
database that the Bureau could identify for this rulemaking, and
commenters did not identify any other database that the Bureau should
use. In light of these factors, the Bureau believes that the AutoCount
data can adequately inform the decision of setting a threshold using
the criterion of aggregate annual originations.
The Bureau's use of the AutoCount database in this rulemaking will
not result in covered persons being misidentified as larger
participants, as some commenters asserted. To the extent that the Final
Rule's definitions differ from the types of transactions that

[[Page 37514]]

are included in AutoCount, the Final Rule's definitions control for
purposes of determining whether an entity is in fact a larger
participant of the automobile financing market. The Bureau will
consider a variety of data sources in determining whether a nonbank
covered person qualifies as a larger participant before initiating any
supervisory activity. In addition to AutoCount data, these sources may
include, for example, filings with the U.S. Securities and Exchange
Commission, public shareholder information, and industry surveys. In
some instances, if sufficient information is not available to the
Bureau to assess a person's larger-participant status, the Bureau may
require submission of certain records, documents, and other information
pursuant to existing Sec. 1090.103. The Bureau will notify an entity
if the Bureau decides to undertake supervisory activity.\118\ Pursuant
to Sec. 1090.103, a person will then be able to dispute whether it
qualifies as a larger participant in the automobile financing market,
should it choose to do so.
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\118\ As noted above, the Bureau prioritizes supervisory
activity among entities subject to its supervisory authority on the
basis of risk, taking into account a variety of factors.
---------------------------------------------------------------------------

While generally agreeing with the Bureau's proposal to consider
aggregate annual originations, a number of consumer advocates and civil
rights groups suggested that the Bureau include servicing activity
within the criterion or otherwise ensure that the Final Rule will cover
large servicers as well. These commenters noted that servicing may be
done by entities that do not own the obligations that are being
serviced and that it is important to ensure that consumer protection
laws and regulations are being followed in servicing.
The Bureau agrees that oversight of servicing in the automobile
financing market is important, but believes it can accomplish that goal
without including servicing activity within the Final Rule's criterion.
As the commenters recognize, the use of non-holder servicers is not as
prevalent in the auto market as in the housing market. Instead, most of
the entities that will be larger participants under this Final Rule
service their own loans and leases, and the Bureau will be able to
examine their servicing activity as part of its larger-participant
examinations even if servicing activity is not part of the criterion
used in this Final Rule.\119\ Additionally, the Bureau has the
authority to supervise service providers to larger participants.\120\
Accordingly, where a third-party servicer acts as a service provider to
a larger participant, the Bureau will have the authority to supervise
the servicer's performance of services for the larger participant. In
light of these considerations, the Bureau has decided not to include
servicing activity within the criterion.
---------------------------------------------------------------------------

\119\ See 77 FR 42874, 42880 (July 20, 2012).
\120\ 12 U.S.C. 5514(e); see also 12 U.S.C. 5481(26)(A)
(defining service provider).
---------------------------------------------------------------------------

Two industry trade associations and an industry commenter also
suggested that the Bureau should exclude all direct lending from the
scope of the market defined in this rule. These commenters suggested
that the Bureau's primary concerns are with practices that only occur
in the purchase of motor vehicle sales finance contracts, such as
pricing disparities that result when dealers are given pricing
authority. The Bureau has considered these comments but believes that
direct lending is an integral and important part of the automobile
financing market defined in this rule. Like indirect lending and
leasing, direct lending can affect a consumer's access to
transportation. Supervision will allow the Bureau to ensure that market
participants engaging in these activities are complying with applicable
Federal consumer financial law. The Bureau therefore declines to carve
direct lending out of the scope of this rule and is finalizing the
criterion as proposed.
Threshold
The Proposed Rule defined a nonbank covered person as a larger
participant of the automobile financing market if the person has at
least 10,000 aggregate annual originations. The Bureau received
comments supporting the Bureau's proposed approach, as well as comments
advocating a higher or lower threshold. For the reasons that follow,
the Bureau is finalizing the rule with a threshold of 10,000 aggregate
annual originations as proposed.
Based on the Bureau's estimates, a threshold of 10,000 aggregate
annual originations will bring within the Bureau's supervisory
authority about 34 entities and their affiliated companies that engage
in automobile financing.\121\ The Bureau estimates that these entities
account for roughly 7 percent of all nonbank covered persons in the
automobile financing market and are responsible for approximately 91
percent of the activity in the nonbank automobile financing market.
---------------------------------------------------------------------------

\121\ The Bureau originally estimated that the proposed
threshold would bring within the Bureau's supervisory authority
about 38 entities. In the proposal, the Bureau noted that it had
consolidated entities in some cases based on known affiliations and
excluded other entities listed in the AutoCount data on the ground
that they do not engage in automobile financing activity as defined
in the Proposed Rule. The Bureau's estimates of coverage at the
different thresholds considered have changed slightly since the
proposal stage due to the identification of some additional
affiliations and additional entities that should be excluded from
the market definition such as title lenders. However, these changes
do not affect in any significant way the Bureau's analysis or its
estimates of aggregate market activity covered at each threshold.
---------------------------------------------------------------------------

As the Bureau explained in its proposal, the aggregate annual
originations threshold of 10,000 will 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. The Bureau estimates that in 2013 the entities that would
qualify as larger participants under the proposed threshold provided
loans and leases to approximately 6.8 million consumers.\122\
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\122\ The Bureau assumes that an average consumer only enters
into one auto loan or lease in a given year.
---------------------------------------------------------------------------

A number of consumer groups, civil rights groups, and consumer
attorneys supported the proposed threshold and encouraged the Bureau to
ensure that a threshold of 10,000 aggregate annual originations covers
finance companies that target subprime consumers, regional finance
companies, and finance companies related to Buy Here Pay Here (BHPH)
dealers. One consumer advocacy group urged the Bureau to decrease the
threshold to 5,000, asserting that the Bureau should protect as many
consumers as feasible. A consumer banking trade association urged the
Bureau not to raise the threshold above 10,000 because the proposed
threshold would allow the Bureau to supervise a more varied mix of
entities and would help to level the playing field between banks and
nonbanks.
Two trade associations and an industry participant encouraged the
Bureau to raise the threshold to 50,000. They believe that a lower
threshold might prompt some covered persons to limit their originations
to larger loans and to avoid making smaller loans, in order to avoid
the rule's coverage. Three trade associations and an industry
participant noted that many of the entities that would be larger
participants at the proposed threshold have well below 1 percent market
share and that small businesses could qualify as larger participants
under the proposed threshold. A law firm representing small businesses
urged the Bureau either to increase the threshold or to explicitly
carve out small businesses as defined by the Small Business
Administration (SBA). The commenter indicated that

[[Page 37515]]

one of its clients is a small business that would meet the threshold.
The Bureau is finalizing the threshold as proposed because it
believes that 10,000 aggregate annual originations is a reasonable and
appropriate threshold for defining larger participants of the
automobile financing market. A threshold of 10,000 aggregate annual
originations will bring within the Bureau's authority roughly 34
entities together with their affiliated companies that engage in
automobile financing. Each of these entities provides or engages in
hundreds of automobile originations each week and falls in the top 10
percent of nonbank entities in the market according to the Bureau's
estimates. They can reasonably be considered larger participants of the
market. Some entities that meet this threshold will have considerably
less than 1 percent market share, but that is due in large part to the
fragmentation of the market and does not change the fact they are
``larger'' than the vast majority of market participants.
The Bureau does not believe that the proposed threshold is likely
to have any appreciable effect on the availability of credit. As
discussed in part VI.B.2.b below, the Bureau estimates that the cost of
supervision for an entity that provides 10,000 aggregate annual
originations would be a small fraction of 1 percent of its total
revenue from one year's originations. Given the nominal cost of
supervision, the Bureau does not believe that entities will change the
types of loans and leases they offer merely to avoid the Bureau's
supervisory authority. Furthermore, should an entity that would
otherwise meet the larger-participant test adjust its offerings in
response to the rule, any effect on consumers would be mitigated by the
large number of remaining nonbank entities in the market as well as
depository institutions that provide auto financing.
The Bureau also considered a lower or higher threshold. For
example, a threshold of 5,000 aggregate annual originations would allow
the Bureau to supervise approximately 50 entities and their affiliated
companies that engage in automobile financing. While lowering the
threshold would substantially increase the number of entities subject
to supervision, it would only result in a marginal increase in the
percentage of overall market activity covered due to the relatively
small market share of entities at the lower threshold.
The Bureau has a variety of other tools that it can use to protect
consumers should concerns emerge regarding nonbank market participants
that have less than 10,000 aggregate annual originations. The Bureau
could, for example, establish supervisory authority over a particular
company that the Bureau has reasonable cause to determine poses risks
to consumers pursuant to the Bureau's risk determination rule.\123\ The
Bureau could also use non-supervisory tools if appropriate, such as
initiating enforcement investigations; coordinating with State
regulators, State attorneys general, and the Federal Trade Commission;
and engaging in research and monitoring. In light of all these
considerations, the Final Rule does not include a lower threshold.
---------------------------------------------------------------------------

\123\ 12 CFR part 1091.
---------------------------------------------------------------------------

The Bureau estimates that a higher alternative threshold of 50,000
aggregate annual originations would allow the Bureau to supervise only
the 15 very largest participants in the market and their affiliated
companies, representing approximately 86 percent of market activity. At
this higher threshold the Bureau would not be able to supervise as
varied a mix of nonbank larger participants because some firms
impacting a large portion of consumers in important market segments,
such as captive, subprime, and BHPH lending, would be omitted.
The Bureau does not believe it is necessary to raise the threshold
in order to avoid capturing small businesses as defined by the SBA or
to add an express exclusion for such entities. According to the
Bureau's estimates, few if any entities that meet the proposed
threshold have annual receipts at or below the relevant SBA size
standard, which in recent years has increased from $7 million to $38.5
million.\124\ In setting its size standards, the SBA considers a
variety of factors, such as eligibility for Federal small-business
assistance and Federal contracting programs; startup costs, entry
barriers, and industry competition; and technological change. In
contrast, the Bureau has established its larger-participant thresholds
by reference to relative participation in the market, with a view to
ensuring sufficient coverage of the market to allow it to assess
compliance with Federal consumer financial law and detect and assess
risks to consumers effectively. Because the SBA's size standards and
the Bureau's threshold are used for different purposes and targeted to
different statutory objectives, the Bureau does not need to conform its
threshold for a particular market to the most applicable SBA size
standard even if some small businesses will be larger participants. In
light of all of the considerations discussed above, the Bureau is
finalizing the threshold of 10,000 aggregate annual originations as
proposed.
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\124\ See infra note 168. As explained below, 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 entities that it identified as
potential larger participants meeting the 10,000 threshold. Based on
this review, the Bureau believes that few if any of these entities
would be small businesses under the current small business size
standard. One law firm indicated in a comment that one of their
clients is a small business that would meet the proposed threshold,
but did not identify the client. Assuming this is accurate, the
Bureau's estimates suggest that this is very much the exception to
the general rule.
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108(c) Exclusion for Dealers
The Bureau proposed to exclude from the rule those motor vehicle
dealers that are excluded from the Bureau's authority by section 1029
of the Dodd-Frank Act.\125\ The Bureau also proposed to exclude
additional motor vehicle dealers that are not subject to the statutory
exclusion and over which the Bureau has rulemaking and other authority.
Specifically, the proposal excluded 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.\126\ For the reasons
that follow, the Bureau is finalizing the exclusion for dealers with no
substantive changes.
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\125\ 12 U.S.C. 5519.
\126\ As the Bureau explained in the proposal, this exclusion
applied to certain dealers that extend retail credit or leases to
consumers without routinely assigning them to unaffiliated third
parties. However, the proposed rule included those 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. Thus, for example, a captive lender that meets
the definition of ``motor vehicle dealer'' under section 1029(f)(2)
but is predominantly engaged in the financing of motor vehicles
could qualify as a larger participant.
---------------------------------------------------------------------------

The Bureau explained in its proposal that the dealers that were
excluded by proposed Sec. 1090.108(c)(2), typically BHPH dealers, can
reasonably be considered part of a separate and distinct market. A
trade association representing the used motor vehicle industry objected
to the exclusion of BHPH dealers from this rule and stated that BHPH
dealers provide the same financial product or service as those entities
that the Bureau proposed to include. No other comments related to the
exclusion under proposed Sec. 1090.108(c) were received.
The Bureau continues to believe that it is appropriate to exclude
dealers that are identified in proposed Sec. 1090.108(c)(2) from the
market defined in this Final Rule and is therefore

[[Page 37516]]

finalizing Sec. 1090.108(c) as proposed with minor changes for
clarity.\127\ As the Bureau explained in the proposal, the Bureau
specifically has rulemaking and other authority over motor vehicle
dealers that are identified in section 1029(b)(2) of the Dodd-Frank
Act. Because such dealers engage in both selling and financing
automobiles, they set the price of the automobile and other sale terms
in addition to establishing the terms of the financing. Such dealers
use a different business model and are typically much smaller in asset
size and activity level than the entities included in this rule.
Therefore, it is appropriate and consistent with the Bureau's authority
to consider dealers that are identified in Sec. 1090.108(c)(2) in a
separate larger-participant rulemaking, should the Bureau determine it
is appropriate to do so.
---------------------------------------------------------------------------

\127\ The Final Rule clarifies that the term ``motor vehicle''
is used in Sec. 1090.108(c) as that term is defined in section
1029(f)(1).
---------------------------------------------------------------------------

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

A. Overview

The Bureau has considered potential benefits, costs, and impacts of
the Final Rule.\128\ The Bureau set forth a preliminary analysis of
these effects, and the Bureau requested and received comments on the
topic. In developing the Final 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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\128\ 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 Final Rule defines a category of nonbanks that would be subject
to the Bureau's nonbank supervision program pursuant to section
1024(a)(1)(B) of the Dodd-Frank Act. The category includes ``larger
participant[s]'' of a market for ``automobile financing'' described in
the Final Rule. Participation in this market is measured on the basis
of aggregate annual originations. A nonbank covered person engaged in
automobile financing is a larger participant of the market for
automobile financing if, together with its affiliated companies, it has
aggregate annual originations (measured for the preceding calendar
year) of at least 10,000. As prescribed by existing Sec. 1090.102, any
nonbank covered person that qualifies as a larger participant will
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.\129\
The Final Rule also includes in the definition of ``financial
product[s] or service[s]'' a new category of automobile leases, as
defined by the Final Rule, under authority granted to the Bureau by
section 1002(15)(A)(xi)(II) of the Dodd-Frank Act.\130\
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\129\ 12 CFR 1090.102.
\130\ The Final 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
changes to the affiliate aggregation provisions clarify the Bureau's
methodology for affiliate aggregation. The changes will 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 participants seeking to self-
assess could arrange to obtain information relevant to the threshold
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 will 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 Final Rule against a baseline that includes the
Bureau's existing rules defining larger participants in certain
markets.\131\ At present, there is no Federal program for supervision
of nonbank covered persons in the automobile financing market for
compliance with Federal consumer financial law. The Final 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), the Consumer Leasing Act (CLA), and
the prohibition on unfair, deceptive, or abusive acts or practices
(UDAAP) under section 1031 of the Dodd-Frank Act, as well as other
Federal consumer financial laws, to the extent applicable.
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\131\ 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
Final Rule. As described above, the Bureau has utilized the 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 Final Rule.\132\ 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.
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\132\ While the Final Rule differs slightly from the Proposed
Rule in the types of refinancings that are included as ``annual
originations'' and the types of asset-backed securitization
transactions that are excluded, the changes are intended to
effectuate what the Bureau intended in its proposal, and so should
not result in any additional costs or benefits beyond those
discussed in the proposal. Accordingly, the impacts of these changes
are not discussed here.
---------------------------------------------------------------------------

The discussion below describes four categories of potential
benefits and costs. First, the Final Rule authorizes 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

[[Page 37517]]

the results of the individual supervisory activities might also produce
benefits and costs.\133\ Third, entities might incur certain costs as a
result of their efforts to assess whether they qualify as larger
participants under the Final Rule. Fourth, including certain automobile
leases in the Dodd-Frank Act definition of ``financial product or
service'' subjects those leases to the UDAAP prohibition 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). The definition also expands 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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\133\ 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 Final Rule
generally applies to service providers to larger participants.
---------------------------------------------------------------------------

In considering the costs and benefits of the Final Rule, it is
important to note that various products or services are included in the
defined 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 automobile loan and sales volume.
Direct lending is currently dominated by traditional depository
institutions and credit unions already regulated by the Bureau and
other Federal 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.\134\
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\134\ According to Experian Automotive, of all new and used auto
financing transactions recorded in the fourth quarter of 2014,
approximately 14 percent occurred through leasing arrangements,
while the remainder used loans. See Zabritski, supra note 33, at 16.
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1. Benefits and Costs of Responses to the Possibility of Supervision
The Final Rule will subject larger participants of the automobile
financing market to the possibility of Bureau supervision. That the
Bureau will be authorized to undertake supervisory activities with
respect to a nonbank covered person that qualifies as a larger
participant does not necessarily mean the Bureau will 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 is probabilistic in nature. For example, the Bureau
will examine certain larger participants on a periodic or occasional
basis. The Bureau's decisions about supervision will 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 believes it
qualifies as a larger participant will know that it might be supervised
and might gauge, given its circumstances, the likelihood that the
Bureau will 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. In addition, an actual
examination will likely reveal any past or present noncompliance, which
the Bureau can seek to correct through supervisory activity or, in some
cases, enforcement actions. Larger participants might therefore judge
that the prospect of supervision increases 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 will
increase compliance in response to the Bureau's supervisory activities
authorized by the Final Rule. However, because the Final Rule itself
does 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 the
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 Final Rule, that response would result in both benefits and costs
to consumers and covered persons.\135\
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\135\ Another approach to considering the benefits, costs, and
impacts of Sec. 1090.108 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.
---------------------------------------------------------------------------

a. Benefits From Increased Compliance
Increased compliance with Federal consumer financial law by larger
participants in the market for automobile financing will be beneficial
to consumers who either finance the purchase of or lease automobiles,
or refinance their credit obligations related to the purchase of their
automobiles. The number of individuals potentially affected is
significant. As noted above, data from Experian Automotive for the
fourth quarter of 2014 show auto lenders holding outstanding auto loans
totaling almost $900 billion.\136\ The market is even larger when
taking into account the auto leasing market, which comprised an
additional 14 percent of the auto financing market in the fourth
quarter of 2014.\137\ Increasing the rate of compliance with Federal
consumer financial law will benefit consumers and the consumer
financial market by providing more of the protections mandated by law.
---------------------------------------------------------------------------

\136\ See supra note 79.
\137\ See Zabritski, supra note 33, at 16.
---------------------------------------------------------------------------

Several Federal consumer financial laws offer protections to
consumers who seek automobile financing as defined in the Final Rule,
including, to the extent applicable, TILA and Regulation Z, the Fair
Credit Reporting Act and Regulation V, the CLA and Regulation M, ECOA
and Regulation B, and the Gramm-Leach-Bliley Act and Regulation P.\138\
More broadly, the Bureau will examine whether larger participants of
the automobile financing market engage

[[Page 37518]]

in UDAAPs.\139\ Conduct that does not violate an express prohibition of
another Federal consumer financial law may nonetheless constitute a
UDAAP.\140\ 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 will 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.
---------------------------------------------------------------------------

\138\ 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).
\139\ 12 U.S.C. 5531.
\140\ The CFPB Supervision and Examination Manual provides
further guidance on how the UDAAP prohibition applies to supervised
entities. CFPB Supervision and Examination Manual (Oct. 1, 2012),
available at http://files.consumerfinance.gov/f/201210_cfpb_supervision-and-examination-manual-v2.pdf.
---------------------------------------------------------------------------

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 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 will also
require investment and might entail increased operating costs.
In the proposal, the Bureau stated that economic theory predicts
that fixed costs will be absorbed by providers, here the entities that
may qualify as larger participants. One commenter stated that this
prediction does not constitute broadly accepted economic theory. The
Bureau disagrees and believes that fixed costs will not be directly
passed through by providers. Canonical economic theory states that
sellers will set a price along the demand curve based on the level of
output where marginal cost equals marginal revenue. Since fixed costs
do not impact demand, marginal cost, or marginal revenue, economic
theory states that changes in these costs should not impact the pricing
decisions of existing producers.\141\
---------------------------------------------------------------------------

\141\ See, e.g., N. Gregory Mankiw, Principles of Microeconomics
284, 286-87 (7th ed. 2015).
---------------------------------------------------------------------------

Although these fixed costs are not expected to pass through to
consumers via changes in price by current providers of automobile
financing that become larger participants, consumers may be adversely
affected by increases in costs associated with the introduction of this
larger-participant rule to the extent these cost increases cause
current providers to decrease volume below the larger-participant
threshold (or to exit), deter current providers from increasing volume,
or deter entry by new providers in the future.\142\ 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. One commenter expressed this concern as well,
suggesting that smaller businesses may decrease origination volume in
favor of issuing larger loans, thus restricting consumer choice. The
extent to which this concern could come to fruition depends on the
total number of participants in the market, as well as the existing
number of covered entities. As stated earlier, the Bureau believes that
the low relative costs of additional supervision, along with the large
number of market participants in the market for automobile financing,
should minimize these concerns.
---------------------------------------------------------------------------

\142\ Alexei Alexandrov & Xiaoling Ang, Identifying a Suitable
Control Group Based on Microeconomic Theory: The Case of Escrows in
the Subprime Market (Dec. 30, 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.
---------------------------------------------------------------------------

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 covered by the Final
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 Final Rule will
result in an increase in the costs faced by larger participants, that
increase will 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. 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 the Final Rule's potential price effect, it is
important to take into account the fact that nonbank covered persons
below the larger-participant threshold will not be subject to
supervision. The costs of these nonbank covered persons will therefore
be unaffected by the definition of larger participants in the Final
Rule and so their pricing should also not be affected. To the extent
that nonbank larger participants consider raising 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 actually increasing prices.
While a shift in transactions from larger participants toward nonbank

[[Page 37519]]

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 will choose to increase their prices in response to the
Final Rule.
2. Benefits and Costs of Individual Supervisory Activities
In addition to the responses of market participants anticipating
supervision, the possible consequences of the Final Rule 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 will 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 conduct 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.\143\
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\143\ 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 will examine a number of covered persons in the automobile
financing market, the Bureau will build an understanding of how
effective compliance systems and processes function in that market.
---------------------------------------------------------------------------

b. Costs of Supervisory Activities
The potential costs of actual supervisory activities arise in two
categories. The first involves any costs to larger participants of
increasing compliance in response to the Bureau's findings during
supervisory activity and to supervisory actions. These costs are
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 is 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 will face in connection with an
examination is the cost of employees' time to collect and provide the
necessary information.\144\ The frequency and duration of examinations
of any particular entity will 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.
---------------------------------------------------------------------------

\144\ Some commenters suggested that the Bureau's estimate
overlooks non-labor costs that supervised entities may incur in
responding to examinations and other supervisory requests. The
Bureau recognizes that responding to examinations and other
supervisory requests will entail certain other costs, such as costs
of producing information electronically or in hard copy. However,
such expenses are generally minimal in comparison to labor costs,
and accordingly, the Bureau has focused on staff time in collecting
and providing information in order to provide an approximate sense
of the magnitude of the key cost involved.
---------------------------------------------------------------------------

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,

[[Page 37520]]

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 nine weeks.\145\ Assuming that
each exam requires two 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 mean hourly wage of
a compliance officer in a nonbank entity that operates in activities
related to installment lending is $33.97, and the mean hourly wage of a
lawyer in the same industry is $83.88.\146\ Assuming that wages account
for 67.5 percent of total compensation, the total labor cost of an
examination would be about $27,611.\147\ The Bureau estimates that the
cost for an entity with 10,000 aggregate annual originations per year,
with an average amount financed of approximately $22,000 per loan
origination,\148\ would be less than one-tenth of 1 percent of total
revenue from originations for that year.\149\ 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 could
provide.
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\145\ This estimate was derived at the proposal stage 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.
\146\ Bureau of Labor Statistics (BLS), Occupational Employment
Statistics, available at http://data.bls.gov/oes/ (May 2013 release
for North American Industry Classification System code 522200
``Nondepository Credit Intermediation'').
\147\ 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). Dividing the mean hourly wages by 67.5 percent yields a total
mean hourly cost (including total costs, such as salary, benefits,
and taxes). Assuming that individuals are compensated for 40 hour
work weeks, the total labor cost of an examination is calculated as
follows: [(0.1*83.88+33.97)/0.675]*40*11.
\148\ In the proposal, the Bureau used an estimated average
amount financed of $21,750 based on 2013 origination data from
AutoCount for all entities with 360 or greater loans and leases on
an annual basis. As noted below, one commenter raised a question
about the Bureau's estimated average amount financed. To ensure that
the estimate accurately reflects the nonbank market defined in this
Final Rule, the Bureau has applied the same methodology as in the
proposal but has excluded entities that are not participants in the
nonbank market defined in this rule, such as depository
institutions, which resulted in a very similar average amount
financed of $22,299. These estimates of average amount financed per
origination are based solely on loans in AutoCount for which data
are available on amount financed. The Bureau was unable to obtain
data on the average amount financed in lease transactions, but
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 the 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.
\149\ In the proposal, the Bureau estimated revenue as the sum
total of payments received for loans originated that year, assuming
zero interest rates and no defaults. The proportion of revenue was
thus $27,611/($21,750*10,000). A similar, more conservative
calculation can also be done that considers only revenue generated
from interest for an entity with 10,000 originations. Using 2013
origination data from AutoCount for which rate and term data are
available, the Bureau estimates that the average interest rate per
vehicle originated in the nonbank market defined in the Final Rule
is 6.54 percent, and the average term length per vehicle originated
in the nonbank market defined in the Final Rule is 60.42 months.
Assuming zero default and zero prepayment, the Bureau estimates that
an entity making 10,000 originations a year would receive
approximately $39 million in total revenue from interest from a
single year's originations. This is likely a low estimate because
the interest rate of 6.54 percent reflects the frequently-subsidized
low interest rates offered by the largest captive participants that
typically originate much more than 10,000 loans per year. Under
either approach to estimating revenue, the cost of an examination is
less than one-tenth of 1 percent of revenue from a year's
originations according to the Bureau's estimates.
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Some industry commenters challenged this estimate, drawing on
experiences by other companies in other industries to suggest that exam
costs for larger participants would, in fact, range from $750,000 to
$1,000,000.\150\ While the Bureau acknowledges that larger and
lengthier exams may prove costlier than the amount estimated in the
Proposed Rule, it also believes that the experience-based analogue it
uses provides a better analogue than the commenter's general cross-
industry comparison because the exams considered by the Bureau more
accurately reflect the sort of examination to which automobile
financing entities will be subject.
---------------------------------------------------------------------------

\150\ These commenters suggested that an examination might
require the participation of a compliance officer with a higher
salary than the mean hourly wage used in the Bureau's analysis. In
estimating that an examination might require a full-time compliance
officer for 11 weeks and using the mean hourly wage for compliance
officers, the Bureau did not mean to suggest that only one mid-level
person would be involved in an examination. Instead, the Bureau
recognizes that both junior and high-level staff may participate on
a part-time basis and that these staff may be drawn from different
offices within the entity. The Bureau intended its original estimate
to represent the aggregate amount of labor resources a company might
dedicate to responding to supervisory activity.
---------------------------------------------------------------------------

A law firm that represents financial services entities indicated
that one of its clients finances an average of $3,800 per transaction,
an amount approximately 83 percent lower than the Bureau's estimate,
and stated as a result that the cost of an examination relative to
total revenue would be much higher than the Bureau's estimate. The
Bureau acknowledges some entities may participate in certain segments
of the market in a way that results in a lower amount financed;
however, of the over 500 institutions in AutoCount that the Bureau
considered as participants in the nonbank market in 2013, the amount
cited by the commenter ($3,800) falls within the lowest percentile of
amount financed. Even if this remarkably low amount financed were
considered in evaluating relative costs, for an entity with the larger-
participant minimum of 10,000 aggregate annual originations the costs
would still be less than one-half of 1 percent of total revenue from
the 10,000 aggregate annual originations according to the Bureau's
estimates.
The Bureau declines to predict, at this point, precisely how many
examinations in the automobile financing market it will undertake in a
given year, as neither the Dodd-Frank Act nor the Final 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 will be supervised is
uncertain. The frequency of examinations will 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.

[[Page 37521]]

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 Final 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 Final Rule, develop new systems to count their aggregate annual
originations in accordance with the definition in the Final Rule. The
data the Bureau currently has do not support a detailed estimate of how
many nonbank entities will engage in such development or how much they
might spend. Regardless, nonbank entities will 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
does 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 will not be subject to Bureau supervision
notwithstanding those expenses. The Bureau therefore believes it is
unlikely that any but a very few nonbank entities will undertake such
expenditures.
4. Benefits and Costs of Adding Certain Automobile Leases to the
Definition of ``Financial Product or Service''
Finally, in Sec. 1001.2, the Bureau is defining the term
``financial product or service'' to include automobile leases that (1)
meet the requirements of leases authorized under section 108 of CEBA,
as implemented by 12 CFR part 23, and are thus permissible for national
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. As explained below, the Bureau believes that the benefits,
costs, and impacts to consumers and covered persons of Sec. 1001.2
will likely be small. First, Sec. 1001.2 will not extensively alter
the substantive obligations of covered persons. Second, Sec. 1001.2
will not substantially expand the number of market participants brought
under supervision as a result of the Final 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 Sec. 1001.2.
a. Benefits of Sec. 1001.2
Benefits of Sec. 1001.2 will stem from enhanced consumer
protections relating to automobile leases that will fall under the
definition. As financial products or services under title X of the
Dodd-Frank Act, such leases will 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). \151\ 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 will 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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\151\ 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.
---------------------------------------------------------------------------

Section 1001.2 also has the potential to expand supervisory
activities in two distinct ways. First, Sec. 1001.2, as incorporated
into the final larger-participant rule, 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 Final Rule. To the extent that nonbank entities in the
automobile financing market are brought under supervision as a result
of Sec. 1001.2, both consumers and covered persons will benefit. The
nature of these benefits, including from both the possibility of
supervision and actual individual supervisory activities, are discussed
above.
Second, Sec. 1001.2 could affect the scope of supervision for
other nonbank entities and certain banks and credit unions and their
affiliates.\152\ For nonbank entities in the automobile financing
market that will be subject to supervision as a larger participant even
absent Sec. 1001.2, Sec. 1001.2 will not expand the leasing
activities of such entities that will be subject to supervision.
However, Sec. 1001.2 will expand the scope of supervision for leasing
covered by Sec. 1001.2 to include compliance with section 1031 of the
Dodd-Frank Act.
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\152\ 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, student loan servicing, and international money transfer
markets. The Bureau is not aware of any significant automobile
leasing activity by these entities. Thus, the Bureau believes that
Sec. 1001.2 in itself will 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 insured depository institutions and credit unions 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 insured
depository institutions and credit unions with total assets of $10
billion or less for compliance with Federal consumer financial laws. As
noted above, although Sec. 1001.2 will not expand the scope of leasing
activities of depository institutions and credit unions that are
subject to supervision, for leasing covered under Sec. 1001.2, it will
expand the scope of that supervision to include compliance with section
1031 of the Dodd-Frank Act.

[[Page 37522]]

Again, the benefits to consumers of that expanded supervision authority
will 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
Sec. 1001.2, the Bureau believes such benefits will 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 Final Rule as a result of Sec. 1001.2.\153\ Further, for
bank and nonbank entities that will be subject to supervision even
absent Sec. 1001.2, the Bureau believes that Sec. 1001.2 will expand
only the scope of supervision of the leasing activities of such
entities. Notably, even absent Sec. 1001.2, all leasing activities of
such entities will 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 CLA.\154\ 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 will be subject
to supervision even absent Sec. 1001.2, the expanded supervision
resulting from Sec. 1001.2 will be focused on the entity's compliance
with section 1031 of the Dodd-Frank Act in connection with the
activities covered by Sec. 1001.2.
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\153\ As discussed above, some commenters have argued that Sec.
1001.2 will actually cover most, if not all, automobile leases. Even
assuming this were the case, the Bureau estimates that very few
entities will exceed the larger-participant aggregate annual
origination threshold solely as a result of their total leasing
volume. Thus, even if Sec. 1001.2 were to cover all leasing, it
would not have a significant effect on which entities are considered
larger participants.
\154\ 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), the Bureau has authority to
prescribe rules applicable to a covered person or service provider
identifying as unlawful UDAAPs 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, the Bureau could
promulgate such rules in connection with transactions for the leases
that would fall under Sec. 1001.2. The Bureau would consider the
benefits, costs, and impacts of any such rulemaking as part of its
analysis under section 1022(b)(2) 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
UDAAPs. It is not possible, however, to identify with any greater
specificity here the potential benefits to consumers or covered persons
from Sec. 1001.2 as a result of an unspecified future rulemaking.\155\
---------------------------------------------------------------------------

\155\ Section 1001.2 will also benefit consumers by expanding
the scope of certain other Bureau authorities under title X of the
Dodd-Frank Act. Perhaps most significantly, Sec. 1001.2 will 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, Sec.
1001.2 will 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 receives
from such persons. 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(b)(2) analysis for such
rulemakings.
---------------------------------------------------------------------------

b. Costs of Sec. 1001.2
Section 1001.2 will impose compliance costs on covered persons by
subjecting leasing activities that fall under Sec. 1001.2 to the UDAAP
prohibition in section 1031 of the Dodd-Frank Act. Those entities will
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 will be limited in extent.
Regarding supervision, Sec. 1001.2, as incorporated into the final
larger-participant rule, could also bring certain nonbank entities
under Bureau supervision and will affect the scope of supervision for
other nonbank entities, banks, and credit unions. With respect to
nonbanks, Sec. 1001.2 will, 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 Final Rule. To the extent that larger
participants in the automobile financing market are brought under
supervision as a result of Sec. 1001.2, such entities will 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 larger-
participant rule even absent Sec. 1001.2, Sec. 1001.2 will 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, Sec. 1001.2 will 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 will 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, and, as discussed above, the Bureau believes that few, if
any, nonbank participants in the automobile financing market will be
brought under Bureau supervision under the Final Rule as a result of
Sec. 1001.2.\156\ Similarly, for banks and nonbank entities that will
be subject to supervision even absent Sec. 1001.2, the Bureau believes
that Sec. 1001.2 will only subject the leasing activities of such
entities to slightly expanded supervision. Notably, even absent Sec.
1001.2, 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 CLA.\157\ And under
the existing

[[Page 37523]]

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 Final
Rule, the scope of expanded supervision for the limited activities that
will fall under Sec. 1001.2 will 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 will
be minimal.
---------------------------------------------------------------------------

\156\ See supra note 153.
\157\ 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 UDAAPs 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, under Sec. 1001.2, the Bureau may promulgate such rules in
connection with transactions for the leases that fall under Sec.
1001.2. 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(b)(2) for that
rulemaking.\158\
---------------------------------------------------------------------------

\158\ Section 1001.2 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, Sec. 1001.2 will
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, Sec. 1001.2 will 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 receives from such persons. 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(b)(2)
analysis for such rulemakings.
---------------------------------------------------------------------------

5. Consideration of Alternatives
The Bureau considered different thresholds for larger-participant
status in the market for automobile financing. One alternative the
Bureau considered 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 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 also considered lower thresholds, such as 5,000 aggregate
annual originations, but believes these 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 based on risk and would not necessarily examine more or
fewer entities if the rule's coverage were broader or narrower.\159\
---------------------------------------------------------------------------

\159\ Further discussion of comments on the threshold level is
provided in the section-by-section analysis of Sec. 1090.108(b)
above.
---------------------------------------------------------------------------

The Bureau also considered 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 Final 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 Final Rule. Consequently, the costs, benefits, and impacts of this
Final Rule should not depend on which criterion the Bureau uses.

C. Potential Specific Impacts of the Final 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 will become
larger participants in the market for automobile financing under the
Final Rule. Further, as explained above, the Final Rule's definition of
certain leasing activity as a financial product or service will not in
itself have any significant effect on depository institutions and
credit unions with $10 billion or less in total assets. Nevertheless,
the Final Rule might, as discussed above, have some impact on
depository institutions or credit unions that provide financing for
automobile transactions. The Final 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 requested comments that provide information
related to how automobile financing transactions affect rural
consumers, but did not receive any.

VII. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA),\160\ as amended by the Small
Business Regulatory Enforcement Fairness Act of 1996,\161\ requires
each agency to consider the potential impact of its regulations on
small entities, including small businesses, small governmental units,
and small not-for-

[[Page 37524]]

profit organizations.\162\ 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.\163\
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\160\ Public Law 96-354, 94 Stat. 1164 (1980).
\161\ Public Law 104-121, section 241, 110 Stat. 847, 864-65
(1996).
\162\ 5 U.S.C. 601-12. 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 Final Rule would apply.
\163\ 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.\164\ 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.\165\
---------------------------------------------------------------------------

\164\ 5 U.S.C. 605(b).
\165\ 5 U.S.C. 609.
---------------------------------------------------------------------------

The undersigned certified that the Proposed Rule, if adopted, would
not have a significant economic impact on a substantial number of small
entities and that an IRFA was therefore not required. The Final Rule
adopts the Proposed Rule with some modifications that do not lead to a
different conclusion. Therefore, a final regulatory flexibility
analysis is not required.
The Final Rule defines a class of nonbank covered persons as larger
participants of the automobile financing market and thereby authorizes
the Bureau to undertake supervisory activities with respect to those
nonbank covered persons. The Final Rule also defines the term
``financial product[s] or service[s]'' to include automobile leases
that (1) meet the requirements of leases authorized under section 108
of CEBA, as implemented by 12 CFR part 23, and are thus permissible for
national 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 Final Rule will 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.\166\
The final definition of larger participants of the automobile financing
market applies only to nonbank entities, so it will have no significant
impact on depository institutions or credit unions of any size. The
final definition of the term financial product or service to include
certain automobile leases will have little impact on compliance and
supervision costs for insured depositories and credit unions. The
leasing activities covered under Sec. 1001.2 will 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, if any, small banks
will experience a significant impact due to the Final Rule's change to
the definition of a financial product or service.
---------------------------------------------------------------------------

\166\ 13 CFR 121.201.
---------------------------------------------------------------------------

Regarding nonbank entities, the Final Rule adopts a threshold for
larger-participant status of at least 10,000 aggregate annual
originations.\167\ Under the size standard for the most relevant SBA
classification, i.e., North American Industry Classification System
(NAICS) code 522220, an entity engaged in automobile financing is a
small business if its annual receipts are at or below $38.5
million.\168\ The Bureau solicited comments on whether NAICS code
522220 or any other NAICS code is more appropriate for this market, but
did not receive any. 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.\169\ Based on this review, it appears
that few, if any, of the potential larger participants identified by
the Bureau's analysis meet the small business threshold
classification.\170\
---------------------------------------------------------------------------

\167\ 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. 12 CFR 1090.102.
\168\ 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 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.
\169\ To generate these estimates, the Bureau first calculated
an estimate of the average stream of interest income the 34
potential larger participants identified by the Bureau 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 five potential
larger participants with receipts from loans in 2013 that it
estimated would fall below the current $38.5 million SBA size
standard. Further market research indicated that four of these five
remaining entities likely had sufficient additional revenue from
leases, affiliate activity, or other sources such that their 2013
annual receipts also exceed the relevant size standard. Upon further
review of information considered at the proposal stage and
additional market research, the Bureau was not able to determine
whether the final remaining entity would have met the relevant size
standard in 2013.
\170\ The Bureau's analysis concluding that few, if any,
potential larger participants meet the relevant size standard is
described in note 169 above. 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 Final Rule's technical amendments to Sec. Sec.
1090.104(a) and 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.
---------------------------------------------------------------------------

Considering the limited public information available for several of
the smallest potential larger participants, the Bureau requested
comment on the impact of the Proposed Rule on small nonbank entities
and solicited data that may be relevant to this analysis. A law firm
that represents financial services entities stated that one of its
clients, which the law firm did not name, had approximately $30 million
in total receipts during fiscal year 2014, while generating sufficient
origination volume to constitute a larger participant under the
Proposed Rule. The Bureau acknowledges that it is possible that a few
firms that qualify as a small business could also meet the threshold as
a larger participant due to small loan amounts, short term lengths, or
other factors. However, the Bureau's analysis indicates that this will
not be the case for a substantial number of small entities. In order to
qualify as a small business and a larger participant according to the
Bureau's estimates, an

[[Page 37525]]

entity would need to maintain a portfolio featuring a total number of
originations at or close to the threshold, with the typical loan
featuring some combination of below average rate, term length, and
amount financed.\171\ The Bureau therefore maintains its estimate that
very few, if any, small businesses will be classified as larger
participants of the automobile financing market under the Final
Rule.\172\
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\171\ For example, an institution with exactly 10,000 aggregate
annual originations at an interest rate and amount financed at the
median among nonbank participants in 2013, along with a loan term in
the fifteenth percentile, would still be estimated to generate
receipts above the current $38.5 million SBA size standard.
\172\ 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/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_52SSSZ4&prodType=table. Thus, even
if a few small firms were classified as larger participants, they
would constitute less than 1 percent of the small firms in the
industry under that NAICS code.
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Section 1001.2(a) will 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, under Sec. 1001.2 small nonbanks will have to comply with
the UDAAP prohibition under section 1031 of the Dodd-Frank Act when
providing automobile leases covered under Sec. 1001.2. 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
CLA. Additionally, as explained above, there are likely to be few, if
any, small nonbank businesses in the automobile financing market that
will be subject to supervision irrespective of Sec. 1001.2. To the
extent that any small nonbanks are larger participants under the Final
Rule, the Bureau believes that Sec. 1001.2 will 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 will not be significant. Notably, even absent Sec. 1001.2, all
leasing activities of such entities would be subject to supervision by
the Bureau for compliance with the enumerated consumer laws, including
the CLA.\173\
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\173\ 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.
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Additionally, if a larger participant qualifies as a small business
under the $38.5 million SBA size standard, the Final Rule will not
result in a ``significant impact'' on the entity. The Final Rule will
not itself impose any business conduct obligations beyond those
described above regarding the automobile leases defined under the Final
Rule as financial products or services. Furthermore, the Bureau's
supervisory activity will have very little economic impact on a
supervised entity. When and how often the Bureau will in fact engage in
supervisory activity, such as an examination, with respect to a larger
participant (and, if so, the extent of such activity) will 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 will be supervised is uncertain.
Moreover, if supervisory activity occurs, the costs that will result
from such activity are expected to be minimal in relation to the
overall activities of a larger participant.\174\ Hence, the Final Rule
will not have a significant economic impact on a substantial number of
small entities because the Final Rule will not impose any significant
business conduct obligations on the defined class of larger
participants and the cost of supervisory activities will be nominal in
relation to the revenue of a larger participant whose annual revenue
fell at or below the $38.5 million SBA size standard.\175\
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\174\ As noted in part VI.B.2.b above, the Bureau estimates that
the cost of participation in an examination would be less than one-
tenth of 1 percent of the total revenue generated from one year's
originations for an entity at the threshold of 10,000 aggregate
annual originations. Even if the unusually low amount financed
suggested by a commenter is used in the analysis, the Bureau's
estimates suggest that an examination would still require less than
one-half of 1 percent of total revenue from one year's originations
for an entity at the threshold of 10,000 aggregate annual
originations.
\175\ Because the Final 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 of 10,000 or more. The Bureau
anticipates no more than a very few such cases, if any, in the
automobile financing market.
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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 Final 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 potential larger participants of the
market for automobile financing would result in a significant economic
impact on a substantial number of small entities.\176\
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\176\ 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
approximately 34 potential larger participants and their affiliated
companies 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.
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Accordingly, the undersigned certifies that the Final Rule will not
have a significant economic impact on a substantial number of small
entities.

VIII. Paperwork Reduction Act

The Bureau has determined that this Final Rule does 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 Parts 1001 and 1090

Consumer protection, Credit.

Authority and Issuance

For the reasons set forth in the preamble, the Bureau adds 12 CFR
part 1001 and amends 12 CFR part 1090, to read as follows:

[[Page 37526]]

0
1. Add part 1001 to read as follows:

PART 1001--FINANCIAL PRODUCTS OR SERVICES

Sec.
1001.1 Authority and purpose.
1001.2 Definitions.

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

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 automobile
is 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
2. 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).

Subpart A--General

0
3. 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.
* * * * *

Subpart B--Markets

0
4. Section 1090.104 is amended by revising paragraph (iii)(D) of the
definition of ``Annual receipts'' to read as follows:

Sec. 1090.104 Consumer reporting market.

(a) * * *
Annual receipts* * *
(iii) * * *
(D) The annual receipts of a formerly affiliated company are not
included in the annual receipts of a nonbank covered person for
purposes of this section, 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
5. Section 1090.105 is amended by revising paragraph (iii)(D) of the
definition of ``Annual receipts'' to read as follows:

Sec. 1090.105 Consumer debt collection market.

(a) * * *
Annual receipts* * *
(iii) * * *
(D) The annual receipts of a formerly affiliated company are not
included in the annual receipts of a nonbank covered person for
purposes of this section 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. 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 (i)(A)(1) of this
definition that are secured by an automobile, and any subsequent
refinancings thereof that are secured by an automobile; and
(4) Purchases or acquisitions of obligations described in
(i)(A)(1), (2), or (3) of this definition.
(B) The term annual originations does not include:
(1) Investments in asset-backed securities; and
(2) Purchases or acquisitions of obligations by a special purpose
entity established for the purpose of facilitating asset-backed
securities transactions if the purchases or acquisitions are made for
the purpose of facilitating an asset-backed securities transaction.
(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) of this section) 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 or engaging in 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) of this section, a nonbank covered person that engages in
automobile financing is a larger participant of the automobile
financing market if the person has at

[[Page 37527]]

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 Bureau's authority 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 (as that term is defined in 12
U.S.C. 5519(f)(1)), the leasing and servicing of motor vehicles, or
both.

Dated: June 5, 2015.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2015-14630 Filed 6-29-15; 8:45 am]
BILLING CODE 4810-AM-P