In 2013, the Consumer Financial Protection Bureau (CFPB) issued regulations holding financial institutions responsible for discriminatory lending practices at dealerships. The rules were based on fair lending requirements under the Equal Credit Opportunity Act (ECOA) as they related to the practice of dealer markup. While intended to prevent creditors — and dealers — from any type of credit discrimination based on race, nationality, or financial status, the ruling has had wide-ranging impacts well beyond its intent.
Historically, most banks and captive finance companies paid dealers a portion of the loan interest rate, capped around 2 percentage points. But dealers could negotiate that rate with their lenders, prompting the CFPB to perceive an opportunity for racial bias. After the ruling, several lenders instituted a flat-rate system, creating a fixed framework for dealers and limiting the negotiation.
Auto dealers were critical of the flat-fee system, indicating it would strip away flexibility to use interest rates as a negotiating tool with consumers as well as increase revenue with their lending partners. The National Automobile Dealers Association was a particularly strong critic, stating that the ruling would weaken competition, drive up the cost of credit, and ultimately negatively impact consumers.
While the CFPB’s intent to protect certain groups from disproportionately high interest rates might have been noble, its effects have not been good for lenders, dealers, or consumers. Millions of dollars have been paid to the CFPB over the years by financial institutions found to be in violation of the regulations. Other lenders continue to tweak their systems in an attempt to give dealers more flexibility. Dealers have seen a secure revenue stream virtually disappear; replaced with velvet handcuffs hampering their ability to meet the financing needs of their customers.
While this issue will likely linger into the first quarter of 2018, what steps should lenders take in the meantime?
~ Continue to strengthen relationships with dealer principals and F&I teams. Ensure your partners clearly understand your current lending framework,
~ Place higher value on those deals with F&I products attached. Chances of discrimination — or — default are greatly reduced.
~ Consider implementing strategic, complimentary consumer protection products to your auto loans to increase native revenue streams and differentiate your loans with dealers and consumers.
~ Keep a close eye on compliance processes, and toe the line on each deal that crosses your desk.
Administrators such as EFG Companies can bring you up to date on the latest F&I products, methods of building strong dealer relationships, and methods for implementing sound compliance systems. Fortify your business with EFG Companies. Contact us today to learn how our solutions provide the greatest return to you and your dealership partners.
