For the past couple years, dealers have been standing on the sidelines watching lenders and regulators go to head to head on fair lending issues. Since late last year, though, dealers ― who are officially exempt from Consumer Financial Protection Bureau oversight ― have slowly been drawn into the match, and now they’re now gearing up for the latest bout.
At the recent National Automobile Dealers Association convention in New Orleans, conversations about compliance overheard in elevators, along sidewalks, and even at a French Quarter oyster bar overshadowed stories of vibrant dealer performance, as players in the market discussed how to be best prepared when the CFPB (www.consumerfinance.gov) comes knocking. In a lively speech, NADA’s incoming Chairman Forest McConnell III told members that the Washington, D.C.-based organization is working through the tough regulatory and legislative changes. In an effort to appease government concerns, NADA (www.nada.org) unveiled details of its new Fair Credit Compliance Policy and Program.
The move comes on the heels of a Fitch Ratings (www.fitchratings.com) report last month that says compliance requirements will likely raise regulatory costs for lenders in 2014 and could lead to the elimination of dealer markups altogether. NADA’s new compliance program template seeks to avoid such a move.
“As CFPB has stated, there are many ways to solve this problem, and we’ve found one,” NADA Senior Director of Legislative Affairs Bailey Wood told Auto Finance News.” We have found a way to take care of any disparate impact discrimination by having an explained reason other than race as to why an auto loan was discounted.”
Wood said the CFPB fails to consider that the rate a consumer pays might have more to do with legitimate business concerns, such as a lower dealer participation rate, a consumer who can only pay a fixed amount per month, or an incentive offered by a competing dealer. The NADA plan would have dealers establish a standard wholesale buy-rate markup amount for all customers to avoid any disparate impact discrimination. Seven exceptions ― the same ones used in Department of Justice (www.justice.gov) discriminatory lending settlements with a pair of Philadelphia dealerships in 2007 ― could justify lowering, but not raising, the markup rate. One of the factors is to meet or beat a competitor’s rate.
Despite NADA’s efforts, at least one consumer watchdog group is wary that the changes will fall short. “We believe that any system where a dealer has discretion over interest rates will ultimately lead to discriminatory impact,” said Chris Kukla, senior vice president at the Center for Responsible Lending (www.responsiblelending.org).
A January CRL survey of more than 900 car buyers found that African Americans and Latinos attempt to negotiate loan pricing more often than whites, yet white car buyers ― even those who didn’t haggle ― reported lower interest rates. The report charged that the disparities “appeared even after controlling for risk factors such as credit score and loan-to-value ratio, as well as loan characteristics, neighborhood demographics, and geography.”
Kukla thinks the NADA program fails to solve the bigger issue since it still allows dealers to influence interest rates.
But supporters of the NADA plan say it goes a long way toward meeting the concerns raised by the CFPB. And some question the CRL’s survey findings. “To put the new CRL data up as any sort of meaningful analysis is ridiculous,” Bill Himpler, AFSA’s executive vice president for federal government affairs, told AFN. “At the end of the day, what we’re talking about is consumer access to affordable credit.”
Randy Henrick, associate general counsel for Dealertrack Inc. (www.dealertrack.com), called NADA’s proposal “very viable” because it calls for a standard wholesale buy-rate markup amount for all customers. Henrick told Auto Finance News that the Department of Justice had effectively endorsed the proposal as a way to manage the disparate impact risk in discretionary pricing, at the CFPB Auto Finance Forum in November 2013.
“For example, suppose a lender set up a minimum income requirement for all loans,” he said. “That might have a disparate impact on women who generally make less than men. The creditor could show a legitimate purpose that income correlates with likelihood of payment in underwriting. The burden would then shift to the regulator to show the legitimate business purpose could be achieved by an alternative means having less of a disparate impact, for example using a debt-to-assets ratio.”
Unlike with mortgages, in which consumers specify ethnicity, the CFPB determines disparate impact by relying on proxy methodology that analyzes names and ZIP codes. In the auto lending sector, the CFPB is essentially policing the people who underwrite the paper, not the dealers who make the loans. “[Lenders] never even see the actual customer,” Himpler said, adding that caps have been in place since the 1990s and dealers, largely, abide by those caps.
The NADA program focuses on standard participation rates, meaning that essentially every dealer gets the same rate. “It’s just like when a consumer walks into Wal-Mart and buys a pack of gum,” NADA’s Wood said. “The same profit Wal-Mart makes on Consumer A, the store will also make from Consumer B.”
CREDIT SCORE DISCREPANCIES
Dealers may still charge consumers different rates, though, because of varying consumer credit histories. “My credit score is unique as is yours,” Wood said. “How do you compare somebody like me with somebody like you? We’re in different situations, cities, we have different incomes or credit histories, I have a lot of college debt I’m paying off; you may have none.”
In a 2007 report to Congress, the Federal Reserve Board (www.federalreserve.gov) said that credit scores consistently relate to estimates of loan denial and loan pricing. That same study reported that blacks appear to “incur somewhat higher interest rates on automobile and installment loans than non-Hispanic whites; and Asians incur interest rates that, on average, are typically lower than, or about equal to, those paid by non-Hispanic whites for every category of loans for which interest rates could be estimated.”
But, the FRB report also said evidence shows that blacks, Hispanics, single people, those younger than 30, and people residing in low-income or predominantly minority census tracts have lower credit scores, on average, than people in other subpopulations defined by race or ethnicity, age, or location.
The report concludes that because individuals with identical items in their credit records receive the same credit score, population differences in scores must stem from average differences in information in their credit records, such as differences in the incidence of serious delinquencies. Groups with lower average scores tend to have had a higher incidence of payment problems on credit obligations, collection actions, and public record items such as garnishment and bankruptcy, according to the Fed.
But what does that have to do with dealer participation? Wood said that CFPB reviewed auto loans originated in a 16-month period and found that the dealer participation rate is different for minority and non-minority customers. In response to Congressional queries last November for more clarity on its methodology, the CFPB said it had based its findings on patterns detected through public records such as a database of names from the Social Security Administration and demographic data from the U.S. Census Bureau.
NADA is trying to come up with a solution that deals with the problems of unintentional discrimination. Wood said the group was not questioning whether there’s discrimination, but was asking for proof.
Meanwhile, critics say CFPB’s “disparate impact” theory under the Equal Credit Opportunity Act is questionable because the plain language of ECOA does not support such a theory, it only supports “disparate treatment,” which is intentional discrimination.
Dealertrack’s Henrick thinks the NADA program will be successful alleviating those concerns. “All customers will get the same markup of the wholesale rate unless one of the seven exceptions that have been approved by the Justice Department is present,” he said. And it will hold up in court if ever challenged, he added.
NADA has sent the report to lenders for review and is awaiting response from the CFPB. A CFPB spokeswoman declined comment on NADA’s compliance program.