At least four banks have been told by the Consumer Financial Protection Bureau that they may be sued over seemingly discriminatory vehicle loans and interest-rate markups from auto dealers.
Three people familiar with the matter, speaking anonymously to Bloomberg since the issue has not been made public, said that the CFPB sent at least four banks letters telling them they have 15 days to give an explanation. The letters signify that the bureau believes those banks violated the 1974 Equal Credit Opportunity Act, which bars discrimination in lending.
Auto lending has bounced back as the economy improves, and the Federal Reserve found that new loan originations reached $85.8 billion in 3Q12. Part of that increase stems from higher demand for cars and credit availability, according to Melinda Zabritski, director of automotive finance at Experian.
Data compiled by Experian in 3Q12 found that no lender controlled more than 6% of the auto-loan market. The top three lenders during that time were Wells Fargo with 5.9%, Ally Financial (5.54%), and JPMorgan Chase & Co. (4.94%).
When the CFPB was created by the 2010 Dodd-Frank Act, car dealers were exempt from the agency’s authority after they overcame opposition from the Obama administration. Dealers are instead regulated by the Federal Trade Commission.
On Feb. 5, CFPB director Richard Cordray said that there have been “a number” of grievances about auto finance. During a conference call with credit unions, he said that the bureau is investigating institutions’ auto lending in addition to mortgages, credit cards, and student loans.
The potential lawsuits relate to indirect lending, specifically, “dealer markup,” as it’s called by consumer groups. The Center for Responsible Lending, a Durham, N.C.-based consumer advocacy group, likened dealer markups to yield-spread premiums, which rewarded mortgage originators though home loan interest rates, a practice banned by the Fed in 2010.
Learn more about this at Auto Finance Risk Summit 2013, register here.
Frank, most of the companies I’m familiar with in indirect do try to approach collections from a customer service perspective. My former company even had a group that was designed to help distressed customers work through budgeting issues, etc. It is a fine line though, as you run the risk and liability of taking on the role of a consumer credit counselor.
Marcie, we are not doing anything different on the reconditioning front. Our strategy is to be as consistent as possible from start to finish. I have seen companies overreact to auction trends, which are merely a reflection of what dealers were doing yesterday. On many of these types of issues, the market has changed by the time you can implement an organizational change.
HMMMM – one of the three biggest auto lenders may also be the largest bank payday loan lender. Their payday loan practices are also “seemingly discriminatory” wherein the risk premium spread probably could not be related to the real risk (the bank has refused to provide any data to the contrary to its shareholders). Perhaps this bank needs close scrutiny by CFPB in all their consumer lending products.
Just another case of political bullying! Indirect lending is by nature once removed by the lender from predatory practices. I had been thru several of these witch hunts in wholesale mortgage and the results were always the same. The originator universally charged the additional costs to the consumer and the majority of abusers were of like ethnicity. The audit proved that an originator with common interests and social economic origins were more likely to abuse. It’s just not sexy and has no political ammunition to admit social cannibalism.
This just came in.
CFPB Warns Banks About Questionable Auto Loans, Bloomberg Reports
The U.S. Consumer Financial Protection Bureau (CFPB) has alerted at least four banks that they may face lawsuits over vehicle loans and interest-rate markups by auto dealers that appear discriminatory, according to Bloomberg.
The banks, which received letters from the CFPB last week, have 15 days to provide an explanation of the practice, according to the report.
The letters indicate that the banks may have violated the Equal Credit Opportunity Act, which bars discrimination in lending. They also suggest that the CFPB may be willing to sanction banks over mark-ups by auto dealers, which were excluded from the bureau’s supervision in the 2010 Dodd-Frank Law.