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.
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