CFPB Zeros In on Indirect Auto Lending

The Consumer Financial Protection Bureau made its first regulatory move in the auto finance sector yesterday as the bureau released a guidance bulletin aimed at dealer reserve and potential discriminatory practices. The bulletin provides compliance guidance in accordance with the Equal Credit Opportunity Act and its implementing regulation, Regulation B. 

The guidance applies to all indirect auto lenders, including depository and nonbank institutions, which allow dealers to raise consumer interest rates and reward dealerships with a portion of the increased interest revenues, known as dealer reserve or dealer participation. CFPB director Richard Cordray stated yesterday that lenders offering auto loans via dealerships are accountable for illegal, discriminatory pricing, and that the bulletin was meant to offer guidance to those lenders within the agency’s authority on how to address the fair lending risk.

The CFPB said in the bulletin that it found indications that dealer markups, which tend to increase loan interest rates by 1% or 2%, may be discriminatory toward minorities, costing them tens of millions of dollars.

“Consumers should not have to pay more for a car loan simply based on their race,” he said. “Today’s bulletin clarifies our authority to pursue auto lenders whose policies harm consumers through unlawful discrimination.”

Richard Hunt, president and chief executive of the Consumer Bankers Association, released a statement saying that the organization looks forward to working with the CFPB and other regulators to protect consumers. “CBA and our members have a deep and abiding commitment to fulfilling the financial needs of consumers and have zero tolerance for discrimination, he said. “This is a bedrock principle throughout the banking industry across all products. … Unfortunately, Congress dealt the American consumer a real clunker by not guaranteeing all consumers are protected equally at all points of purchase.”

Created after the 2008 financial crisis, the CFPB oversees financial institutions with more than $10 billion in assets, but it does not have the ability to regulate, investigate, or sue dealerships. Dealers are concerned that a clampdown such as the one alluded to in yesterday’s bulletin could decrease the payments they get for arranging financing, a vital part of profits since margins on new cars have decreased the past few years.

According to Bloomberg, the bureau reportedly sent letters earlier this year to at least four auto lenders forewarning them that they could face charges for such infringements, though the CFPB has not confirmed sending those letters. It is not known which auto lenders received the warnings.

The American Financial Services Association said in a statement yesterday the organization “intends to work with the CFPB for a solution that fairly treats consumers, protects their access to credit and choice, and reasonably compensates dealers for the value they provide.”