Some regulators within the Consumer Financial Protection Bureau originally wanted to ban dealer reserve outright, but over time the CFPB decided on a more in-between approach, CFPB Director Richard Cordray told the House Financial Services Committee in a hearing on Tuesday.
“What we have found is, it is a somewhat more complex problem than maybe we thought it was,” Cordray said. That may be stating the obvious, but in the face of withering political opposition, the CFPB has played its cards close to the vest. That made Cordray’s statements this week something of a revelation.
Cordray also confirmed that the CFPB would like to see recent consent orders with Fifth Third Bank and American Honda Finance Corp. serve as a model for other lenders to follow. In the consent orders, the lenders agreed to limit but not eliminate dealer reserve.
Until recently the CFPB continued to try and get lenders to eliminate dealer discretion in setting dealer reserve, often called dealer markup, in favor of flat fees or some other form of compensation where dealers had no discretion over consumer interest rates. The CFPB maintains that dealer discretion can lead to higher rates for legally protected groups, especially minorities. That so-called “disparate impact” amounts to illegal discrimination, the CFPB says.
However, with a couple of exceptions lenders have stuck with dealer reserve — even Ally Financial Inc., after the CFPB and the U.S. Department of Justice socked Ally with a $98 million consent order in December 2013.
Cordray has now tacitly admitted the bureau has decided to settle for lower ceilings on dealer reserve instead of eliminating it completely. “I think our consent orders … have signaled to the industry we have a possible way to solve this on a global basis, and that would be a good thing,” he said in the committee hearing.
The formal reason for the hearing was so Cordray could ceremonially hand over the CFPB’s semiannual report. However, the hearings are also an occasion for committee members led by Chairman Jeb Hensarling (R-Texas) to rake Cordray over the coals. Cordray did get a lot of hostile questions, mostly from Republicans, but also a handful of admiring remarks, mostly from Democrats.
In a follow-up phone interview on Wednesday, a spokesman for the American Financial Service Association said AFSA and its members are reviewing the details of the Fifth Third and Honda Finance consent orders. The lender group is no fan of the CFPB, but AFSA reacted to the latest consent orders with less overt hostility than it has shown in the past.
“If there are elements of a settlement that make sense from a business perspective, then everybody — both regulators and industry — wants to get this issue behind us,” said Bill Himpler, AFSA executive vice president.
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