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Car Dealers Fight Back Against CFPB Auto Financing Rule

WASHINGTON — Auto dealership advocates are warning that costs will rise for borrowers if the Consumer Financial Protection Bureau presses banks to curtail auto loan markups determined by dealers.

The warning followed the CFPB's bulletin this week that said banks are responsible for discrimination if their partner dealers mark up the interest rates on loans for minority borrowers or engage in other fair lending abuses. The agency is encouraging lenders to adopt a flat-fee model for dealer compensation.

But dealer industry representatives said doing so would hurt competition and ultimately boost car prices.

"The dealer-assisted financing model (indirect auto lending) has been enormously successful in both increasing access to, and reducing the cost of, credit for millions of Americans," the National Automobile Dealers Association and the National Association of Minority Automobile Dealers said in a joint statement released late Thursday. "The CFPB's attempt to eliminate the dealer's ability to discount the APR that it offers to consumers will only weaken the consumer's ability to secure financing at the lowest possible cost."

The CFPB said Thursday that internal research showed a disparity in interest rate markups for minorities, particularly African Americans and Hispanics. The agency does not have authority to supervise auto dealerships directly, so it instead is cracking down by effectively forcing lenders to oversee how their partners mark up loans and whether they discriminate against certain borrowers.

"Such discrimination may not be consciously intended, but for consumers who are disadvantaged by these policies, the result is the same," CFPB Director Richard Cordray said at the National Community Reinvestment Coalition annual conference Friday. "We cannot afford to tolerate practices, intentional or not, that unlawfully price out or exclude whole segments of the population from the credit markets."

Cordray received a standing ovation at the NCRC conference and many other consumer advocates have praised the guidance.

"This is a bedrock principle throughout the banking industry across all products," said Richard Hunt, president and CEO of the Consumer Bankers Association, in a statement issued Thursday. "We look forward to working with the CFPB and all our regulators to ensure every consumer is protected."

Auto dealer advocates also supported the CFPB's anti-discrimination approach, but they questioned the research that prompted the agency to target markups.

The CFPB "is relying on a theory of discrimination that is based on a statistical analysis of past transactions - not intentional conduct — and the CFPB has not provided any information about how it is conducting its analysis," said the national auto dealers associations. "Without such basic information as how the CFPB is identifying different groups of consumers, how it is controlling for factors that can affect finance rates but are unrelated to the consumer's background, and what constitutes a finding of disparate impact, one can have little confidence that the CFPB is conducting its analysis in a statistically-reliable manner."

Industry representatives have said the research-gathering on consumer demographics between the auto dealers and lenders has cracks, often leaving regulators to depend more on inconsistent bank proxies.

"The available name and geography proxies are ineffective in identifying the race of the borrower," said Andrew Sandler, a partner with BuckleySandler, in a recent interview with American Banker.

The CFPB's guidance did not address the aggregate proxy methodology that banks should use to test for discrimination at particular dealerships. But Kenneth Rojc, managing partner of the auto finance group at Nisen & Elliott LLC, says that will be next for the agency.

"The CFPB did announce they are looking at coming out with specific guidance on proxy methodology and the industry is eagerly awaiting that," he said, noting some banks have already begun implementing restrictions on dealerships. Once clear methodology is released, "banks will be able to fashion and construct compliance management systems to achieve the goals the CFPB has established."

Regardless of the guidance, consumers still have the option of going to their lender directly or negotiating for a lower rate at the dealership.

But dealer advocates argue the dealer-assisted financing is more convenient and competitive. They pressed the CFPB to rethink the guidance and take a more traditional rulemaking approach by seeking public comment as well as input from other regulators like the Federal Reserve Board and Federal Trade Commission.

"The guidance issued by the CFPB today attempts to force auto finance sources into changing the way they compensate dealers without any indication that the Bureau has examined the effect this change could have on the cost of credit for consumers," stated the NADA and NAMAD. "This anti-competitive approach is not in the interests of consumers and should not be accomplished through guidance and enforcement actions that lack transparency, the opportunity for public comment, and the benefits of a data driven analysis into the effects they would have on consumers and the automobile financing marketplace."


(11) Comments



Comments (11)
I agree with the auto dealer's points because this finance rule is truly worthless and not keeping their rights. Since the last few years auto dealers have gone through extreme rise and fall, but at present the industry is at its stable position. It will weaken the customer's ability to opt low cost financing service being provided by dealers.
Posted by gilbertosims | Monday, April 13 2015 at 9:31AM ET
PRLynn, I supposed the CFPB will go out of business the day all consumers no longer place themselves at the mercy of for-profit financiers who, as everyone here seems to agree, are not entirely honest. Interesting how some think the CFPB is all about government when it's really about honesty. By their logic, the U.S. Marines are also all about government instead of national security.
Posted by mdillon | Friday, April 26 2013 at 11:46AM ET
What is the CFPB going to do when all of the dealerships leave the banks and go exclusively with the credit unions?
Posted by PRLynn | Friday, April 12 2013 at 1:49PM ET
It is difficult to look at all the attempts to regulated responsbile lending without giving some thought to poorly our education system prepares consumers to research or judge for themselves those terms and conditions that represent predatory practices. Maybe less time on valuing diversity could be spent with more time training students how to evaluate terms and conidtions and where to seek assistance.
Posted by JPJC | Friday, March 29 2013 at 7:59AM ET
Sandypoint is accurate. It used to be that the dealer net profit reported to his manufacturer was equal to the F&I income. This may have changed but the mission of the F&I department has not changed. It can be contained by strong contract purchase programs by good bankers; but, that constraint is often warped because new, incompetent bankers try to get fast loan growth results by permitting discriminatory practices. As for walking into a bank branch and getting a direct loan at the contract buy rate, good luck! And for the argument that banks price by credit risk premiums spreads, I have been bashing Wells Fargo, US Bank, Regions Bank, 5th-Third in these comment areas for a year about how they are earning 1000% ROE on their payday lending customers at risk premiums that cannot be justified and no one has challenged me yet. And I have communicated directly to their boards of directors and none has challenged the accuracy of my statements. So those of you in the indirect lending area that are "concerned" - I suggest that you start by looking in-house and within the industry to see where this predatory behavior started. Instead of the CBA asking for the industry to clean-up this mess via self-regulation, they are looking to see how to "lobby Congress " around it. the industry is guilty as charged.
Posted by frankarauscher | Monday, March 25 2013 at 10:49AM ET
MY former neighbor was sales manager of a major metro auto dealership. He prided himself on claiming "we can give you a great price on a car, because we will eat your lunch on financing in the back office". This has been the business model for many dealerships for decades, and carries the same attributes as the yield-spread premium debacle outlawed by Dodd-Frank. The only difference here is there is no law directly addressing it, and CFPB will have to prove disparate impact. The unwary (whether of protected group or not) will likely pay more under a dealer-financing scheme.
Posted by Mr. Sandypoint | Monday, March 25 2013 at 9:21AM ET
I (Scotttish/Irish man over 60) recently purchased a new car. My credit rating was terrible thus the cost per month was double someone who has good credit. Before you start screaming- the degree of risk in the main criteria in making a loan, I waa high risk, it doesn't matter how I got there or whether I feel I deserve the low credit rating what matters is the lender makes a decision based upon risk. If you don't like it you are free to not borrow the money.

I'm always disturbed when some paint a boad brush and determies there is discrimination based upon race. Let's step back and examine each idividual's credit rating before making such a statement.
Posted by btobey1 | Sunday, March 24 2013 at 7:24AM ET
Good points. But it's lose-lose-lose-win. Banks, car dealers and consumers lose. Our government has more control in picking winners and losers in what was once a free market. Big win for them.
Posted by My 2 Cents | Friday, March 22 2013 at 4:31PM ET
Not exactly. Dealers mark rates up on all customers to the extent they can. The CFPB is not outlawing that but they have apparently concluded on a statistical analysis of proxies because there's no HMDA-like data here that protected classes get marked up more. There's flaws in the logic and the analysis but their goal is to move dealers to a flat fee per transaction pricing that would be less favorable to dealers. Trying to make the lenders who buy the contracts from the dealers the cops to police disparate impact is a risky proposition and it won't be the lenders who push back on all this. I suspect the dealers will attempt to lobby Congress to reign the CFPB back in on this indirectly regulating who they can't directly regulate and that may get accomplished regardless of how the CFPB's other political issues do or do not get resolved. In the meantime, consumers will be the losers because lenders will withdraw from the market based on the onerous compliance requirements from the CFPB for rate participation programs while dealers will refrain from sending their paper to lenders who flat fee price. An all around lose-lose.
Posted by randyh44 | Friday, March 22 2013 at 4:24PM ET
This is just the tip of the iceberg in regard to the Federal Government mandating not only who will receive loans from the Credit Industry, but the rate at which they will apply. I worked out a centrally planned and operated banking industry in Central Europe in the early and mid 90's compliments of the USG,and believe me it was a mess to fix. Now ironically we have the Federal Government basically driving in the direction of the Central European centrally planned banking system which was so egregiously bad!!! But - Government and Politicians always know what is best - FOR THEM!!
Posted by rmartin47 | Friday, March 22 2013 at 2:01PM ET
Dealerships don't mark rates up or down based on race. Period. Talk to any live, breathing banker or F&I guy. If anything, they move heaven and earth to make loans to minorities that they'd never make for a non-minority. The fear of being accused of discrimination is so great, they err on the side of being too lenient. Remember how this works? You mark up or down based on credit history and scores. If you have no history to show you should absolutely be trusted to pay back and on time, you get a higher rate. Just like I did 30 years ago on my first car loan. Or, if you actually have a history of very late payments and bad debt... you pay more. That's how the system works folks. Or, I guess, that's how it once worked. We're now apparently in a world of class-envy, race-baiting, and bank-bashing. Give these guys credit (pardon the pun) however. When in 5 short years, you can grab control of both healthcare and banking, and get most of the media to thank you for it... you're gooood.
Posted by My 2 Cents | Friday, March 22 2013 at 1:38PM ET
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