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Auto Loan Reform Is A Tall Task

For well over a year, the Consumer Financial Protection Bureau and the U.S. Justice Department have confronted auto lenders and dealerships about the discretionary markups that car sellers add to the price of loans.

At issue is the effect of the practice on minorities.

The CFPB and Justice have been investigating instances where legally protected classes of borrowers, such as racial minorities, may have paid larger markups than other consumers with similar credit profiles. In December, the CFPB reached a $98 million settlement with Ally Financial, one of the nation's largest automobile lenders, in a deal that offered incentives for the company to switch to a flat-fee pricing model.

Under a flat-fee system, auto dealers would receive a fixed amount of compensation for each loan, rather than a sum that varies depending on the outcome of their negotiations with each car buyer.

But despite the pressure to switch to flat fees, Ally CEO Michael Carpenter made clear in recent news reports that his company will stick with the industry's longstanding way of doing business.

"We are not going to be the Trojan horse for driving industry change," he said in strongly worded remarks to the trade publication Automotive News.

"That is obviously not what the CFPB wanted to hear. They thought we were going to cave," he was quoted as saying.

CFPB officials say their goal is not to end the markup system, which is sometimes called dealer rate participation. The bureau has suggested other options that would also remove discretion from the auto dealers.

"What we think is problematic is when, if creditworthy determination has been made and there's a rate that is gauged, that somehow that rate will be pushed up because of financial incentives for people to push that up higher at the expense of the consumer," CFPB Director Richard Cordray said during congressional testimony earlier this year.

According to the December consent order with Ally, the average African-American car buyer who received an Ally loan paid more than $300 in additional interest over the course of the loan's term than a similarly situated white borrower.

The consent order gave the Detroit lender an unpalatable choice. The company could either switch to a system that takes pricing discretion away from the auto dealers, or it could implement a monitoring program that may require Ally to write checks on a rolling basis to any minority borrowers who are deemed to have paid too much.

Ally is choosing the latter option. Says an Ally spokeswoman, "Ally does not believe that there is measurable discrimination by auto dealers, and we believe dealer finance income can be an important tool for dealers to run strong businesses and offer consumers competitive annual percentage rates."

Ally is the first auto lender to reach a settlement with the federal government, but other companies remain the subject of CFPB scrutiny. Christopher Willis, a lawyer at Ballard Spahr, says it's possible that other big lenders will elect to switch to a flat-fee system, but timing would be keyŚno one wants to go first and risk a sudden loss of business from car dealers.

"I continue to believe that the market is headed away from dealer participation," Willis says. "I just don't think that the conditions for that to occur have coalesced yet."




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