WASHINGTON-The Consumer Financial Protection Bureau said it has detected alleged racial discrimination in the auto loan market. Finding the evidence was the easy part-the tougher questions involve what the agency intends to do about it, and how its eventual actions will affect competition among lenders, according to American Banker, an affiliate of Credit Union Journal.
The CFPB began collecting data through civil investigative demands early last year, notifying major bank auto lenders in February that it had grounds to sue them over fair-lending infractions. The bureau released an industry bulletin warning banks to monitor the loans they buy from dealers, and its staff have repeatedly addressed the topic at industry forums.
But the bureau has refrained from a politically and procedurally fraught effort to create rules banning dealer markups, the commonplace auto-lending compensation practice that creates the potential for discrimination.
That leaves lenders facing the question of how to legally protect themselves without jeopardizing their place in a competitive market with $700 billion in loans outstanding.
Underlying the dilemma that both CFPB officials and bankers face is the unique nature of the auto loan market. Banks and other lenders have long paid car dealers for originating loans, adding extra incentives for dealers when borrowers agree to pay above-market interest rates.
Consumer advocates allege the practice has encouraged dealers to steer customers into expensive loans and disproportionately hurt minorities.
Those claims were bolstered by class action suits a decade ago that alleged discrimination and prompted lenders to cut around $100 million in settlements. Most auto lenders are avid in their desire to avoid a repeat.
"Banks choose not to litigate [auto financing discrimination allegations] with the regulatory agencies for reputational and other reasons" explains Leonard Chanin, a former head of the CFPB's rulemaking division who now represents banks at Morrison Foerster. "Enforcement is going to be used to establish policy in a significant area of the law."
The CFPB has downplayed the idea that it's using enforcement as a substitute for rulemaking, pointing to the fact that anti-discrimination laws already apply, it noted in a March bulletin.
"Indirect auto lenders [those who originate loans through dealers] must comply with fair-lending laws and are responsible for ensuring that the dealer compensation system they are using does not result in unlawful discrimination," Chanin said. "Maybe a percentage of loan amount," he said.
