WASHINGTON Consumer Financial Protection Bureau Director Richard Cordray praised BMO Harris Bank on Wednesday for becoming the first indirect auto lender to switch to a flat-fee structure, limiting the amount of discretion that dealers have to price finance loans.
The move reportedly came as a result of the CFPB's bulletin last year warning lenders they could be cited for unintentional discrimination if they partnered with lenders that marked up interest rates on loans to minorities and other protected legal classes of borrowers.
"It is encouraging to see BMO Harris taking this proactive step to protect consumers from discrimination," said CFPB Director Richard Cordray, in the release. "When people go to buy a car, they should not have to worry whether they'll pay more for their auto loan because of their race, gender, or ethnic background. The CFPB is committed to creating a fair marketplace for all consumers, and we recognize that many lenders share that commitment as well."
The move is significant because dealers and auto lenders have argued that moving to a flat-fee system would be worse for consumers. CFPB officials, in turn, have said they are not trying to force lenders to adopt a flat-fee structure, but want them to seek pricing alternatives.
Still, Cordray's statement make it clear that the agency is pleased with BMO Harris' move.
BMO Harris reportedly issued a notice last week saying it plans to pay auto dealers a flat percentage of the loan amount as compensation in response to the CFPB's bulletin. The notice was first reported.
in trade publication, F&I and Showroom,and later expanded on by Automotive News Wednesday that included comments from Cordray and were later released by the CFPB in an email blast.
The CFPB has promoted flat-fees as an option to eliminate potential risk in dealer discretion that could result in higher costs to certain borrowers. However, indirect auto lenders have argued that going to a flat-fee structure eliminates the borrower's ability to negotiate their rate at the dealership and would ultimately create higher costs to the borrower.
"Flat fees do not end the type of fair credit risk that the CFPB is trying to eliminate. As long as lenders offer different compensation amounts for originating the loan, a dealership will have the discretion to choose which finance source gets the customer's business," said Bailey Wood, senior director of legislative affairs and communications at the National Automobile Dealers Association. "This may solve BMO Harris' issue but it does not eliminate whatever fair credit risks may exist for the consumer."