The Consumer Financial Protection Bureau's use of enforcement actions to try and make broad changes to the auto lending market is fragmenting the industry further and potentially limiting a consumer's ability to negotiate for a lower interest rate.

The agency has so far cited a handful of indirect auto lenders for unintentional discrimination under the controversial legal theory of disparate impact. It has forced Toyota Motor Credit Corp., American Honda Finance Corp. and Fifth Third Bank to pay restitution and limit the extent to which a partnering auto dealer can raise interest rates on loans as a means of compensation. But there are key differences in each of these agreements that are making it harder for the CFPB to make systemwide changes.

"This is what happens when using rulemaking though enforcement actions. There are disparities and loopholes which allow for incongruity of the law," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading. "The problem with managing a market through enforcement actions and not broader rulemaking is that you have a disparate regulatory impact predicated off of a disparate market impact. There's definitely a degree of irony to it."

One of the biggest differences can be seen between the Honda agreement, which was signed in the summer of last year, and Toyota's, which came just two weeks ago.

Both agreements look similar at first blush. Under the terms, both lenders are restricted from allowing partnering dealerships to mark up the wholesale interest rate — the "buy rate" — by 1.25 percentage points for loans of five years or less or 1 percentage point for longer loans. That is roughly half the level it was before the agreements were put in place.

But Honda almost immediately found a way to go around the restriction. It raised the overall buy rate so that it could pay partnering dealerships a larger flat fee, according to several sources familiar with Honda's pricing. As a result, the baseline price for an auto loan with Honda is higher than it was previously, and consumers cannot negotiate for as low a rate.

Though several knowledgeable sources, including the CFPB, confirmed that Honda raised its buy rate following the settlement, a company spokesperson denied it.

"No, Honda did not raise its 'buy rate' with dealers after the settlement was announced," the spokesman wrote in an email. "Similar to other lenders, American Honda Finance Corporation's buy rates are constantly changing based on the costs of funds and market forces, so it's not possible to discuss the rate at any particular time. American Honda Finance Corporation customers are continuing to receive rates that are extremely competitive, and are not paying higher rates today as a result of the settlement."

But Toyota's deal is "substantially" different, a spokesman for that company said. It did not increase the buy rate to compensate for the lower cap, which means it effectively eats the cost of the CFPB's order. On the other hand, however, it has to operate under the order for a shorter time period. While Honda's $24 million settlement lasts for five years, Toyota's order expires in three years at the latest, with an option to end a year earlier if certain conditions are met. Toyota also received a longer time to implement the requirements, 180 days instead of 120.

Toyota "has flexibility to work with dealers and customers and can reduce the contract rate in any increment to satisfy the needs of the customer. When this occurs, we can pay participation when we reduce the buy rate," said Justin Leach, a company spokesman.

As for the lower cap on dealer compensation, Toyota emphasized that it would not increase the underlying interest rate, but said it was introducing a flat fee to compensate dealers for the difference.

Toyota "isn't increasing buy rates for the purpose of covering a new component of dealer compensation because we want to remain competitive and continue to best meet the needs of consumers and dealers," Leach said. "While we respectfully disagree with the agencies' methodologies to determine whether industry lending practices have been discriminatory, we share the agencies' commitment to ensuring that consumers can count on competitive and fair auto financing options. The actions we're taking under this agreement are intended to further that commitment."

The CFPB is crediting Toyota with taking a more positive approach.

"Along with limiting dealer markup, each lender is implementing a new program to fairly compensate dealers by developing a flat fee that fits within their unique business model and does not increase fair-lending risk," a spokesperson for the agency said. "Honda chose to increase its buy rate to fund the flat fee; Toyota has committed not to increase its buy rate to fund the flat fee, which is a particularly consumer-friendly approach. The exact mechanism of how the flat fee is structured and paid to dealers is proprietary to each lender."

But auto lending industry representatives said it's a problem that two of the biggest players in the market are effectively operating under different guidelines.

"Not only does the CFPB's latest sue-and-settle scheme only further confuse the regulatory landscape, it calls into question whether the CFPB is operating outside the limits that were imposed on its authority by Congress, which is sure to prompt additional congressional oversight," said Jared Allen, a spokesman at the National Automobile Dealers Association. "We already know that this campaign to eliminate auto loan discounts is costing consumers money, harming the very people the agency is trying to help by making credit less affordable across the board, and proving to be an unreliable and ineffective approach to addressing fair credit risk in auto lending."

To be sure, enforcement actions and settlement agreements are typically crafted to fit each company's circumstance and negotiating power, so it's common to have differences in each order.

But observers said what matters here is the CFPB's intent. According to private agency documents, the agency is hoping to use its enforcement powers to make industrywide changes, an effort first noted publicly by American Banker.

If that is intent in the cases of Toyota and Honda, the differences between the two orders make it harder for other companies to comply by example.

"The CFPB has different types and amounts of leverage over each specific company so the resulting enforcement actions will naturally be structured with small differences to reflect those operational realities," Boltansky said. "The biggest problem for the bureau is the realization that this method may not ultimately prove successful in altering the whole market."

Still, consumer groups have applauded the CFPB for its efforts in reducing the maximum interest rate that dealerships can charge, arguing it reduces the chances that minorities will be discriminated against. Yet they also acknowledge that it's difficult for the CFPB to move the needle in pricing models overall through enforcement actions because the market is so fragmented. For example, Toyota Motor Credit, which is the largest captive auto lender and fifth-largest auto lender, has only 5.2% of auto loan originations in the country, according to its consent order.

"If there were one huge auto lender that controlled a quarter or half of the market, the CFPB would be able to move that one [through enforcement] and then it would be easier for everybody else to fall in line," said Delvin Davis, a senior researcher for auto lending at the Center for Responsible Lending. "But even the biggest indirect auto lenders have only 5% to 6% of the market, so there's no certainty of where that tipping point is."

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