CFPB Ruling Could Adversely Affect Dealers and Consumers

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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.

Dealer Reserve

For stores and groups that depend on dealer reserve as a cru­cial piece of F&I income, indus­try asso­ci­a­tions are already out to keep indi­rect financ­ing in place as legal experts see the lat­est move from the Con­sumer Finan­cial Pro­tec­tion Bureau putting it in jeopardy.

NADA State­ment:

“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.”

One Legal Viewpoint:

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.”

Steps Deal­ers Can Take

With the debate likely to con­tinue for the fore­see­able future, Auto Advi­sory Ser­vices offered some rec­om­men­da­tions that dealer man­agers can do now.

Rob Cohen, co-author of Auto Dealer Law and pres­i­dent of Auto Advi­sory Ser­vices, indi­cated that deal­ers can reduce expo­sure to poten­tial vio­la­tions of the Equal Credit Oppor­tu­nity Act by hav­ing dealer par­tic­i­pa­tion. His three rec­om­men­da­tions included:

  • Adopt a fair lend­ing pol­icy that includes manda­tory usage of what the firm calls a “Stan­dard Rate Excep­tion Report.”
  • Train all sales and finance man­agers on this policy.
  • Mon­i­tor for com­pli­ance with and enforce the policy.

“Based on this most recent CFPB bul­letin, as well as com­mu­ni­ca­tion from lend­ing part­ners like Chase, deal­er­ships must be proac­tive about pro­tect­ing them­selves against lend­ing dis­crim­i­na­tion claims mov­ing for­ward,” Cohen said.

For more infor­ma­tion on the Con­sumer Finan­cial Pro­tec­tion Bureau and its recent bul­letin, please visit their website.

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