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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