New Federal Bureau Looks at Auto Dealership Lending Practices

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Consumer Financial Protection Bureau Looks at Auto Lending

Auto deal­ers may not be aware of a new fed­eral agency, the Con­sumer Finan­cial Pro­tec­tion Bureau, ini­ti­ated under the Obama administration.

As recently as last week, a fed­eral con­sumer reg­u­la­tor from the Bureau issued a bul­letin say­ing that some lenders offer­ing auto loans through auto deal­er­ships are charg­ing minori­ties above-market inter­est rates and has warned that it will crack down on a profit-sharing prac­tice between deal­ers and lend­ing companies.

The CFPB would force auto lenders “into chang­ing the way they com­pen­sate deal­ers with­out any indi­ca­tion that the bureau has exam­ined the effect this change could have on the cost of credit for con­sumers,” the National Auto­mo­bile Deal­ers Asso­ci­a­tion and National Asso­ci­a­tion of Minor­ity Auto­mo­bile Deal­ers said in a statement.

The Con­sumer Finan­cial Pro­tec­tion Bureau has tar­geted dealer reserve and poten­tial dis­crim­i­na­tory prac­tices as the agency took its first reg­u­la­tory move aimed solely at the auto finance industry.

The CFPB explained its bul­letin was directed at indi­rect auto lenders that per­mit deal­ers to increase con­sumer inter­est rates and that com­pen­sate stores with a share of the increased inter­est rev­enues, bet­ter known in the F&I office as dealer reserve or dealer participation.

The agency said it made the notice to pro­vide guid­ance about com­pli­ance with the fair lend­ing require­ments of the Equal Credit Oppor­tu­nity Act (ECOA) and its imple­ment­ing reg­u­la­tion, Reg­u­la­tion B.

The CFPB’s review of the auto-lending indus­try marks the first time a fed­eral reg­u­la­tor has looked com­pre­hen­sively at poten­tial dis­crim­i­na­tion in auto lend­ing. The agency was cre­ated by the 2010 Dodd-Frank finan­cial law and has the power to penal­ize lend­ing com­pa­nies that vio­late fair-lending laws.

The con­sumer reg­u­la­tor said lenders should con­sider elim­i­nat­ing the interest-rate markups and instead use a flat-fee sys­tem for orig­i­nat­ing loans. The agency said com­pa­nies should also vol­un­tar­ily mon­i­tor the impact of lend­ing poli­cies on minori­ties. It stopped short of propos­ing a com­pre­hen­sive set of new rules.

CFPB direc­tor Richard Cor­day said that lenders that offer auto loans through deal­er­ships are respon­si­ble for unlaw­ful, dis­crim­i­na­tory pric­ing, and the bul­letin was intended to pro­vide guid­ance to indi­rect auto lenders within the CFPB’s juris­dic­tion on how to address fair lend­ing risk

Cor­dray noted the guid­ance applies to all indi­rect auto lenders within the juris­dic­tion of the CFPB, includ­ing both depos­i­tory insti­tu­tions and non­bank institutions.

For more infor­ma­tion, please visit the Con­sumer Finan­cial Pro­tec­tion Bureau web­site and check out the arti­cles cited above.

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