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.