Auto lending rules and some of the heavy Consumer Financial Protection Bureau (CFPB) fines associated with them will be significantly rolled back if H.R. 1737, the “Reforming CFPB Indirect Auto Financing Guidance Act,” becomes law.
The bill was recently approved by a 332-96 House of Representatives vote, and is currently awaiting Senate action.
Supported by the US Consumer Coalition, the National Automobile Dealers Association (NADA), the Alliance of Automobile Manufacturers, the Motorcycle Industry Council, the American Financial Services Association (AFSA), and others, the bill would force the CFPB to publish more formal rules for lenders within the auto lending space, and could possibly impact the manner in which the CFPB operates, not only within the auto finance sector, but possibly throughout its mandated jurisdiction.
Since the CFPB issued its guidance in early 2013, some lenders have paid significant fines and changed their lending practices: Ally paid $98 million, but didn’t change its lending rules, while American Honda Finance Corp. ($24 million in fines) and Fifth Third Bancorp ($18 million in fines) lowered their dealer reserve caps.
At the heart of the issue is the CFPB’s belief that buyers who received financing through the dealer were discriminated against due to their ethnicity or religion. The agency believes that different loan rates were offered to different buyers based on those factors, rather than creditworthiness.
CFPB rules and proposed changes
Prior to March 2013, auto dealers typically “shopped” loans for car buyers to multiple lending sources, and offered buyers loan rates that often included a markup from the rates offered by the lenders. That markup generally didn’t represent a huge profit center to the dealership, but could make a significant difference in the profitability of any given deal.
Now, some lenders still allow dealers to add a markup on loan rates, while others pay dealers a flat fee regardless of the loan amount. Reportedly, some lenders have lost business because of the change.
Because the CFPB has no legislated jurisdiction over auto dealers, lenders are the ones who face potential penalties. If the CFPB believes that buyers are paying different loan rates because of their ethnicity or race, the agency may fine the lender for perceived disparate impact on different buyers. To date, according to industry reports the CFPB’s actions in this area have been based on race and ethnicity identification techniques that are inherently flawed, if not arbitrary.
The proposed bill would nullify the CFPB bulletin that currently governs auto lending and allows for penalties against lenders. Technically, it amends the Consumer Financial Protection Act of 2010 to direct the CFPB, when proposing and issuing guidance primarily related to indirect auto financing, to:
- Provide a period for public comment and a notice about that period;
- Make public any studies, data, or analyses upon which the current guidance is based;
- Consult with the Federal Reserve Board, the Federal Trade Commission, and the Department of Justice; and
- Study the cost and impact of the current guidance on consumers as well as women-owned, minority-owned, and small businesses.
Effect on current enforcement
Nothing in the proposed bill is likely to scale back existing enforcement activities. It is possible, depending upon any changes the CFPB institutes if the bill passes, that Congress might introduce additional legislation to further restrain CFPB’s regulation of auto lenders.
What lenders and dealers should do now
Regardless of the bill’s fate, lenders should, if they haven’t already, institute robust, proactive oversight and internal controls, as well as data gathering and analysis, to limit exposure to potential CFPB penalties. Lenders may be forced to prove that they have not discriminated against any protected class of borrowers/buyers, either intentionally or unintentionally. For lenders, ongoing oversight and controls to ensure no intentional or unintentional discrimination is taking place is imperative to compliance with CFPB guidance. Documentation of that compliance with the CFPB should also be carefully considered.
Dealerships should continue to refine and improve finance operations to be intentionally responsive to CFPB regulations or guidance. Dealerships should consider periodic testing to ensure they are facilitating the sale of the vehicle and the related financing in a manner that does not reflect disparate treatment or other actions inconsistent with the CFPB’s guidelines.
Most importantly, lenders and dealerships should make a concerted effort to demonstrate that the traditional model of soliciting multiple lenders for any given loan, including the traditional dealer markup, is an integral part of the transaction that inherently incorporates consideration of the buyer’s creditworthiness, and that such model can exist within a framework of fully defined and fairly applied consumer credit laws and regulations.