New U.S. consumer agency zeros in on car loans

New U.S. consumer agency zeros in on car loans

A guidance bulletin from the Consumer Financial Protection Bureau (CFPB) warns that dealer markup in indirect auto lending may lead to discrimination against African Americans and Hispanics.

To avoid such discrimination, the CFPB advises indirect lenders to impose controls on dealer markup of car loans in the credit arranging phase of the financed transaction, that may go so far as to curtail dealer discretion to mark up buy rates, instead using another method, such as flat fees.

The CFPB also recommends that lenders (1) regularly analyze individual dealers loan pricing data for potential disparities resulting from dealer markup, and (2) initiate prompt corrective action against dealers when unexplained disparities are found. That could mean eliminating the use of dealer markup or excluding dealers entirely from their longstanding role as credit arrangers.

NADA and NAMAD (the National Association of Minority Automobile Dealers) questioned the CFPB bulletin in a joint statement, saying the regulatory guidance could result in higher rates across the board for consumers. The guidance attempts to force auto finance sources 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 statement said. 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.

Dealer attorney Michael Charapp of Charapp & Weiss says the CFPB guidance will cause lenders to increase their oversight of dealers markup and loan pricing. That in turn means dealers should increase their compliance efforts.

CFPB appears to be pushing lenders to adopt flat fees to dealers rather than the reserve system, says Charapp. This is a major issue.