Dealer-assisted financing, also known as indirect auto lending, has allowed many American consumers to obtain credit at interest rates that are often significantly lower than those offered elsewhere.
The reason is simple: in the dealer-assisted financing model, consumers benefit from heightened competition, with numerous financing companies fighting for the same business.
Historically, the indirect auto lending model has been looked upon as a “win-win” for dealers, consumers and the economy. Recently, however, the Consumer Financial Protection Bureau expressed concern over perceived disparities in these lending practices.
In March, the CFPB issued a bulletin intended to address issues concerning the fair-lending requirements of the Equal Credit Opportunity Act. Despite its good intentions, the bulletin was viewed by industry analysts and organizations, including the National Automobile Dealers Assn., as a CFPB attempt to regulate the finance-reserve practices of auto dealers.
Dealers need to be aware of this increased scrutiny, and how it may affect their bottom lines.
Although Congress specifically has directed only the Federal Trade Commission and the Federal Reserve Board to oversee dealer-assisted financing, the CFPB’s recent efforts appear to have placed the Bureau on the periphery of the oversight process. In fact, since the issuance of the March bulletin, several dealerships have begun to feel the effects, receiving letters from financial institutions regarding possible fair lending problems.
One lender contacted a dealer to say it had uncovered “pricing differences that may suggest a violation of fair lending laws.” The lender indicated that as part of its routine monitoring of dealers to assess differences in pricing on a prohibited basis (e.g., race, ethnicity, gender), the institution “reviewed the loans” that it purchased from the dealerships, and it "identified pricing differences for affected groups."
The correspondence concluded by noting that if similar results are found in the future, the institution will take action, including the possible termination of the dealer agreement or the implementation of a flat-fee compensation schedule.
Industry analysts believe recent scrutiny by lenders is the end result of the CFPB's efforts to shape dealer-assisted financing strategies via the financial institutions dealers rely upon. In fact, many analysts believe the CFPB is determined to push banks to require a flat-fee compensation approach, without any indication that the Bureau has examined the effect this change could have on the cost of credit for consumers.
The CFPB's attempt to eliminate the dealer's ability to discount the interest rates it offers only will weaken the consumer's ability to secure financing at the lowest possible cost. When the Bureau's guidance was issued in March, NADA and the National Association of Minority Automobile Dealers issued a statement that read, in part, as follows:
"The guidance issued by the CFPB today attempts to force auto finance sources into changing the way they compensate dealers.”
The joint-statement went on to say that while both organizations strongly oppose any form of discrimination in auto lending, the CFPB "theory of discrimination" is based on a statistical analysis that has not been explained or verified, and that the analysis itself “pays no heed to the role of outside factors.”
Dealerships should pay close attention to the CFPB’s ongoing efforts. The Bureau's recent activities suggest the ability of dealers to leverage reserve income for indirect financing could be critically impacted.
If financial institutions are moved to implement a flat-fee structure, dealerships could face significant financial consequences. With long-accepted indirect lending strategies on the line, auto dealerships may need to re-tune their operational goals and processes to attain their revenue goals.
Ira Silver, CPA, is the principal-in-charge of the Orlando office of Morrison, Brown, Argiz & Farra, one of the top 40 accounting firms in the country. For more information, visit www.mbafcpa.com.