The federal Consumer Financial Protection Bureau, which oversees lending institutions, officially wields no direct control over car dealers.
But the agency is stepping up working with other regulators, such as the Federal Trade Commission and individual state attorneys general, to target dealers for alleged unfair, deceptive and abusive auto lending practices.
So says attorney Terry O’Loughlin, compliance director at automotive information technology services provider Reynolds and Reynolds.
Speaking at an Association of Dealership Compliance Officers webinar, he says CFPB Director Robert Chapra has a “hit list” targeting what the bureau considers undue fees and markups on indirect auto loans that dealers arrange between their customers and banks.
In doing the middleman work for indirect auto loans, dealers typically get a so-called “reserve” cut. That’s an extra percentage point or two added to the lenders’ wholesale rates.
It’s a traditional practice, but the CFPB is no fan of it.
“Dealer markups are not expressly prohibited, but the CFPB has sought to render enforcement against industries it has no direct control over,” O’Loughlin (pictured, below left) says.
Also in the bureau’s crosshairs is the potential that loan rates can discriminate against minorities, intentionally or not.
“Be afraid, very afraid of federal regulators’ timetable,” O’Laughlin tells webinar attendees, citing policy changes. “They are ramping up their approach to regulations. They’re giving notice.”
Last year, the CFPB announced its intention to use its authority to prosecute perceived discrimination as unfair acts or practices in any financial services category.
“This is a new approach, untested, and there are no examples of its application just yet,” O’Loughlin says.
In the bureau’s view, injuries sustained from discrimination need not be on purpose.
“Machine learning models and artificial intelligence will be a point of focus for any potential discriminatory outcomes,” he says. “Disparate impact will be a preferred theory for UDAAP (unfair, deceptive and abusive acts or practices).”
In other words, a dealership F&I manager teeing up an auto loan can do something deemed discriminatory without even realizing it.
He urges dealers to avoid practices that could attract the attention of regulators, let alone draw their ire.
“Dealers are an enormous target,” says O’Loughlin. “Try to do something. Once targeted (by government regulators), it is too late.” Some dealer discrimination cases are apparent.
For instance, regulators penalized a New York City Chevrolet dealership for allegedly telling employees to charge higher loan rates for minority customers.
In another case involving an Arizona dealership, some staffers, not just the store itself, were held liable.
But not all instances are so overtly egregious, says O’Loughlin, citing a less obvious form of discrimination called disparate impact.
Regulators can allege disparate impact if a statistical analysis shows that dealership customers – often identified as minorities by last names and zip codes – paid higher interest rates on auto loans arranged by dealers.
O’Loughlin, who once worked for the Florida attorney general’s enforcement division, says, “I’ve talked to dealers over 33 years who say they’ve done something for years without being cited.”
That’s an unwise position, he says.
O’Loughlin notes franchise auto dealers are immune from “the direct threat” of the CFPB. But he adds, “the FTC and, much more significantly, state attorneys general, may be able to prosecute this new wrinkle in UDAAP and discrimination law.”
He adds: “Franchise dealers may be targeted in this new way regardless of CFPB jurisdiction or authority. Because the unfairness standard is broad and flexible, the capability to prosecute discrimination in this manner will be far easier to advance.”
Congress created the CFPB in response to the financial crisis of 2007-2008. Its status as an independent agency has faced court challenges.
Dealers should not have the discretion to set interest-rate levels for car loans, a CFPB representative has said, calling instead for a flat fee.
The National Automobile Dealers Assn. has created its fair-credit compliance program that the trade group recommends its members follow.
The program calls for dealers to first establish a preset amount of compensation for arranging indirect financing, then make downward adjustments depending on circumstances.
- A customer’s inability to satisfy a monthly payment constraint at the predetermined amount.
- A customer’s access to a more favorable credit offer from another lender.
- A financing promotional offer a dealer extends to all customers.
- A particular transaction is eligible for a subvented (decreased) interest rate from an automaker, finance company or other third party.