LAS VEGAS – A Congressional bill is making the National Automobile Dealers Assn. feel less threatened by a regulatory agency that has sought to change the way dealers are compensated for arranging customer auto loans.
NADA had lobbied for the legislation that would put reins on the Consumer Financial Protection Bureau, a product of the Dodd-Frank financial reform act and an agency that has challenged a long-standing practice of dealers adding to an indirect auto loan’s percentage rate as compensation for acting as a middleman.
The pending legislation that would affect the CFPB has bi-partisan support and is expected to go to the House floor in late September or early October, says Andrew Koblenz, NADA’s executive vice president-legal and regulatory affairs.
He's hopeful of its passage "but now is not the time to take the foot off the gas," he says at this year’s F&I Industry Summit here. "We still have a little ways to go.”
The legislation would repeal a two-year-old CFPB bulletin NADA says was intended to pressure lending institutions to shift from the so-called dealer reserve practice to something such as flat fees for dealers.
The agency says dealer reserve, also called dealer discretion, has resulted in unintended discrimination of minorities. Two major lenders, Ally and Honda Financial, have settled disparate impact cases initiated by the CFPB and U.S. Justice Department.
But NADA argues the dealer-reserve system spurs dealer competition and results in lower interest rates than consumers would get from a flat-fee setup. Moreover, NADA and others have challenged the methodology of an analysis that used surnames and zip codes to determine alleged discriminatory lending practices.
A counter study by Charles Rivers & Associates indicated the government analysis had a wide margin of error.
NADA says “Congress should pass H.R. 1737 to rescind the CFPB's flawed auto finance guidance and make the bureau more transparent and accountable when issuing future auto-finance guidance.”
Referring to the CFPB, Koblenz says, “Have a methodology, be transparent and, my God, do a cost analysis to find out the impact (switching from dealer reserve to flat fees) would have on the market.”
The CFPB has acknowledged dealers should be compensated for their part in indirect auto lending, but “there was an unmistakable push to get the industry to shift to a new form of compensation,” Koblenz says.
Car buyers would suffer from such a shift because dealers would more likely gravitate to lenders that offer generous flat fees to dealers rather than the lowest interest rates to consumers, he says. “The economic incentive would be to go for the highest flat fee.”
During his conference appearance, he showed newly produced NADA videos of car buyers talking about how they got better financing because of their dealership’s efforts.
“These aren’t actors,” he says. “It’s a powerful demonstration of dealer-assisted financing working for the consumer.”
The pending House bill would also address fair-lending practices which “are the law of the land and everyone recognizes,” Koblenz says. “There should be no discrimination in lending.”
NADA has created a voluntary fair-credit compliance program for dealers. It allows for flexibility in negotiations and recognizes marketplace needs while also ensuring fair-lending practices, he says. “This program really does work.”