The Consumer Financial Protection Bureau issued a stern warning to at least four banks this week. If they find vehicle loans and interest rate increases by car dealers that even appear to be discriminatory, they are prepared to sue. The banks got word this week via letters from the government consumer watchdog bureau. They were given fifteen days to provide documentation that justifies their practices and proof that they’re not violating the Equal Credit Opportunity Act.
CFPB has drawn its line in the sand and it’s made it clear that it’s ready and willing to place sanctions on the nation’s banks over dealer mark ups. These loans now account for close to $86 billion as of the end of 2012. These sanctions, however, weren’t included in the responsibilities of the bureau when the 2010 Dodd Frank Law was enacted. Still, CFPB Director Richard Cordray said in a conference call in February that auto lending is definitely within his agency’s jurisdiction. He explained,
We are examining institutions around auto lending just as we are looking at them on mortgage, credit cards, student loans.
There’s no love lost between Republicans and the federal bureau, despite the major strides it’s made in just three short years. There have been undeniable benefits for the American consumer and it’s all due to the efforts of the Cordray’s agency.
The letters, as mentioned, went out this week, but a CFPB spokeswoman declined to comment on the letters nor would she even confirm they had been sent.
Lack of Guidelines
What complicates efforts are the absence of financial guidelines. The market for auto loans have no lender controlling in more than 6 percent of the market. According to Experian, Wells Fargo & Co. had 5.9 percent at that time, while Ally Financial Inc. had 5.54 percent. Other banks had lower percentages.
Experian spokeswoman Melinda Zabritski said in an interview last week,
There is always a demand for autos. You also have banks with money to lend.
Auto lending took a beating during the regulation aspects of the new financial laws. Automobile dealers somehow managed to stand tall through strong opposition from the Obama Administration, which wanted it regulated under CFPB. Instead, Congress passed regulatory powers to the Federal Trade Commission. Still, Cordray said during the February call that his agency regularly fields a number of complaints on vehicle financing. Specifically, the complaints are based mostly on those loans backed by third parties, which is sometimes referred to as indirect lending. It’s usually banks that serve as the third parties – and therein lies the problem, according to Cordray – and his agency’s ‘in”. CFPB has the authority to supervise banks with more than $10 billion in assets.
Not only that, but CFPB also has the authority to issue any kind of rules that would allow it to supervise the larger players in the auto lending sector that don’t fall under the heading of banks. That might include companies that do their own financing, those owned by auto manufacturers and even finance companies. Leonard Chanin, the former head of regulation authoring at CFPB said,
I think ultimately the bureau will want to establish their supervisory authority over auto loans. It’s a matter of time and priorities.
Chanin is now a partner in a DC area law firm.
The bureau, meanwhile, continues to reiterate its focus on putting action into place if needed while also remaining mindful of the efforts to promote a fair lending environment for both consumers and lenders. It can pull from the ECOA, which has definitive rules about lender discrimination. Cordray said last year that the bureau could and would apply the legal doctrine, disparate impact, which allows sanctions for discrimination. Cordray said that consumers who are at a disadvantage don’t care if a lender discriminated on purpose or by accident, they need access – equal access – to credit products, whether it’s credit cards, student loans or auto loans. He went on to explain that historically,
people of color are affected more than others when it comes to the fees auto dealers collect. Every consumer, regardless of race, gender or other characteristics protected by federal law, should have equal access to credit,
We Help, Not Hinder
Those in to the auto industry insist their efforts are what expands access to credit for everyone and that it’s often the only way (the efforts made by the dealers) consumers are approved. If approvals can’t be had, no one wins.
Meanwhile, the Supreme Court might have already played a role in how this will ultimately play out. The potential lawsuits filed by CFPB could focus on the the indirect lending process that consumer groups call the “dealer markup” and whether it is applied in a discriminatory way. Lobbyists in the industry often refer to it as “dealer participation” or “dealer-assisted financing.” Buyers are granted a loan, but with terms that have additional fees tacked on. Those fees are added by the dealer after it receives approval from the bank but before it’s offered to the consumer. Those in the industry say it’s a reasonable way for dealers to negotiate while still earning a profit. Chris Stinebert, head of the American Financial Services Association points out that in a competitive marketplace, consumers can always negotiate the numbers with the dealer. Unlike credit card offers, which come with a “take it or leave it” APR, the consumers do have power when it comes to how much they ultimately pay.
Many looking ahead say the CFPB could end up causing more problems than it solves since its only regulatory authority is with the banks, and not the dealerships. Ah, but there’s also precedent. Stuart Rossman, director of litigation at the Boston-based National Consumer Law Center, said his center litigated a series of cases on discrimination in auto lending nearly ten years ago. The cases resulted in settlements valued at more than $100 million and changes to lending practices in auto finance.
Regardless, one thing CFPB has proven – it’s not willing to walk away without a fight.