The Industry's Leading Source For F&I, Sales And Technology


The Guidance That Isn’t

The magazine’s legal eagle doesn’t mince words when he describes the ‘logical disconnect’ between the CFPB’s view of fair lending and how dealer participation really works.

May 2013, F&I and Showroom - Feature

by Michael Benoit

In March, the Consumer Financial Protection Bureau (CFPB) created a big stir in the world of dealer financing when it released its “fair lending guidance” for companies that buy retail installment sales contracts from dealers. As a result, finance companies are telling dealers to expect much more oversight over the process that determines financing rates for their customers.

There’s a logical disconnect between the CFPB’s worldview on what it calls “fair lending” and the reality of dealer compensation in vehicle financing. There are multiple financing models that result in different compensation values, even within a single dealership. But by its public statements, the CFPB perceives that all dealers use just one model, i.e., they take a credit application, collect “buy rates” from interested finance companies, then negotiate a higher rate with the consumer. That is certainly one model, but it is hardly the predominant one.

Take the spot delivery. The dealer pulls a bureau and sees his customer has a 770 Beacon score. The dealer negotiates the transaction and the rate and the customer drives off before a finance company has had a first look. Why? Because the dealer knows that one of his finance companies will buy that transaction at the rate the customer agreed to.

The CFPB’s vision of how the business works is far too narrow and fails to recognize that rate is simply one piece of the deal. Indeed, consumers could pay a higher rate for a vehicle and still pay less overall than consumers with lower rates by negotiating lower prices for the goods and services being financed. So how, under real-world facts, does the CFPB impose liability for credit discrimination on companies buying retail installment contracts?

The CFPB employs a disputed legal theory called “disparate impact.” Under this theory, intent to discriminate is not a requirement. A CFPB analyst looks at the aggregate pricing imposed by the dealer, then looks for patterns of illegal discrimination — primarily in the areas of race, ethnicity and gender. When the target of the CFPB’s inquiry is a finance source, they review the data on a dealer-by-dealer basis and on a “portfolio-wide” basis.

Because there is no requirement for dealers to collect race, sex and ethnicity data on consumers, the CFPB employs certain “proxies” in looking for prohibited discrimination. For example, if the consumer’s ZIP code is one in which 80 percent of the residents are African American, the bureau might assume that consumer is African American for the purposes of its analysis.

If the CFPB’s analysis reveals that consumers in a protected class are paying more for credit than consumers who are not in a protected class, even by a very small margin, it may take action against the offending finance  source or independent (non-franchise) dealer. The CFPB has been unwilling, thus far, to reveal the amount of disparity it deems significant for these purposes. The agency also has refused to reveal the proxies it employs in place of hard data about race, ethnicity and gender.

In effect, the CFPB is saying, “Don’t break the speed limit, and by the way, we aren’t going to tell you what it is.” And if you read between the lines, the bureau is saying, “dealer participation bad, flat-fee compensation good.”  

But what board of directors is going to approve a change to a flat-fee compensation model when the result will be that their business dries up? It would be a breach of their fiduciary duty. It would be great if all the finance sources could get together and agree, but we have these pesky antitrust laws that prevent that kind of activity.

The guidance was less than helpful, and Richard Cordray admitted as much when he said in a public forum that the CFPB needs to do a better job of explaining what its fair lending expectations are. Unfortunately, there seems to be a disconnect between the director and the rest of the bureau.

What the CFPB should have done is write a rule prohibiting finance sources from compensating dealers through dealer participation. It did it with the mortgage brokers. Of course, franchise dealers would, in all likelihood, sue the bureau, and the dealers might win. But if the bureau is as committed as it seems to the idea that dealer participation creates illegal discrimination, one has to wonder why it would not be committed to taking the most direct route to remedy it and defend its actions in court. I’m just sayin’.

Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. He is a frequent speaker and writer on a variety of consumer credit topics. E-mail him at Nothing in this article is legal advice and should not be taken as such. Please address all legal questions to your counsel.

Your Comment

Please note that comments may be moderated. 
Leave this field empty:
Your Name:  
Your Email:  


So Here's the Deal

Ronald J. Reahard
Selling High-Mileage VSC Plans

By Ronald J. Reahard
How do you sell a $3,000 VSC on an $8,000 car? Top trainer offers a four-step process to ensure every customer gets the protection they need.

Selling Warranty Compliance Plans

By Ronald J. Reahard
Do-it-yourself customers will tell you they prefer to save a few bucks by performing their own maintenance. F&I trainer has the perfect response for this common objection.

Handling the ‘Last Car’ Objection

By Ronald J. Reahard

Sold But Not Closed

By Ronald J. Reahard

Done Deal

Gregory Arroyo
Rescinding the CFPB’s Auto Finance Guidance

By Gregory Arroyo
The editor debunks a few myths about the Consumer Financial Protection Bureau, then explains why the industry is on the brink of repealing the bureau’s auto finance guidance.

Still a Work in Progress

By Gregory Arroyo
The editor explains why he put another digital retailing startup on the cover and looks at two studies that point to online car buying and financing still being a work in progress.

It Is Unwise to Lower Your Defenses

By Gregory Arroyo

What's Really Behind the Subprime Pullback?

By Gregory Arroyo

Mad Marv

Marv Eleazer
Your F&I Backup Plan

By Marv Eleazer
Equipment failures can’t stop an F&I manager who is prepared for any contingency. His Madness lists four backup plans you can implement today.

Love It or Leave It

By Marv Eleazer
His Madness is reminded that excelling at F&I requires true passion for the craft. He offers a few suggestions for staying focused and mentally sharp.


By Marv Eleazer

The Little Things

By Marv Eleazer

On the Point

Jim Ziegler
Sharpen Your Survival Skills

By Jim Ziegler
‘Da Man’ has a plan you can use to survive the collapse of the car business and remain profitable through the dealer apocalypse.

Sales Rock Stars Still Exist

By Jim Ziegler
Da Man says $40,000-a-month sales rock stars still exist. He says you’ll find them on YouTube and Facebook Live.

The New Stooges

By Jim Ziegler

Is Your Quick Lube Driving Away Business?

By Jim Ziegler