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
Measuring Up

By Ronald J. Reahard
Top trainer has a three-part answer for an F&I newbie who wants to know how he measures up against his peers.

It's OK to Be Nervous

By Ronald J. Reahard
Top trainer welcomes an anxious recruit to the F&I ranks with 10 pieces of practical, hard-earned advice.

(Video) Have a Real Conversation

By Ronald J. Reahard

Combating CUs

By Ronald J. Reahard

Done Deal

Gregory Arroyo
What’s Your Take?

By Gregory Arroyo
The editor provides an up-close look at the topics he hopes to cover during his Industry Summit 2017 panel session. He’d also like to hear your take on these hot-button issues.

Connecting the Dots

By Gregory Arroyo
The editor opens up about his time in the car audio industry and how that experience shaped his thoughts about the internet, telematics, and the connected car.

See You in Big D

By Gregory Arroyo

Don’t Tune Out

By Gregory Arroyo

Mad Marv

Marv Eleazer
Industry Summit: It’s Worth the Investment

By Marv Eleazer
Reflecting on the returns of a well-trained service technician, His Madness has a message for dealers who think F&I training isn’t worth the investment.

6 Ways to Deliver Exceptional Service

By Marv Eleazer
Inspired by a visit to the suit store, His Madness lists six ways F&I pros can tailor their wares to fit any customer.

Doing Our Part

By Marv Eleazer

There’s No ‘I’ in Team

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