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Wedge Play

Solutions aimed at heading off the CFPB’s and the Justice Department’s scrutiny of rate participation has the magazine’s legal wiz smiling with satisfaction — mainly because they put the two agencies at odds just a bit.

February 2014, F&I and Showroom - Feature

by Michael Benoit

As you may already know, Ally Financial agreed to pay $98 million to settle allegations that it charged higher interest rates to minority purchasers. The order, issued jointly by the Department of Justice (DOJ) and Consumer Financial Protection Bureau (CFPB), claimed Ally discriminated against more than 235,000 minority borrowers, who, between April 2011 and December 2013, paid higher interest rates for their auto financing than similarly situated non-minorities.

The alleged discrimination was, according to the CFPB, a result of Ally’s discretionary pricing system, which allows dealers to mark up the wholesale buy rate up to 250 basis points. The CFPB found African Americans paid 29 bps more, Hispanics 20 bps more and Asian-Pacific Islanders 22 bps more. And according to the settlement, Ally will distribute $80 million in damages to those impacted by the alleged discrimination.

One of the key issues in the investigation was the CFPB’s assertion that Ally failed to maintain a robust dealer monitoring program. As a result, a major requirement under the settlement is that Ally must now implement such a program. But what’s really interesting is the settlement says Ally can forgo the monitoring program if it does away with dealer discretion in pricing. This, to me, reveals the CFPB’s true agenda. I mean, what better way to eliminate potential discrimination than to obligate the dealer to no more or less than the buy rate?

The CFPB has consistently said it believes dealers should be compensated for helping consumers attain vehicle financing. The bureau has also said it’s not married to a flat fee structure, and that it is open to other compensation methods. It’s a change in stance that I believe is the result of the education the bureau has received about the economics of auto finance, as well as pushback from Congressional lawmakers. And make no mistake about it, that pushback is the direct result of tireless efforts by all of you who have been walking the halls of Congress and writing to your Congress people.

There is a lot more to the Ally settlement, but the dealer monitoring requirement is what should be of most interest to dealers. No doubt you have already received communications from your finance sources about your obligations under the Equal Credit Opportunity Act. Some of you may have also received letters warning you that your pricing is out of whack. Well, you can expect to see more of that going forward.

The biggest takeaway from the Ally settlement is that finance companies are going to have to be far more aggressive in policing dealer pricing if they want to mitigate the potential for large fines and settlements. And finance companies with more robust dealer monitoring programs are far more likely to experience less regulatory pain. That’s why dealers should expect more oversight by their finance sources.

The National Automobile Dealers Association (NADA) unveiled a fair lending program at its annual convention in January that was generally well received by the membership. The solution is based on a settlement from a few years ago between a handful of dealers and the DOJ, and it basically has dealers implementing a standard retail rate that they can reduce based on predetermined and documented business justifications.

The upside of the program is that it’s Justice Department-approved. The CFPB, however, doesn’t like it, mainly because the solution allows dealers to retain limited discretion to mark down a rate. I love it because it puts the two agencies at odds a little bit, and it’s always entertaining to watch that sort of thing unfold.

But seriously, every dealer should expect 2014 to be an evolutionary year in terms of their relationships with finance sources. All of them will be creating or beefing up dealer monitoring programs. That’ll result in some unwelcomed letters and actions taken against dealers.

The NADA may be successful in its push to promote its fair lending program, which, for some dealers, fundamentally changes the way they manage their F&I operations. While the program may be damaging economically to some dealers, by and large, it’s a good solution for the industry in that it provides documentation to justify dealer pricing decisions.

Bottom line, we are living in a very fluid environment. Dealers will need to be prepared for whatever may come down the pike.

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. Email him at michael.benoit@bobit.com. Nothing in this article is legal advice and should not be taken as such. Please address all legal questions to your counsel.

Comment

  1. 1. William V. Fowler [ February 27, 2014 @ 02:39PM ]

    The Present Poor integration of risk management system compromises auto dealers loan origination quality
    With the recent development of the Dodd-Frank Act and the establishment of the CFPB, auto financing sources have highlighted the need to manage auto loan origination risk more proactively and in a more holistic way at the dealerships. If there’s nothing linking a dealers multiple financing source risk management systems to a multiple loan origination transactional systems at the auto dealership you have the danger that one or more of the financing source risk management system are applied to the loan origination process in retrospect; if at all, rather than actively on the front end of the loan origination process. To fully comply to the CFPB requirements that all the financing sources at the dealership must be included within each and every loan evaluation process, and then the results display side by side for each of the financing sources risk models.

    The CFPB wants the consumer to have the availability to view side by side all of the dealers multiple financing sources offers to finance or lease a dealer’s loan package. This includes everything in the loan package fully displayed to the customer with all cost for the vehicle as well as all the different products or services the dealer is offering the customer. Nothing hidden, full disclosure. The dealer must all so offer the customer the ability of viewing all of the dealers financing source loan or lease offers, side by side at the same time.

    The CFPB is pressing financing sources and auto dealers to demonstrate to the customer all the financing sources they are associated with as well as all their risk model decisions of those financing sources on why the customer could not be financed in certain risk models verse other risk models. Commonly referred to as an “Adverse Action Notice”.

 

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