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The Tide Has Turned

Has the CFPB changed its tune about dealer markups? The editor believes it has, but he says the battle to save rate discounts isn’t over.

September 17, 2015

I learned two things from American Honda Finance’s $24 million Equal Credit Opportunity Act (ECOA) settlement with the Consumer Financial Protection Bureau and the Department of Justice (DOJ): The pressure the CFPB is putting on auto finance sources isn’t going away, but neither are dealer markups.

I predicted the latter at Industry Summit 2013, about seven months after the bureau issued its controversial guidance on dealer participation. The five-page bulletin gave finance sources an ultimatum: Eliminate dealer markups or monitor compliance and impose controls that address the CFPB’s fair lending concerns.

It was as though everyone but me thought dealer markups were going away. Heck, even Alpha Dawg Jim Ziegler believed we’d lose markups. “In recent weeks, it’s become evident, at least to me, that the [CFPB] is going to regulate, and, ultimately, eliminate dealer finance reserve,” the magazine’s On the Point columnist wrote in August 2013.

Well, not only did the CFPB allow Honda Finance to maintain markups — even through it claimed the captive violated the ECOA by allowing its dealer partners to charge higher interest rates on auto loans to minority borrowers — it commended Honda for its new compensation model.

But the tide hasn’t completely turned in the CFPB’s attack on dealer participation. Days after the settlement was announced, CFPB Director Richard Cordray said that the bureau still believes rate markups have led to “discrimination for consumers.” And Honda Finance did agree to implement a 1% flat fee to supplement its reduced markup caps, which it lowered from 2.25% to 1.25% on loans with terms of five years or less and from 2% to 1% on loans with longer terms.

But considering how far we’ve come from the months leading up to the passage of the Dodd-Frank Act five years ago, this was a major victory. I mean, just about every consumer advocate, civil rights group and even the President and military officials were calling on Congress to put dealers under the supervision of the CFPB. And at the top of their list of reasons why were dealer markups.

“Recent studies prove what many of us have known anecdotally for years; that widespread racial disparities, unrelated to credit risk, exist in the markups added by auto dealers to auto loan interest rates and fees,” stated Hilary Shelton, the director of the National Association for the Advancement of Colored People (NAACP), in a letter issued to the U.S. Senate in May 2010.

And here’s what the Leadership Conference on Civil and Human Rights offered in June 2010: “Auto dealers, whether arranging financing or providing financing themselves, all too often engage in discrimination against minorities. As many academic studies and class action lawsuits have shown, minority car buyers pay significantly higher dealer markups than nonminority car buyers with the same credit scores.”

Heck, groups like the Consumer Federation of America and the National Consumer Law Center even called on the Federal Trade Commission to ban dealer markups during the agency’s Motor Vehicle Roundtables in 2012. So we went from calls for a total ban to the CFPB accepting markups with a reduced cap.

“… The settlement really is more evidence that dealer participation is here to stay,” noted Andrew Koblenz, the National Automobile Dealers Association’s executive vice president of legal and regulatory affairs. “What’s really under threat is the degree to which the dealer can offer discounts.”

That’s why the NADA continues to push H.R. 1737, legislation that, if passed, would repeal the bureau’s guidance on dealer participation and add a few more steps to its guidance-writing activities. It’s also why I’d like to plug the Fair Credit Compliance Policy & Program the NADA issued in early 2014 with the National Association of Minority Automobile Dealers and the American International Automobile Dealers Association.

It’s important to note that while the program is based on a 2007 DOJ consent order, the CFPB has not fully endorsed it. However, one of its former officials, Rick Hackett, has. In fact, 11 of the industry’s top legal minds have endorsed the program, which calls on dealers to establish a markup cap and only discount from that cap based on “legitimate factors that can affect finance rates.”

Three of our 2015 F&I Pacesetters installed the program last summer. They admit it took time for their sales and F&I teams to adjust, but they say the program has resulted in improved F&I turnovers because it forces salespeople to begin talking to customers about vehicle financing. Hey, maybe the tide has turned after all.

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