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It Is Unwise to Lower Your Defenses

The editor wonders how regulators, including two new mini-CFPBs in Pennsylvania and Maryland, view a consumer advocacy group’s highly critical report on how dealers price F&I protections.

November 14, 2017

As of press time, President Donald Trump’s signature on the repeal of the Consumer Financial Protection Bureau (CFPB)’s rule banning mandatory pre-dispute arbitration was virtually assured. So where does that leave the embattled regulator?

No, I have no insider info on whether the U.S. Court of Appeals for the D.C. Circuit will uphold its first ruling that declared the bureau’s leadership structure unconstitutional, nor am I going to prognosticate on whether Director Richard Cordray will remain until his term ends in July 2018. I also don’t have a beat on whether the Republican-controlled Congress will abolish the Dodd-Frank Act and with it, the CFPB itself.

"Apparently, the Pennsylvania attorney general is creating a mini-CFPB that will be headed by former CFPB enforcement attorney Nick Smyth. Maryland has also formed a new Financial Consumer Protection Commission to assess the potential impact of changes to Dodd-Frank and other federal laws and policies Republican lawmakers are pushing and 'recommend ways to protect Maryland citizens in financial transactions.'"

What I will say is that, from my time covering the CFPB, never count this regulator out. And, well, less than a week after Vice President Mike Pence cast his deciding vote in the U.S. Senate to send the repeal measure to the president’s desk, the CFPB published an eight-page report on auto loan terms. It showed that 42% of auto loans made in the last year carried a payback term of six or more years, compared to 26% in 2009.

“The move to longer-term auto loans is opening up more risk for consumers,” said Cordray.

The bureau does concede that vehicles cost more and that consumers are simply opting for longer terms to keep payments affordable, noting that the average amount financed has increased 16% while the average payment has increased only 7% between 2009 and 2016. It also notes that longer terms aren’t having the desired effect for borrowers and even finance sources.

See, according to the bureau, loans with terms of six years or more had a default rate that exceeded 8%, whereas shorter-term loans have default rates closer to 4%. That’s means that six-year loans are about twice as likely as five-year loans to result in default.

Like I said, don’t count the bureau out yet.

I found the timing of the report’s publishing particularly interesting after listening to an October webinar hosted by the attorneys at Hudson Cook. Apparently, the Pennsylvania attorney general is creating a mini-CFPB that will be headed by former CFPB enforcement attorney Nick Smyth. Maryland has also formed a new Financial Consumer Protection Commission to assess the potential impact of changes to Dodd-Frank and other federal laws and policies Republican lawmakers are pushing and “recommend ways to protect Maryland citizens in financial transactions.”

And that’s why you need to be concerned about another report issued last month. This one came from the National Consumer Law Center. The NCLC claimed its analysis of approximately 1.8 million vehicle transactions revealed inconsistent and discriminatory price markups on F&I products over a span of six years in all 50 states and the District of Columbia.

The method used to come up the 58-page report’s conclusions does sound a lot like the Center for Responsible Lending’s approach in its now-discredited 2009 study on rate markups — the one that claimed that such markups cost consumers $26 billion annually. The reason you need to care is that statistic was often cited by lawmakers who supported the bureau’s targeting of dealer participation.

John Van Alst, an attorney with the NCLC, said the study’s findings are based on unprotected data posted online by a national F&I product provider. The data set, which has since been removed from the web, included information on vehicle transactions from September 2009 through June 2015, which resulted in the sale of almost 3 million F&I products by more than 3,000 dealers.

According to the study, the average dealer markup for etch was 325% in 2012. The average markup for GAP that same year was 151%. The average markup for service contracts was 83%, with 38 dealers marking up the product by an average of more than 300%.

As for its discrimination claims, the NCLC was limited to checking for pricing disparities between consumers with Latino surnames and non-Latinos, since the Equal Credit Opportunity Act prohibits creditors from collecting race and ethnicity information on non-mortgage credit actions. The group found the average markup for a service contract was higher for Latinos in 44 states, with the differences in both percentage and absolute markups statistically significant in 14 states.

The NCLC’s report also offered three recommendations, including that the ECOA be amended to require documentation of a customer’s ethnicity for non-mortgage credit actions. The consumer advocacy group also recommended that dealers be required to post non-negotiable prices for F&I products. It also urged the CFPB, the Federal Trade Commission, the Federal Reserve Board, and state attorneys general to mount an investigation into product pricing similar to the bureau’s examination of dealer rate markups.

I just wonder what those mini-CFPB’s thought of the NCLC’s report.

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