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Taking Fire

Until last month, the CFPB was doing a lot more aiming than shooting. But its first enforcement action against an auto finance source and its partner company proves the agency isn’t firing blanks.

July 2013, F&I and Showroom - Feature

by Brittany-Marie Swanson

It took nearly three years for the auto finance industry’s newest regulator to make its presence felt, and it did so in a big way. On June 27, the Consumer Financial Protection Bureau (CFPB) ordered U.S. Bank and its nonbank partner company, Dealers’ Financial Services (DFS), to pay a total of $6.5 million in restitution for deceptive marketing and auto finance practices.

It was a shot heard ‘round the industry, but it surprised no one. Three years earlier, the CFPB had been established and charged with assuming responsibility for enforcing certain consumer financial protection laws. The agency’s directors hinted in the closing months of 2012 that auto finance would be a major target in 2013.

The CFPB’s assistant director, Richard Hackett, confirmed this at the National Automotive Finance (NAF) Association’s annual conference in June, 22 days before the bureau announced its enforcement action. The bureau, Hackett said, was “doing a lot of aiming … before firing those bullets.”

Caught in the Crosshairs

Legal insiders and compliance experts have predicted the CFPB’s targeting of the indirect financing channel since the bureau went live on July 21, 2011, as a result of the Dodd–Frank Wall Street Reform and Consumer Protection Act. But the bureau’s agenda remained somewhat of a mystery until Hackett appeared at the American Financial Service Association (AFSA)’s annual conference in February.

Hackett listed off a number of areas the bureau was targeting. He then made clear dealer participation was at the top of the bureau’s list.

Two weeks after Hackett addressed finance execs, reports began to swirl that at least four banks were issued letters warning them of possible violation of the Equal Credit Opportunity Act (ECOA). At issue were finance source policies that allow dealers to mark up interest on retail installment sales contracts. According to reports, the letters indicated the bureau believed such policies were creating ethnicity-based pricing disparities.

Ally Financial was the first finance source to confirm the CFPB’s actions. In a March 1 filing with the Securities and Exchange Commission (SEC), Ally officials stated the company had been advised by the CFPB that certain parts of its retail financing practices were under investigation and that it could face legal actions.

Three weeks later, the CFPB issued a five-page guidance that spelled out its review of dealer participation programs. It stated that finance sources wouldn’t be protected by the ECOA’s Reg. B, which lets creditors off the hook for another creditor’s violation. The guidance also stated that the bureau would hold finance sources liable under the legal doctrine known as “disparate impact,” which states that lenders can be sanctioned for actions that have a discriminatory effect — even if they didn’t intend to discriminate.

“Consumers should not have to pay more for a car loan simply based on their race,” CFPB  Director Richard Cordray said the day the bureau issued its guidance. “Today’s bulletin clarifies our authority to pursue auto lenders whose policies harm consumers through unlawful discrimination.”

Finance institutions like Chase and Fifth Third Bank reacted quickly, issuing notices to dealers announcing dealer participation monitoring programs. Legal experts, however, questioned the bureau’s theory of liability to determine whether car buyers are being discriminated against.

Under the “disparate impact theory,” the CFPB is free to pursue violations of the ECOA based solely on statistics that suggest an otherwise neutral policy is, in fact, affecting minorities. Currently, the theory is under attack before the Supreme Court as it relates to the Fair Housing Act, but the issue is far from settled. 

“The government is defending this theory very, very strongly,” says Jean Noonan, partner in the law firm of Hudson Cook LLP. “The bottom line message here is that there are very important things happening, but we probably won’t know for many months whether or not it’s going to make a difference. If it does make a difference, it could be a sea change in fair lending enforcement.”

Comment

  1. 1. Al Mosher [ July 19, 2013 @ 11:32AM ]

    Excellent article!!! A must read for all dealers at every level.

  2. 2. William V. Fowler [ November 16, 2013 @ 07:56AM ]

    Federal and States have recently enacted a number of consumer protection laws that directly related to the activities of most Banks, Credit Unions and other Financing Sources, hereinafter referred to as “Lenders”. These consumer protection rules and regulations have impacted virtually all bank operations and specifically for the auto dealers and lenders they have modified the method in which auto loans can be approved and financed.

    Vendor management of third party service providers (such as Auto Dealers) has become a top priority for all Lenders who they now must regularly monitor. The CFPB has made auto lenders responsible for the acts and practices of their associate Auto Dealer, specifically during the auto loan origination process. Lenders bear the responsibility of being at the source during the loan origination process and they may be held accountable for any violations of consumer protection laws as well as their unfair, deceptive and abusive acts and practices for auto loans they finance for dealers.

    Regulators are just beginning to increase their focus on third party auto dealer’s contracts and activities and they are in the process of requiring all Lenders to conduct a risk assessment for each of the third party dealer(s) they are associated with. The risk assessment has to be performed as part of the initial due diligence they conduct prior to entering into a relationship, but also they must perform an ongoing risk assessment throughout their relationship. Plus these regulators, predominately the CFPB are putting policies and procedures in place requiring all of the auto lenders to manage their relationships and maintain documentation of all initial and ongoing due diligence and monitoring of their dealers loan packages.

  3. 3. William V. Fowler [ November 16, 2013 @ 08:08AM ]

    If you want more information on this go to my LinkedIn post, or jus e-mail me: bfowler@enetfs.net

 

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