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Compliance

CFPB: Lenders Are Responsible for Discriminatory Markups

March 21, 2013

WASHINGTON — Lenders that offer auto loans through dealerships will be held responsible for unlawful, discriminatory pricing, according to a bulletin issued today by the Consumer Financial Protection Bureau (CFPB).

The bulletin is intended to provide guidance to indirect auto lenders within the CFPB’s jurisdiction on how to address fair lending risk. The agency claims potentially discriminatory markups in auto lending may result in tens of millions of dollars in consumer harm each year.

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

The bulletin, which comes on the heels of the CFPB’s reported investigation of dealer participation policies employed by auto finance sources, explains how the Equal Credit Opportunity Act (ECOA) applies to indirect auto lending. The ECOA makes it illegal for a creditor to discriminate in any aspect of a credit transaction on prohibited bases including race, color, religion, national origin, sex, marital status and age.

The CFPB recommends that indirect auto lenders take steps to ensure that they are operating in compliance with fair lending laws as applied to dealer markup and compensation policies. These steps may include, but are not limited to:

  • Imposing controls on dealer markup, or otherwise revising dealer markup policies
  • Monitoring and addressing the effects of markup policies as part of a robust fair lending compliance program
  • Eliminating dealer discretion to markup buy rates, and fairly compensating dealers using a different mechanism that does not result in discrimination, such as flat fees per transaction

“Lender policies that allow dealers to markup the interest rate charged to a car buyer and share that revenue with the lender increase the risk of pricing disparities among consumers based on race, national origin and potentially other prohibited bases,” stated the CFPB in a release. “Research indicates that markup practices may lead to African Americans and Hispanics being charged higher markups than other, similarly situated, white consumers.”

Comments

  1. 1. PATRICIA [ March 21, 2013 @ 12:14PM ]

    The CFPB statement regarding disparities among consumers is ludicris. It is based on credit worthiness and has nothing to do with race. Branches at our local BB&T, Wells Fargo and BOA have a different rate for their customers than dealerships. When I purchased my own VW, I called around to see if I could get my bank to match my the 1.99 I was getting from Sun Trust. I wanted to have the option of being able to stop by and make my payment in person. This is nothing more than another avenue to place blame for not paying their bills!

  2. 2. Mad Marv [ March 21, 2013 @ 01:42PM ]

    Absolutely amazing that the CFPB would issue such a strong bulletin to indirect lenders without knowing anything at all about real world lending practices.

    Do they actually believe if spreads go away that double digit rates are magically going to disappear as well and people-regardless of ethnicity-with poor credit are suddenly going to get rates in the single digit range?

    How VERY narrow minded!

  3. 3. Rick [ March 21, 2013 @ 02:02PM ]

    The CFPB should concentrate on preventing predatory lending and unethical lending and collection practices with buy here pay here dealers and lenders. You want to see discrimination, look there first and leave the indirect lenders and non bhph dealers alone to help real economic growth.

  4. 4. Kevin [ March 21, 2013 @ 02:08PM ]

    The CFPB should look at the Risk Base Pricing Guide which plainly states that your credit score determines the price you pay for credit. What is so hard to understand?
    Or do they a sub committee to the super secret sub committee on how to bash and dash lenders and dealers before they realize the controls are already in place.

  5. 5. Kev [ March 21, 2013 @ 02:18PM ]

    Discrimination has been happening on the dealer level for years there even, a study on this discussed in the popular book Blink.

    However this doesn't have anything to do with indirect lenders. They often don't even see the customer! It all comes down to how the person's credit, DTI, etc. looks to the lender. The CFPB can't touch the dealers who in some cases still stereotype people, so they are threatening lenders who are actually doing nothing wrong.

  6. 6. Mark [ March 21, 2013 @ 02:22PM ]

    Rick's comment is equally ludicrous. Why target BHPH specifically? New and used car dealers have been marking up interest rates for years with little or no empirical basis for doing so. They do it because they can. As a BHPH dealer, I have losses as my check for not charging more than the customer can bear. Typical car dealers do not have the concern. Perhaps the CFPB is targeting this practice because there is no risk basis for a dealer to markup a rate in order to get some spread. Furthermore, it is not too much of a stretch to imagine that the sell is easier with a less informed, less sophisticated customer. I have worked on both sides over the last 20 years, I know how this works.

  7. 7. Tyrone [ March 21, 2013 @ 09:18PM ]

    The CFPB has no idea what they are talking about. Rate markup's are not dictated by race or any other protected classifications. It is dictated by the ability of the various Finance Managers to get a customer to accept the contract rate. The other thing that I am sure that the CFBP did not look at, is how many consumers that pay rate markup refinance their loans. How many of those consumers trade their vehicles before the end of the term. If you look at those as well as repossessed vehicles, and also total losses, then the actual impact of marking up rates and participation is no where near as severe as the CFPB would have you believe with the issued bulletin.

  8. 8. Chas [ March 22, 2013 @ 09:43AM ]

    Tactical Auto Training's position on the CFPB's tough stance on dealer arranged financing
    by Chas Roscow

    Overview
    Today, wholesale "buy rates" are offered by indirect lenders to dealers based on credit score and model year. Dealer mark-up to these buy rates range from zero to 2.5% in most jurisdictions, but the mode is 1.5%. 70% to 100% of the difference in finance charge (mode = 75%) between the note rate and the buy rate is earned by the selling dealer and paid upfront subject to (typically) clawback (recapture) should the loan payout within 90 days. While the buy rates are based on score & term, the size of the mark-up IS NOT, opening the door for disparate treatment of a protected class under the ECOA.. These "caps" on buy rate mark-ups were a result of litigation against several large indirect lenders in 2006. The Equal Credit Opportunity Act (ECOA) enacted in 1974 makes it unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex, marital status, or age. The effects test for disparate impact of any protected class under the ECOA will be used by the CFPB to determine if any loans were unlawful/discriminatory. Note that in most jurisdictions (I can only think of Ohio as an exception) the dealer is the initial creditor, and they "assign" (sell) the rights/contract to indirect lenders. This "3-party contract" in most states differs from say, Ohio, where the dealer is an agent of the bank (2-party paper). But the NADA successfully lobbied to have dealerships excluded from CFPB oversight.

    Moving to a flat fee or point structure to avoid government sanction
    While the method of compensating dealers by way of mark-up of a wholesale buy rate has been a common accepted industry practice since GMAC's inception in 1919, indirect lenders must now implement a self-imposed a "flat-fee" or "fixed point" method of compensation for acceptance and/or

  9. 9. Chas [ March 22, 2013 @ 10:04AM ]

    purchase of any retail installment sales contracts from US automobile dealerships. Otherwise, the lender will find themselves in litigation from either the CFPB or a class-action specialist.

    What should this fixed/flat be?
    Given the average amount financed for New & Used auto loans of $26,000 and $17,000 respectively, with corresponding terms of 64 and 59 months, the typical mark-up of 1.5% above the buy rate yields the dealer $838 and $540 respectively for selling the loan to an indirect lender. To achieve similar "dealer participation fees" in a (rounded) fixed-point-fee structure for all loans for all people, the percent would need to be 3.5% of the contract note amount. This would serve to not only disarm any potential disparate treatment of any protected class, but also preserve dealer finance participation income currently realized by US automotive dealerships who invest much labor and infrastructure to make loans convenient and available at the point of sale. The CFPB stance will provide greater transparency to auto finance transactions, thus decreasing dealer-arranged financing, as consumers flock to direct lenders to avoid whatever industry standard flat-fee is adopted by industry leaders. The end result will take away or significantly reduce one of the dealer's key profit centers where low (dealer fee) information is used to "maintain margin" on low-information buyers. Consumers do have a myriad of tools/information at their fingertips to approximate dealer's cost of goods sold. This will force dealers to preserve existing profits per vehicle sold by holding greater vehicle gross profit as finance income is reduced. Lenders and consumers will benefit by not paying dealerships finance income to arrange a loan, (or will pay a reduced amount) as more consumers gravitate towards direct loans due to the new transparency these loan transactions will have. The reason is simple. If the indirect lending industry adopted a flat-fee structure of 3.5% (or a

  10. 10. Chas [ March 22, 2013 @ 10:05AM ]

    (or any percent) of the loan amount for all loans purchased from dealers, a light will shine down on that fee for having the dealer arrange financing, causing consumers to flock to banks and credit unions for a direct loan.

    Recommendations
    Banks and credit unions engaged in indirect lending should consider paying the dealer a point/flat fee of X% of the note amount for all borrowers for loans arranged through dealers, and peg their direct-to-consumer loan rates at the dealer wholesale rate plus 150 basis points or 1.5%. Captive finance companies and independents, who are structured as sales finance companies and thus have no license to make a direct loan, will likely follow the industry standard, which is a benefit since the end result will likely be a reduced fee for dealer arranged loans.

    This industry is about to change dramatically, because the government thinks this 94-year old practice is akin to yield spread premiums that exasperated mortgage brokers to push toxic mortgages onto consumers. Or is this just payback for the NADA, who successfully lobbied to exclude dealers from the scrutiny of the CFPB?

  11. 11. George [ March 29, 2013 @ 10:40AM ]

    Where will it end? Unintended consequences will harm the consumer in the end as it always does!

  12. 12. Bubba B [ April 24, 2013 @ 11:10AM ]

    Thanks CFPB... I look forward to future "bulletins" where you just re-state existing laws. Our dealerships have a form we call the "Pledge" form that the customer has to sign where it states several bullet points, including the fact that purchasing F&I products is not required and does not affect your interest rate, and that customers are free to arrange their own financing, and also that we may retain a portion of the finance income as a service fee for arranging the financing. It would be very difficult for a customer to allege discriminatory or unfair business practices after signing this form.

    On a side note - WTF man?? I've seen plenty of white customers paying 20+% interest rates... plenty.

 

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