ARLINGTON, Va. — The Consumer Financial Protection Bureau (CFPB) isn’t the only enforcement agency shining the spotlight on auto finance. The U.S. Department of Justice is also taking aim at disparate impact discrimination claims related to retail installment transactions.
Speaking earlier this month during a panel discussion on fair lending at George Mason University of Law, Deputy John M. Seward told attendees that the Department of Justice has begun receiving a higher frequency of reported violations related to auto loans. He also said the DOJ is now working closer with the CFPB to investigate fair lending.
In a video obtained by F&I and Showroom of the panel discussion, held Thursday, May 2, during the third annual Public Policy Institute on Financial Services, Seward said: “We’re seeing a lot more referrals involving pricing discrimination allegations in the unsecured consumer lending space; a number of auto-related referrals either involving indirect auto lending or some involving buy-here, pay-here car dealerships.”
The violation referrals originate from federal bank regulators like the CFPB, which the DOJ signed a memorandum of understanding with last December aimed at strengthening their coordination in connection with fair lending investigations.
The DOJ did not return calls asking for comment.
Recently, reports emerged that the CFPB has issued subpoenas to U.S. auto lenders related to the sale of products such as extended-service contracts and other add-ons. Service Contract Industry Council (SCIC) Executive Director and General Counsel Timothy J. Meenan said the move is “possible and probable” based on media reports, but he has yet to receive confirmation.
“It appears that they are looking at lending practices for sales of automobiles, and also looking at issues involving add-on products,” Meenan said.
The reports come less than two months after the bureau confirmed it was watching policies related to dealer participation by issuing guidance to indirect auto lenders. In March, the CFPB said it would hold lenders that offer auto loans through dealerships responsible for unlawful, discriminatory pricing. It alleged that bank policies which allow auto dealers to mark up the interest rates on retail installment sale transactions in exchange for services rendered have caused a disparate impact, meaning that members of minority groups pay higher rates. Several banking institutions, including Ally Financial, received letters stating that they could face lawsuits under the Equal Credit Opportunity Act (ECOA).
Groups such as the National Automobile Dealers Association (NADA) and the National Association of Minority Automobile Dealers (NAMAD) have denounced the bureau’s actions, as the CFPB has not revealed how it is conducting its analysis. Using the disparate impact theory, the CFPB has taken the position that violations of the ECOA can be pursued based solely on statistics — meaning a lender can potentially be held responsible for unintentional impacts on minorities.
NADA’s Director of Public Relations, Charles Cyrill, said the organization was not aware of any CFPB action related to F&I product sales. “We have not received any information about CFPB investigations regarding optional products other than dealer reserve,” he explained.
The CFPB has not publicly confirmed the targeting of F&I products, but a spokesman contacted by F&I and Showroom did not deny recent reports.
“When I look at what the CFPB's been doing with mortgages and with, say, credit card companies, they've gone after things that are potentially misleading,” Meenan said. He explained that while credit card companies have been known to sign up customers for add-on products without their knowledge or understanding, car buyers must sign a contract for F&I add-ons that says, “Yes, I want this.”
Last year, the CFPB reached settlements with credit card issuers such as Capital One Bank, which agreed to refund approximately $140 million to 2 million customers, as well as pay a $25 million penalty for the way it marketed add-on products like payment protection.
“I think those kinds of misleading practices don't really apply to automobile service contracts,” Meenan said. “You can, in the first 45 days, cancel a service contract and get all your money back. And thereafter, you can get the pro rata share back… There are lots of good consumer protections in these products that I think the CFPB will find attractive.”
While Meenan thinks service contracts are unlikely to come under fire, he and his fellow SCIC members are not resting easy. “We’re not taking anything lightly… We are in a fact-finding mode using local council and others to find out what it is the CFPB is after.”
— Brittany-Marie Swanson