CRYSTAL LAKE, Ill. — Last week, the Consumer Financial Protection Bureau (CFPB) proposed a new rule to oversee larger nonbank auto finance companies for the first time at the federal level. If enacted, this rule will significantly affect auto dealer practices, including compensation, according to officials with Automotive Compliance Consultants.
Earlier CFPB documents related to this proposed rule make clear to auto finance sources that any continuation of markup as a compensation model for dealer-generated financing will require a significant Compliance Management System.
“The CFPB is moving full-steam ahead to directly affect, change and establish compensation policies in dealerships,” said David R. Missimer, general counsel for Automotive Compliance Consultants. “The only way to protect the lending model currently in place is for dealerships to institute strict controls through a robust compliance management system, and work with their finance sources to establish controls and procedures to respond to CFPB inquiries and accusations of disparate impact.”
As proposed, the rule would allow the bureau to supervise nonbank auto finance companies that make, acquire or refinance 10,000 or more loans or leases annually. If approved, the rule will place 90% of all nonbank auto finance under CFPB supervision. The proposed rule is open for comment for 60 days.
In addition to the Larger Participant Rule, the CFPB, through Director Richard Cordray, reiterated the bureau’s focus on dealer markup, and the agency’s general disdain for the practice. The CFPB also issued a September 2014 Supervisory Highlights focused exclusively on auto finance.
The document makes clear to auto finance sources that any continuation of markup as a compensation model for dealer generated financing will require a significant compliance management system. Furthermore, it makes clear that compliance would include providing dealer education and training, as well as assisting the dealer in developing a strong fair lending compliance management system.
The CFPB went on to suggest a move to flat rate compensation model or limiting dealer markup to 1% to limit a finance source's fair lending compliance obligations.
The CFPB’s use of disparate impact is questionable from a legal context. Until the Supreme Court weighs in on use of the theory in lending, fair lending practices and procedures must be adopted to prove legitimate business purpose and necessity in response to disparate impact claims, according to Automotive Compliance Consultants.