“There’s a battle outside and it is ragin’” is a line from one of my favorite Bob Dylan tunes, “The Times They Are A-Changin’.” Well, there certainly was a battle raging this past March when Consumer Financial Protection Bureau (CFPB) Director Richard Cordray went before the House Committee on Financial Services to deliver his semi-annual report on the bureau’s activities.  

We all know the CFPB has been flexing its muscles of late, turning up the heat on dealer F&I practices. So what’s its play?

Let’s go back to 2010, when the National Automobile Dealers Association came storming off of the battlefield beating its chest after successfully lobbying for the dealer exemption in the CFPB-creating Dodd-Frank Act. The industry breathed a sigh of relief.

But by 2013, finance sources and dealers began to realize the CFPB was stepping outside of the Dodd-Frank’s guidelines by targeting auto loans originated through the indirect channel. The strategy was simple: Regulate dealer practices by going after the lenders operating in that channel.

So, is the CFPB making an end run around the spirit of the law without Congressional approval? Well, by asserting that finance sources risk violating the Equal Credit Opportunity Act (ECOA) by allowing dealers to increase interest rates on finance contracts and share in the profit of those markups, the CFPB is claiming enforcement authority.

Unfortunately, it appears the only person the CFPB answers to is the president, who, according to the Dodd-Frank Act, is the only one who can remove Cordray. And we’ve seen the bureau leverage the authority the Department of Justice and federal banking regulators have over banks and finance companies to regulate the conduct of dealerships with which they have agreements.  

After doing some extensive reading about the origins and the mission of the CFPB, it appears to me that neither the Dodd-Frank Act nor any other legislation passed by Congress gives the DOJ, federal banking regulators or any other government agency the authority to go after dealers and lenders operating in the indirect financing channel.

So what does this mean to us? Initially, it was thought the CFPB was only targeting rate markups. But based on Cordray’s recent comments, it appears the CFPB is also targeting F&I products sales.

“Consumer should not be lured into a deal by misleading statements about the benefits of the product they are being sold. And consumers should get clear and intelligible contracts centered on terms they can understand,” Cordray said at an auto finance field hearing held last September.

Sounds like an all-out assault on any profit made in the F&I office to me. The goal, it appears, is to strip dealers of all profit associated with the financing and sale of F&I products. I guess the bureau wants us to arrange financing for our customers for free.

Dealers I’ve talked to believe that if the CFPB prevails, it’ll mean they’ll have to keep detailed records of every customer interaction and communication for a minimum of five years. And by detailed records, I mean disclosures of costs and profits, as well as how a loan was shopped and why one particular finance source was selected for a customer over another.

See, I believe loan discrimination isn’t really the bureau’s target. Dealer profitability is what it’s after. I just don’t believe anyone really thinks there is discrimination taking place in the indirect financing process. I have worked in dealerships for 38 years, most of that time in finance. And I can tell you, nobody targets any of the protected classes under the ECOA.

Our goal has always been to make a fair profit on every customer. Negotiation and competition is the only reason the profit we make on a deal varies from customer to customer, never anything else.

Heck, the Federal Deposit Insurance Corp. even published rate-to-risk guidelines a few years ago. The guidelines explain to consumers how their credit score affects their interest rate and loan terms. That tells me even the government recognizes that some consumers pose a higher credit risk for finance sources.

It was extremely interesting to see Cordray take fire from his critics on the House Financial Services Committee. It is too soon to tell if the CFPB will completely unravel, but I do believe it’ll be reined in and that some of its initiatives will be unwound.

Until next time, keep those emails and messages coming.

Jim Ziegler is the president of Ziegler SuperSystems Inc. Email him at [email protected].

About the author
Jim Ziegler

Jim Ziegler

President and CEO of Ziegler SuperSystems

Jim Ziegler ranks among the industry's most recognized and honored trainers, consultants, authors, speakers, and forecasters.

View Bio