I thought I’d use this month’s editorial to clear up a few things regarding the Consumer Financial Protection Bureau. If anything, this exercise will get you caught up on why the battle for control of the CFPB is so important now that its former director, Richard Cordray, has officially departed.
First, the CFPB isn’t to blame for all the paperwork you have to complete to deliver a deal. It’s also not responsible for the Red Flags Rule, that pesky privacy notice, or the advertising crackdown we’ve seen in recent years. You can blame the Federal Trade Commission (FTC) for all of that.
And, no, the bureau has not hammered dealers, because it doesn’t have the authority to do so. What it has done is indirectly affected the activities of dealers through finance sources, particularly when it comes to rate markups. And as I wrote a couple of months ago, it is influencing the lending strategies of finance sources operating in the indirect channel.
As for that rate modification form the National Automobile Dealers Association and a host of other compliance outfits have put out since 2013, the bureau wasn’t responsible for that either. In fact, it has yet to recognize those forms as a solution to its fair lending concerns regarding dealer markups.
So let’s go back to the early days of the CFPB, when it was just beginning to formulate its strategy for the auto finance space. See, the bureau had already set its priorities for the first two years of its existence, discrimination in auto finance being one of them.
And in a Feb. 20, 2012, memo, bureau officials Patrice Ficklin and Rick Hackett, the latter of whom has since left the CFPB, requested that Cordray approve the establishment of the Auto Finance Discrimination Group. Its charter was to “lead the bureau’s efforts to study, investigate, and make recommendations about particular areas of concern in the auto finance market.” They included “high-margin” F&I products, buy-here, pay-here dealers and, you guessed it, dealer markups.
Thanks to the FTC’s 2011 roundtables and a since-debunked study from the Center for Responsible Lending — which claimed that consumers pay an estimated $25.8 billion in interest rate markups over the lives of their loans — the bureau concluded that consumers were really clueless about the vehicle financing process. And that fed its fair lending concerns regarding dealer markups.
In their memo, Ficklin and Hackett also bought up discrimination suits filed against several captives in the late ’90s and early 2000s. As part of those settlements, which were reached between 2003 and 2007, finance sources agreed to cap markups at 2.5 points. Those consent agreements had already expired by the time the memo was being penned, which raised a few questions for the bureau.
“It is not certain whether the caps fully addressed the fair lending concerns associated with dealer markups,” the two officials noted in their memo. “The extent to which auto lenders are self-monitoring for fair lending issues for compliance with the Equal Credit Opportunity Act (ECOA) is also unknown.”
The memo shows that Cordray approved their request to establish the working group, with the fair lending examinations kicking off shortly thereafter. Well, two out of the five finance sources the CFPB first examined didn’t have compliance programs around markups. For those that did, bureau officials said corrective actions were limited to dealer meetings and warnings. In other words, they had no teeth. And based on its controversial proxy methodology, the bureau also discovered that the 2.5-point cap did not eliminate pricing disparities.
The bureau considered three options: The first was banning dealer participation altogether through rulemaking. It also considered a rule clarifying the liability of finance sources under the ECOA. It also considered using the Truth in Lending Act to force dealers to disclose markups to consumers. Problem was, the dealer exemption the NADA fought so hard for stood in the way of the latter.
So all the bureau could do was issue its controversial dealer participation guidance in March 2013, warning finances sources that they would be held responsible for discriminatory markups on the part of their dealers. The rest is history: The bureau has since imposed millions of dollars in fines on auto finance sources, including Ally, American Honda Finance Corp., and Fifth Third Bank.
Well, after almost four years and several attempts at repealing that guidance through legislation, the Government Accountability Office, as you’ll read on Page 8, came out last month and said Congress can do just that under the Congressional Review Act. Well, according to one of my legal sources, Congress doesn’t have to do a thing.
See, my insider said the GAO’s finding gives the acting director all the authority he or she needs to rescind the guidance. And that’s why it’s worth following CFPB Deputy Director Leandra English’s fight to block President Trump’s appointment of White House Budget Director Mike Mulvaney.