-
The Consumer Financial Protection Bureau is preparing to crack down on interest rate markups that automobile dealers add onto the cost of car loans, potentially threatening one of the few bright spots for bank lending of late.
March 15 -
The Consumer Financial Protection Bureau has launched a review of alleged discrimination in auto lending. Bankers fear it will opt for punitive enforcement over rules to prevent misconduct.
June 11 -
Banks including Wells Fargo, JPMorgan Chase and Capital One are cashing in on the rebound in car sales, as their auto lending arms search for ways to boost still-sluggish consumer loans.
March 9
WASHINGTON — The Consumer Financial Protection Bureau is warning indirect auto lenders that they could be violating fair-lending laws by not clamping down on auto dealers who often mark up the loans they issue.
The agency released a bulletin on Thursday that says lenders must enhance their oversight of auto dealers with which they do business after a recent investigation revealed that disparities in interest rates charged to minority borrowers.
Under existing law, auto dealers have leeway to raise the interest rates on loans after a lender sets the rate, sometimes providing a portion of the kickback to the lender in the process.
"Consumers should not have to pay more for a car loan simply based on their race," CFPB Director Richard Cordray said in a press release. "Today's bulletin clarifies our authority to pursue auto lenders whose policies harm consumers through unlawful discrimination."
The bulletin comes on the heels of reports that the agency sent letters to a handful of large banks regarding potential discrimination practices with auto loans.
In recent years, banks including Wells Fargo (WFC) and JPMorgan Chase (JPM) have ramped up their lending through partnerships with auto dealers as sales rebounded. Typically, the lender sets an interest rate for the dealer, which then may raise the rate for the borrower and either pocket the difference or kick a portion back to the lender.
The CFPB does not have authority to supervise auto dealers but it is holding the lenders responsible for monitoring those markups as well as borrower profiles in the contracts with auto dealers. The move is likely to significantly change relationships and may increase regulatory burden, particularly on smaller lenders, according to industry representatives.
"The CFPB has no authority over auto dealers so now we're being put in the difficult position of essentially policing the auto dealers," said Fred Becker, president and chief executive of the National Association of Federal Credit Unions. "And that's very difficult for credit unions that are smaller entities."
The bulletin says lenders must impose "controls on dealer markup and compensation policies" and remove the risk of dealer discrimination by placing in requirements "such as a flat fee per transaction." The bulletin goes further by encouraging lenders to send fair-lending laws to dealers and take prompt corrective action with those dealers who could be violating those statutes.
The markups, though legal, have been an issue for some time, but observers say lenders have been reluctant to put compensation restrictions on dealers for fear that the dealer would just chose another lender without such limitations. The bulletin could prompt systemwide change.
The CFPB's "hope is that this happens on a voluntary basis," said Ed Kramer, the executive vice president of regulatory programs at Wolters Kluwer Financial Services. "Unless a majority of players limit the markups or impose restrictions on auto dealers, it's going to be tough" to change across the board.
Observers have said the agency is trying to force auto dealers to agree to flat-fee compensation by putting pressure on lenders through existing fair-lending laws. But Patrice Ficklin, the CFPB's assistant director of fair lending and equal opportunity, said at a consumer conference last week that the bureau did not consider the markup practice itself unlawful.
Still, the agency's bulletin Thursday noted that markups amount to "tens of millions of dollars" charged to consumers each year. The CFPB argues that by allowing the dealer to set the final interest rate, it increases the risk of pricing disparities among consumers based on race, nationality, or other discriminatory practices; particularly among African-Americans and Hispanics.
"The bureau is clearly trying to serve fair notice that indirect auto enforcement will be a major priority for 2013," said Anand Raman, a banking lawyer at Skadden Arps. "I don't think that there's anything new here. But this bulletin serves as a good indicator of the bureau's concerns and the way it views the legal issues relating to indirect auto lending."
