Where the CFPB Heads Next in Auto Lending Probe

WASHINGTON — Consumer groups and industry advocates found rare common ground Thursday in recommending where the Consumer Financial Protection Bureau should go next in its oversight of the auto loan industry.

Both sides used a CFPB field hearing in Indianapolis to push for clearer disclosures so that consumers can more easily make price comparisons.

"The main thing is that consumers are in a position where they have to negotiate the terms. And I think it would be very critical for consumers to have a good understanding that they can negotiate the terms and that they have the information they need on which to make those decisions," said Steven Zeisel, executive vice president and general counsel of the Consumer Bankers Association. "As consumers gain more understanding of that, they should become better consumers and get better terms of the transaction."

The CFPB used the hearing to receive input from the public on its plan announced Wednesday to supervise the largest nonbank auto lenders.

If the CFPB focused on disclosures, it might be more accepted by the industry, which fears the agency is secretly trying to fix market prices. The CFPB has warned lenders that partner with dealerships that they are on the hook for any potential discrimination committed by the dealer.

Typically, the lender offers a wholesale or "buy rate" to the dealer, who is compensated based on the difference of the interest rate the dealer then offers to the consumer. Though the consumer can negotiate with the dealer, consumer groups say they often times are not aware of this or how to shop around for the best prices.

"You don't have to take dealer financing. I'm not even sure that consumers know that" and "they need to know that if they do opt for dealer financing, that their credit is going to be pulled 10 to 20 times and that could lower their credit score," said Andrew Ault, staff attorney at the Indiana Legal Services, who spoke at the hearing. "The education to shop is very important, although it is a very difficult environment because that's the dealer's whole point: to stop the shopping so you can finance with them."

Many consumer groups have pressured the agency to write rules restricting the ability of the dealer to have price discretion, arguing that it makes auto loans far more open to abuse.

"One of the fundamental difficulties in all this is that the person sitting across the desk from the consumer is always going to know more than the consumer does because it's their job … so expecting consumers to develop expertise on par with the person sitting across the table is a fruitless exercise," said Chris Kukla, senior counsel for government affairs at the Center for Responsible Lending. "Unless you have strong rules and you have protections for consumers, consumer education is pretty meaningless."

The CFPB has stopped short of writing new rules, but is encouraging banks to restrict dealer discretion on prices. The CFPB issued a supervisory highlights report Wednesday, along with a white paper detailing how it determines possible discrimination, that cautioned lenders to either limit or stop dealer discretion altogether.

"Given the fair lending risk associated with discretionary pricing policies affecting dealer compensation, indirect auto lending remains a significant focus of supervisory reviews, especially for indirect auto lenders that maintain discretionary markup policies and have not yet been subject to a fair lending review," the CFPB said in its supervisory highlights report. "Examination teams will continue to review lenders for compliance with federal consumer financial law, and take supervisory action as appropriate to reduce fair lending risk and to promote a fair and competitive auto lending market for consumers."

The report suggests that lenders could "significantly" limit discretionary pricing adjustments by capping off the amount that the dealer can increase the interest rate to 100 basis points, rather than the common 200-or 250 basis-point cap.

"An institution that implements significant limits on discretionary pricing may find that it can significantly reduce certain compliance management activities, such as dealer-specific monitoring and discipline, to which the institution would otherwise need to devote significant attention and resources," the CFPB said.

However, dealers and lenders have argued that by restricting price discretion, it takes away the consumer's ability to negotiate for lower rates and many would face higher pricing overall.

"We know quite simply that flat fees would increase the cost of credit for consumers. Those on the margins would be hurt the most, as they may be forced into higher cost financing or lower priced vehicles, or be priced out of the market altogether," said Bill Himpler, executive vice president of federal government relations at the American Financial Services Association. "Further, the proposed solution of flat fees does not solve the discrimination problem that the bureau alleges."

The trade group is currently putting together a study in support of their claims, which are backed by other industry groups.

"As long as you have multiple finance sources competing for the dealer's business and the dealer is the one who decides who they send the paper to, you have and exercise [dealer] discretion," said Paul Metrey, chief regulatory counsel at the National Association of Automobile Dealers. "And in this arena, our hope is that the bureau will focus its efforts not on the false hope that you can eliminate discretion, but on the real hope that you can manage it in a way that's very effective."

The CFPB's three main areas of concern in releasing the proposal were on disclosures, accurate reporting to the credit bureaus and fair debt collection practices. Another area the CFPB is looking at in auto financing is add-on products typically offered at the dealership that are built into the financing agreement.

Consumers "may encounter certain add-on products such as a warranty, rustproofing, roadside protection, service plans, and more. By the time they have made all those choices, they may be invested in the car and impatient to finish up and drive it home," said CFPB Director Richard Cordray. "Consumers 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."