The Consumer Financial Protection Bureau’s (CFPB) indirect crusade against dealers has been ongoing for several years now. For those who are not familiar with the auto dealership model, dealer participation is a method whereby a dealer arranges a wholesale rate of financing for a customer and then marks it up to a rate equal to that which the customer could find in the retail marketplace. As the NADA describes in their article, “The Fallacy of Flats” , the CFPB has essentially claimed that this provides the dealer with a level of pricing discretion that creates a “significant risk” that certain groups of consumers will pay a higher interest rate (due to more dealer participant) than other groups of similarly situated consumers in violation of the federal Equal Credit Opportunity Act. Although auto lending policies strictly prohibit gathering information on ethnicity, the CFPB has claimed evidence of this violation as a result of its efforts to categorize borrowers into ethnic groups based on the borrower’s name and the zip code in which they reside. The accuracy of the CFPB’s categorization has come under question on many fronts but it has not deterred them from their crusade.
Although the CFPB technically has no direct oversight over auto dealers, it has been working in collaboration with the Department of Justice (DOJ) to enforce policies. Their tactic has been to place heavy pressure on indirect finance sources (lenders) in an attempt to influence compensation programs for auto dealers that originate consumer credit contracts. Many in the industry have been concerned that finance sources would default to a flat fee compensation method in light of this pressure. If this were to occur, the shift would dramatically change the presentation and selection of finance options available to consumers at the time of sale. Instead of being motivated to find the most competitive consumer finance rate, dealers may be incentivized to present only those financing options which have the highest flat compensation fee. As discussed by the NADA in the above article, this change would not necessarily translate to the lowest retail interest rate being offered to the consumer.
While the battle isn’t over, a clearer picture of the future is emerging. Thankfully some finance sources such as Ally have stayed true to traditional dealer participation models even in the face of harsh actions from the CFPB and the DOJ. This resilience by finance companies appears to have persuaded the CFPB to be more willing to accept a nondiscriminatory dealer participation model as evidenced by the CFPB’s agreement with American Honda Finance Corporation in July, whereby it allowed the continued use of a dealer participation model based on fixed rate markups.
While many dealers are continuing business as usual, we recommend that dealers protect themselves by ensuring that they have controls in place to guard against claims of discrimination in this highly sensitive regulatory environment. One of the most important controls we like to see when we go into a dealership is the adherence to a formal Fair Credit Compliance Policy & Program. This is a formal policy which clearly documents that the rate offered to a consumer by the dealer is always the wholesale rate marked up by a standard predetermined margin. Deviations from this policy would then only happen for a specific circumstance (rate cap, monthly budget constraint, promotional financing campaign, etc.) and be clearly documented in the customer’s file. The NADA has done a lot of the leg work in this area and has a great example of a Fair Credit Compliance Policy & Program that can be implemented by dealers. We encourage dealers to spend the time to review this example and your own internal policies and procedures to assess the need to beef up your policies or documentation in this area. Feel free to give me a call to discuss your specific situation. More to follow as the situation continues to develop!
What will the CFPB look at next? F&I product sales? Stay tuned!