CFPB Eyes Discrimination
It didn’t take long to hear the buzz when the Consumer Financial Protection Bureau reminded indirect lenders that they must comply with certain regulations to ensure that they are not discriminating against minorities when marking up interest rates.
The CFPB confirmed that some indirect auto lenders have policies that allow auto dealers to mark up lender-established buy rates and compensate dealers for those markups, which are referred to as markup and compensation policies.
The CFPB said because of the incentives these policies create, and the discretion they permit, there is a significant risk that they will result in pricing disparities on the basis of race, national origin and potentially other prohibited bases.
In a bulletin on the matter released on March 21, the CFPB said the Equal Credit Opportunity Act makes it illegal for a creditor to discriminate in any aspect of a credit transaction because of race, color, religion, national origin, sex, marital status, age, receipt of income from any public assistance program or the exercise, in good faith, of a right under the Consumer Credit Protection Act.
Critics of the CFPB’s guidance argue the bureau is overstepping its role because it does not regulate, supervise or have the authority to investigate or initiate enforcement actions against auto dealers, said Alan Kaplinsky, an attorney with Ballard Spahr LLP, a Philadelphia law firm that has a division, the consumer financial services group, that monitors the CFPB.
The Federal Trade Commission is the only federal agency that has the right to investigate and bring enforcement actions against auto dealers for violating ECOA and Reg B, Kaplinsky noted.
“I believe that the CFPB’s guidance has a disparate impact on the large banks. The large banks will certainly feel more pressure than the small banks or nonbanks to stop using dealer rate participation,” Kaplinsky said.
While the large banks may increase their buy rate and agree to pay the dealers a flat dollar amount without giving the dealers any discretion to set rates, Kaplinsky said he is skeptical if it will enable them to fairly compete with the other banks and nonbanks that continue to use dealer rate participation.
It may be too early to know what kind of impact the CFPB’s guidance will have on credit unions. Because the agency cannot supervise, examine, investigate or bring enforcement actions against financial institutions that haves less than $10 billion in assets, only a handful of credit unions would fall under the division’s purview.
The NCUA may be more concerned with out-of-control indirect lending programs. Years ago, the credit union industry suffered losses due to mismanagement of portfolios and dealer relationships.
In that August 2010 NCUA letter, NCUA Chairman Debbie Matz issued several warnings for indirect lending programs, including rapid growth that can lead to a material shift in a credit union’s balance sheet composition.
“NCUA has seen seemingly healthy credit unions fail in a matter of months due to indirect lending programs that spun out of control. While there are benefits to a well-run indirect lending program, an improperly managed or loosely controlled program can quickly lead to unintended risk exposure. This can increase credit risk, liquidity risk, transaction risk, compliance risk and reputation risk,” Matz wrote.
John Flynn, president/CEO of Opening Lending LLC/Lenders Protection, an Austin, Texas-based auto loan underwriter, has said that there are certainly risks that are tied to the fierce competition for shelf space with the dealerships. Some lenders are also paying the dealers some aggressive rates and reserves to get the deals.
Speaking generally on indirect lending programs, Flynn said he doubts lender are making any net yield at all on the super-prime loans and that for the most part, these loans are typically the only relationship the member has with the credit union so they have to make money here.
The National Automobile Dealers Association and the National Association of Minority Automobile Dealers issued a joint statement questioning the CFPB’s guidance.
“NADA and NAMAD strongly oppose any form of discrimination in auto lending, and the CFPB guidance appropriately explains that unlawful discrimination has no place in the marketplace,” the trade groups said in a statement.
“However, it is relying on a theory of discrimination that is based on a statistical analysis of past transactions–not intentional conduct–and the CFPB has not provided any information about how it is conducting its analysis,” NADA and NAMAD said.
The groups added “this anticompetitive approach is not in the interests of consumers and should not be accomplished through guidance and enforcement actions that lack transparency, the opportunity for public comment, and the benefits of a data driven analysis into the effects they would have on consumers and the automobile financing marketplace.”
Both auto industry trade groups said the CFPB should work with the Federal Reserve Board and the Federal Trade Commission on those various actions.