CFPB: Service contracts won't be targets
LAS VEGAS -- The Consumer Financial Protection Bureau will avoid going after the financing of aftermarket products such as service contracts or GAP, a bureau official told an audience of auto lenders and a few dealers here last week.
"It's not our job to come in and say, 'These are good, and those are bad. You can finance these, but you can't finance those.' It's a competitive marketplace," said Eric Reusch, the bureau's program manager for auto and student loans.
"Let them compete on their own merits," he said at the Auto Finance Summit conference hosted by Royal Media Group. Reusch commented in a brief conversation after his presentation.
But concerns remain.
In a separate session, dealers said they worry about the bureau even though dealers were "carved out" of the bureau's jurisdiction -- except for buy-here, pay-here dealers who collect their own loans.
"I see the train coming," said Tyler Corder, CEO of Findlay Automotive Group in Henderson, Nev.
Corder said he's worried that the bureau or the Federal Trade Commission could regulate lenders in a way that restricts how much dealers can earn in dealer reserve.
Corder: "I see the train coming."
"We've really made a conscious effort to reduce the percent of finance income from reserve. I want finance income to come primarily from products, much less from relying on finance reserve. At some point that's the biggest risk we've got," he said.
Reusch reiterated that the bureau will investigate discrimination, specifically based on what's called disparate impact. The bureau notified lenders in April that it would focus on disparate impact.
Disparate impact means that what counts is the end result -- the impact on a protected class, such as women or minorities -- even if an auto lender or dealer didn't intend to discriminate. If a legally protected class pays higher rates or gets rejected for loans more often, that may constitute discrimination.
To settle disparate-impact lawsuits in the late 1990s and early 2000s, many lenders joined a settlement in which lenders put a ceiling on dealer reserve of 2 to 2.5 percentage points added to the customer's rate, depending on the term. But lenders worry that's still too much leeway for dealerships to set the customer's final interest rate.
Reusch said last week that the bureau won't threaten the basic nature of indirect lending, in which the dealer gets money for acting as a middleman. But if the bureau discovers specific examples of a disparate impact, it would be obliged to act, he said.
"Are there issues with Fair Lending with regard to that compensation scheme?" he asked. "We just don't know yet."
You can reach Jim Henry at email@example.com.