Banks may be sued by U.S. for auto lending activities, report says
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WASHINGTON (Bloomberg) -- The U.S. Consumer Financial Protection Bureau has told at least four banks that it may sue them over vehicle loans and interest-rate markups by auto dealers that appear discriminatory, three people briefed on the matter told Bloomberg.
At least four banks received letters from the CFPB last week giving them 15 days to provide an explanation, said the people, who asked not to be identified because the plans aren't public. The letters indicate the bureau believes the banks may have violated the Equal Credit Opportunity Act, a 1974 law that bars discrimination in lending.
Auto lending has been an area of growing revenue for banks. As the economy has improved, new loan originations have been on the rise, reaching $85.8 billion in the third quarter of 2012, according to the Federal Reserve.
"There is always a demand for autos," Melinda Zabritski, director of automotive finance at Experian Plc, said in an interview. "You also have banks with money to lend."
The 2010 Dodd-Frank Act that created the bureau excluded auto dealers from the CFPB's authority. Stuart Rossman, director of litigation at the Boston-based National Consumer Law Center, said any action by the agency to address auto lending would have to occur through its authority over banks.
"In a general sense, CFPB can only cover the banks," Rossman said in an interview.
Market fragmented
The market for new and used auto loans is fragmented, with no lender -- banks, captive finance companies, credit unions, etc. -- controlling more than 6 percent of the market in the third quarter of 2012, according to data compiled by Experian. Wells Fargo & Co. had 5.9 percent at that time, while Ally Financial Inc., formerly GMAC, had 5.54 percent and JPMorgan Chase & Co. had 4.94 percent.
Other banks that are among the top 20 auto lenders include Bank of America Corp., Fifth Third Bancorp, U.S. Bancorp, SunTrust Banks Inc. and PNC Financial Services Group Inc., according to Experian.
Moira Vahey, a CFPB spokeswoman, declined to comment on the letters.
The regulation of auto lending was one of the hardest-fought provisions of Dodd-Frank. Auto dealers overcame opposition from the Obama administration to their exclusion from oversight by the CFPB, with Congress giving regulatory power to the Federal Trade Commission instead.
CFPB director Richard Cordray said on Feb. 5 that the agency is fielding "a number" of complaints on vehicle financing through its consumer response system. Dealers often provide financing by giving buyers loans backed by banks and other lenders, a process known as indirect lending.
Auto lending
CFPB has the authority to supervise banks with over $10 billion in assets, and non-bank firms that it designates through regulation.
"Auto lending is within our jurisdiction," Cordray said in a conference call with credit unions. "We are examining institutions around auto lending just as we are looking at them on mortgage, credit cards, student loans."
CFPB has the power to enforce ECOA, the 1974 law banning discrimination in lending. Last year, the agency indicated it would apply a legal doctrine known as disparate impact to consumer financial products. The doctrine states that lenders can be sanctioned for actions that have a discriminatory effect -- as demonstrated by statistical analysis, for example -- even if they didn't intend to discriminate.
Bailey Wood, a spokesman for the National Automobile Dealers Association, said the group cannot comment because it has not seen any of the letters. He said it is legally possible for the CFPB to pursue lawsuits of this kind, despite new-car dealers' exemption from the banking reform law.
"We've known all along that they would have jurisdiction over the lenders," he said.
'Discriminatory effect'
"From the perspective of a consumer disadvantaged by policies that have a discriminatory effect, it makes no practical difference whether a lender consciously intended to discriminate," Cordray said in a speech Wednesday to the CFPB's Consumer Advisory Board. "Every consumer, regardless of race, gender or other characteristics protected by federal law, should have equal access to credit."
Fees collected by auto dealers "have historically been found to affect people of color more than others," said Vahey, the CFPB spokeswoman.
Wood, of NADA, defended the dealers' role in vehicle finance across racial and economic categories.
"At the end of the day, dealer assistance does more to expand access to credit than anything else," Wood said in an interview. "We make sure that people can get car loans."
The Supreme Court has signaled interest in a case on disparate impact involving a separate law, the Fair Housing Act.
The possible CFPB lawsuits concern a practice in the indirect lending process that consumer groups call the "dealer markup," and whether it is applied in a discriminatory way, according to the people. Industry lobbyists refer to the practice as "dealer participation" or "dealer-assisted financing."
Under this practice, buyers receive a loan that is costlier than the one the bank gave the dealer. The industry says the difference is a reasonable price for dealers' services, and that buyers can negotiate that spread down.
Marketplace 'competitive'
"It's a very competitive marketplace, and consumers can negotiate the cost of car and financing," Chris Stinebert, head of the American Financial Services Association, a trade group, said in an interview.
The Center for Responsible Lending, a North Carolina-based consumer advocacy group, has estimated that buyers who bought cars in 2009 paid $25.8 billion in interest over the lives of their loans due to dealer markups. They also argue that buyers have limited chances to negotiate the price of the loan, and are unaware that dealers are compensated through the financing, not only the vehicle sale.
Incentive 'perverse'
"This creates a perverse market incentive where the dealer's incentive is to sell the loan that provides the most compensation for the dealer, which by definition is not the loan that provides the most competitive rate for the consumer," the center wrote in a March 30 comment to the FTC.
The center has compared dealer markups to the yield-spread premium, which compensated mortgage originators through the interest rate on a home loan. The Federal Reserve banned the yield-spread premium for mortgages in a 2010 regulation.
The consumer law center litigated a series of cases on discrimination in auto lending about a decade ago. The cases resulted in settlements valued at more than $100 million and changes to lending practices in auto finance, according to the NCLC Web site.
Stinebert, of the financial services trade association, said that the cases also led bank and non-bank auto finance businesses to limit the dealer markup.
"Those voluntary caps on dealer participation agreed years ago are still in place," Stinebert said.
Gabe Nelson of Automotive News contributed to this report.
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