Here's a disturbing thought: As much as the Consumer Financial Protection Bureau has upset auto lenders and dealers, it hasn't even gotten around to the vast category of subprime auto lending.
Sure, the bureau has targeted dealer reserve in prime-risk lending. And now the bureau is reportedly looking into F&I products as well.
In both of those cases, it’s easy to understand the dealer as middleman. For prime loans, dealer reserve is the delta between the lender’s buy rate and the rate the customer pays. For F&I products, there’s a wholesale price and a retail price. Simple.
But what’s the bureau going to measure when it searches for discrimination in indirect subprime lending, in which the pricing model is completely different? I’ve asked some auto lending experts this question, and nobody seems to know.
In a prime-risk loan, the dealership typically adds some amount of dealer reserve to the lenders buy rate. In subprime, the dealership makes money by marking up the retail price of the vehicle based on what it has to pay the lender for providing the loan and based on how much it paid for the vehicle. If it’s a used car, the dealership’s cost for the car can vary from unit to unit with condition, mileage and features.
That’s going to be a real can of worms. The bureau has jurisdiction over buy-here, pay-here dealerships. Maybe that segment will provide some clues for what’s in store for indirect subprime lending. Meanwhile, it’s something to think about.