Auto financing: Time for an open, honest discussion
The fledgling U.S. Consumer Financial Protection Bureau scored its first victory in regulating auto-lending practices.
Ally Financial settled with the CFPB and the Justice Department on Dec. 20. Ally will pay $98 million, and it agreed to monitor auto dealers more closely and reduce what Ally calls the "perceived disparity" that minorities may face obtaining auto loans.
It's the first concrete outcome since the CFPB's preliminary finding earlier this year of systemic differences in auto loan interest rates paid by minorities and whites that couldn't be explained by the borrowers' credit scores.
The action makes it clear the agency is determined to regulate auto lending, especially to end racial discrimination.
Lending discrimination is unacceptable. There's no room in the business for it. It's wrong, and it's bad business.
But we still have a hard time knowing exactly how pervasive it may be because the CFPB is holding its data close to its vest. The National Automobile Dealers Association had previously challenged the CFPB to share the methodology the agency used in finding discrimination. NADA repeated that request after the Ally announcement.
It's still a reasonable request. The CFPB and the auto industry need to reach a working agreement on what the rules are. The agency has a responsibility to define clearly what behavior it considers out of bounds.
The Ally settlement is a step in the right direction. But it doesn't explain how a new industry standard will emerge. It could be a long slog, with each company trying to cover its own back for fear of running afoul of antitrust regulators rather than having an open, honest, industrywide conversation about how to serve everyone's needs.
There must be a way that dealers can be paid adequately for their important role in auto finance while having the right incentive to look out for their customers without creating an opening for discrimination, whether intentional or unintentional. There must be a solution. And the longer the industry waits to find it, the more Allys there will be.
Now is the time for forward-looking dealers, finance executives and other leaders to take the lead and create auto loan origination processes that serve all parties equally. Hopefully, the new models with the most merit will expand into common use.