U.S. Chamber of Commerce calls for detailed auto lending rules from the CFPB

Sharp: “When the CFPB uses enforcement actions to send a signal to the broader regulated community, the message doesn't always get through in a way that's useful for a person sitting at a compliance desk." Photo credit: U.S. CHAMBER OF COMMERCE

The U.S. Chamber of Commerce is pressing the Consumer Financial Protection Bureau to write what would amount to a compliance handbook for auto lenders.

In a letter last week to CFPB Director Richard Cordray, the chamber called for the CFPB to provide auto lenders with specific rules for loans arranged at dealerships instead of forcing companies to interpret and apply guidelines tailored for individual lenders as part of "one-off" enforcement actions.

"When the CFPB uses enforcement actions to send a signal to the broader regulated community, the message doesn't always get through in a way that's useful for a person sitting at a compliance desk," Jess Sharp, managing director of the U.S. Chamber's Center for Capital Markets Competitiveness, told Automotive News in a phone interview Tuesday.

The chamber's 16-page letter, dated Feb. 12, asked for, among other things, standards for disparate impact and liability in the context of indirect auto lending, a definition of "abusive" acts or practices the CFPB wants to eliminate, and a standard for lenders' liability for the actions of service providers, such as collection agencies or repo agents.

The chamber has been a critic of the CFPB since 2010 when the bureau was created. In its letter, the chamber said the CFPB's present approach of "regulation by enforcement settlement" combined with issuing brief guidance statements makes it "virtually impossible for companies to determine in advance what they should do to comply with the law."

The chamber said that instead of using consent orders, such as the December 2013 consent order among Ally Financial, the CFPB and U.S. Department of Justice, as templates for compliance, the CFPB should follow a more formal rule-making procedure which would produce "detailed, practical guidance -- following public comment and meaningful economic analysis -- that both protects consumers and preserves access to credit and gives regulated businesses the clear, understandable standards they need to ensure that they are complying with the law."

The CFPB didn't respond publicly to the letter. In response to questions about the letter, a CFPB spokesman referred to previous public statements.

Too vague?

Last month, during a question-and-answer session at the American Financial Services Association Vehicle Finance Conference in New Orleans, CFPB Assistant Director Patrice Ficklin disagreed with criticism that the CFPB's guidance is too vague to serve as a how-to for lenders.

Chris Stinebert, the AFSA's chief executive officer, asked Ficklin whether the Ally Financial consent order was an adequate "road map" for other companies to follow. "I could not go out and implement a program based on that agreement," Stinebert said.

Ficklin responded that the CFPB has provided plenty of specific direction, both in the consent order with Ally and in the guidance the CFPB provided the industry last March.

"While we may not answer every question to the nitty-gritty 'nth' degree ... I think if someone takes the time to carefully read the consent order, they'll be surprised how much is in there," she said.

Under the consent order, Ally paid $98 million in consumer restitution and penalties to settle CFPB and Justice Department allegations that it had allowed discrimination by letting dealerships set customer interest rates via a compensation method known as the dealer reserve.

The dealer reserve, often called the dealer markup, is an extra bit of interest that lenders allow dealerships to add to the buy rate on an auto loan to compensate the dealership for arranging the loan.

The CFPB said Ally's policy of allowing dealerships to set the dealer reserve led to a disparate impact, or higher interest rates, for minority borrowers. The CFPB said Ally could either switch to a form of dealership compensation that eliminates dealerships' discretion in setting their compensation -- including but not limited to flat fees -- or adopt a strict program of monitoring loans originated at dealerships to detect differences in dealer reserve and then reporting the results to the CFPB.

Although it accepted the consent order, Ally denied tolerating discrimination and opted to stick with the dealer reserve, along with monitoring loans and reporting results to the CFPB, Ally CEO Michael Carpenter said in an interview last month.

A 'robust' system

In New Orleans, Ficklin said the CFPB has spelled out in some detail what it considers to be the main ingredients of a "robust compliance management system" for lenders.

That includes reminders to dealerships explaining the Equal Credit Opportunity Act; periodic training for dealerships; analysis of loans originated at dealerships, both on an aggregated basis and store by store; and prompt refunds for affected consumers.

She said repeatedly that the CFPB does not seek to mandate flat fees. The bureau is also open to a fixed percentage of the amount financed or to an approach that would take into account the amount financed plus the duration of the loan. "The bureau has not found any reason in principle to object to either of these," she said.

You can reach Jim Henry at autonews@crain.com



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