The Consumer Financial Protection Bureau ought to issue clear rules for auto lending using a formal rulemaking process, rather than issuing general guidance or orders aimed at individual companies, which lenders must try to interpret and apply to themselves.
That was the message from a couple of industry speakers Wednesday at a conference in Washington hosted by the U.S. Chamber of Commerce -- a persistent critic of the CFPB.
“It’s almost like the cop standing by the side of the road, pulling people over for speeding,” said Andy Koblenz, general counsel for the National Automobile Dealers Association, during a panel discussion.
“Someone says, ‘OK, I want to comply. What’s the speed limit?’ And they say, ‘I’m not going to tell you. After the fact, I’ll look back and I’ll tell you whether you were speeding.’ That’s not fair, and it’s ultimately going to drive credit out of the market.”
The U.S. Chamber, the dealer association, the auto finance industry and several members of Congress -- mostly Republicans but also some Democrats -- complain that the CFPB hasn’t explained precisely how it analyzes auto loan statistics to determine whether dealers are overcharging minority borrowers, as the CFPB maintains.
A year ago, the CFPB issued guidance after its analysis found dealerships sometimes charge minority borrowers higher amounts of dealer reserve than they do other similarly situated borrowers. The dealer reserve is the added interest -- generally up to 2 percentage points -- lenders allow a dealership to tack onto an auto loan as compensation for acting as a middleman.
The CFPB calls higher interest rates for protected groups a “disparate impact,” which amounts to illegal discrimination, even if it’s unintentional. The CFPB, which holds lenders responsible for loans originated at dealerships, wants lenders to switch to flat fees or some other form of dealership compensation.
Steve Antonakes, CFPB deputy director, spoke separately at the conference today. He stressed that the CFPB has five regulatory tools at its disposal and intends to use all five: rulemaking; consumer complaints; supervision and examination; enforcement; and consumer education.
Broader use of tools
But Koblenz said during his panel discussion that the CFPB relies too heavily on enforcement actions against individual companies. On the same panel, Andy Navarrete, chief counsel for Capital One, echoed that complaint. He said: “The CFPB does have five tools at its disposal. We would like to see, perhaps, a broader use of the rulemaking tool.”
In 2012, Capital One, as part of a CFPB consent order, was required to refund consumers $140 million for allegedly misleading marketing tactics in connection with the sale of “add-on products” for credit cards, such as payment protection and credit monitoring.
Navarette said that as a result of that consent order, Capital One decided to get out of the add-on business. But he noted that other companies with similar consent orders have stayed in. “Those consent orders have actually produced as many different outcomes as there were consent orders,” he said.
He said the CFPB should follow a lengthier but more thorough rulemaking process that would formally take industry input into account.
“You have 5,000 auto lenders in this country. Tackling individual institutions via supervision or enforcement may change behaviors at those individual companies,” Navarette said. “But it’s not going to move markets in a way that actually produces consistent rules of the road for the industry.”
You can reach Jim Henry at firstname.lastname@example.org