Dealerships, lenders bolster compliance staffs in face of CFPB crackdown
Editor's note: An earlier version of this story misidentified the host of the Webinar “Right-Sizing Your Compliance Staff." It was the Center for Auto Finance Excellence, not Royal Media Group.
Auto lenders and dealerships are strengthening their compliance staffs as the Consumer Financial Protection Bureau cracks down on lending practices. Lenders are beefing up to monitor dealerships more closely and dealerships are gearing up to face the added scrutiny.
“Staffing levels are definitely up” for lenders, said Andy Barksdale, managing director for TruPoint Partners, during a Webinar last week hosted by Center for Auto Finance Excellence. TruPoint is a consulting firm in Charlotte, N.C., that works with financial institutions in compliance.
Meanwhile, dealerships are debating whether to add more positions or pile more responsibilities on staffers who are already accountable for compliance, said Paul Metrey, chief regulatory counsel for financial services, privacy and tax at the National Automobile Dealers Association.
“Certainly compliance is going to require much more time and attention on the part of management,” he said in a phone interview on Monday. “Whether that means they need to take on additional personnel is up to them.”
Metrey said dealership staffs already keep up with a long list of compliance requirements, such as the Red Flags Rule, which is aimed at eliminating identify theft.
The Consumer Financial Protection Bureau touched off the escalation in compliance when it said a year ago it would go after lenders for allowing dealerships to decide their own payment for arranging an auto loan. The payment, called the dealer reserve or dealer markup, is an amount of interest that the dealership adds to the lender’s buy rate on a customer’s loan, usually capped at 2 percentage points.
The CFPB says dealer discretion in setting dealer reserve is a standing temptation for dealerships to hike rates as high as possible in order to increase their own compensation. Too often, the agency says, higher rates fall disproportionately on legally protected classes of buyers. The CFPB calls that a disparate impact, which constitutes illegal discrimination, even if it’s unintentional.
NADA counters that it doesn’t tolerate discrimination and that dealerships are motivated to use their discretion to keep interest rates as low as possible in order to compete.
The CFPB gave auto lenders a choice in March 2013: Switch to a compensation plan in which dealerships have no discretion, such as flat fees; or stick with dealer reserve and adopt much closer and stricter monitoring of loans originated at dealerships to detect any disparate impact on protected borrowers.
Lenders have stuck with dealer reserve -- even Ally Financial.
Ally paid a $98 million settlement in December resulting from a consent order with the CFPB and U.S. Department of Justice. Ally settled discrimination charges related to dealer reserve, while at the same time denying tolerating discrimination.
Lenders say they would lose share if they switched to flat fees or some other form of dealership compensation, unless all lenders switched at the same time.
Compliance is a growth area for corporate recruiters specializing in auto finance, said Terri Horn, managing director for People Strategies, a recruiting, training and consulting firm in El Cajon, Calif.
Horn, alongside Barksdale, participated in the Webinar, “Right-Sizing Your Compliance Staff,” last week.
“It’s kind of uncharted waters,” Horn said in a follow-up phone interview on Monday. “Nobody knows just what to expect, but they do know that monitoring is definitely going to continue to be a part of meeting these government expectations.”
Dealerships are preparing, too. Metrey said NADA can scarcely keep up with demand for training under a Fair Credit Compliance program the agency launched in January.
Under the program, dealerships decide on a fixed rate for dealer reserve. The rate is never to be exceeded. The dealership documents any discounts with a “business reason” why the dealership had to deviate from the fixed rate -- for example, to meet or beat a competing rate. The plan is modeled after the settlement in a 2007 Justice Department discrimination case involving dealer reserve.
“We have been traveling just about every week all over the country to different states” since the plan was introduced, Metrey said. “Demand is so high for training, we had a ‘train the trainers’ session so that state dealer associations could start to do that.”
You can reach Jim Henry at email@example.com.