In dealer-reserve debate, CFPB, NADA and American Honda Finance strive to move ball

Last month, American Banker reported that the Consumer Financial Protection Bureau had cited the finance arms of Toyota, Honda and Nissan for discriminatory auto-lending practices.

What happened since then is very telling about the state of the dispute over dealer-arranged auto loans.

On Tuesday, the Department of Justice said American Honda Finance Corp. agreed to pay up to $25 million to settle U.S. claims that minority borrowers were overcharged for auto loans. Terms of the settlement largely matched those laid out in the American Banker report.

A day earlier, the National Automobile Dealers Association launched a push to find out how the CFPB’s moves could affect dealers.

NADA filed a Freedom of Information Act request for access to an internal bureau memo that may shed light on the agency’s goals regarding dealer reserve.

The CFPB has previously said that it wants lenders to switch to nondiscretionary compensation for dealers, such as a flat fee or a fixed percent of the amount financed, to eliminate discrimination.

The agency believes that dealerships’ discretion in setting their own amounts of dealer reserve -- the share of a car buyer’s interest-rate payments that the dealership earns for arranging the loan -- results in minorities and other legally protected groups being charged higher rates than other borrowers with similar credit. That’s discrimination, even if it’s inadvertent.

But this may be the first time that the CFPB has flat-out stated in writing that its goal is essentially to control dealers’ compensation.

The American Banker report quoted a memo sent by three agency officials to CFPB Director Richard Cordray describing how proposed settlements with the finance arms of Honda, Toyota and Nissan would advance the limiting of dealer discretion.

“The significant limitation of dealer discretion, which in turn reduces fair lending risk, is one of the goals we have been seeking with respect to the indirect auto matters, and this settlement proposal attains that goal,” Jeffrey S. Morrow, Jane M.E. Peterson and Rebecca J.K. Gelfond wrote in a June 16 memo to Cordray about the proposed settlements, according to American Banker.

The CFPB has jurisdiction over lenders, not dealers. The goal mentioned in the memo makes it seem as if the agency wants to regulate dealers through lenders.

“The Bureau’s actions have caused many, including both Republican and Democratic members of Congress, to question whether the CFPB has attempted to skirt its jurisdictional boundary in an effort to regulate dealers,” NADA said in a statement.

In March, Cordray told Congress that he is aware and respectful of the fact that the CFPB cannot regulate dealers. The comments made in the memo “directly contradict” that position, Peter Welch, NADA president, said in the statement.

Referring to the lower rates, or discounts, that dealers arrange for consumers by getting lenders to vie for each loan, Welch added: “Consumers benefit tremendously from dealer discounts, so they deserve to know if these discounts are in danger [of] being unjustly and unfairly eliminated by overzealous Washington regulators.”

So that’s how NADA, and in a way, American Honda Finance, reacted to the American Banker article.

The CFPB’s response was a bit different. Rather than commenting on the news, the agency’s only response was that it planned an investigation into who leaked the story.

You can reach Hannah Lutz at hlutz@crain.com

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