Before CFPB crackdown, how about some guidance?

Before the Consumer Financial Protection Bureau cracks down on auto lenders, it should offer guidance on what its dealer reserve standards are.

The American Honda Finance Corp. settlement and recent Fifth Third Bancorp settlement with the CFPB and U.S. Department of Justice have the same dealer reserve limitations: a cap of 1.25 percent for loans lasting 60 months or fewer and 1 percent for loan terms longer than 60 months.

But shouldn’t auto lenders be aware of what the CFPB is going for before hearing about their competitors’ settlements?

During the CFPB’s semiannual reporting session to the U.S. House Financial Services Committee held on Tuesday, Rep. Sean Duffy, R-Wis., told CFPB Director Richard Cordray that it is important for regulators to outline clear auto lending rules.

When “you try to make rules by way of enforcement, people don’t know what the rules are,” Duffy said. “So the heavy hand of the CFPB comes bearing down on an institution making claims of racism.

“If you think this is so important, why wouldn’t you do a rule? Why wouldn’t you let people make comments? Why wouldn’t you offer guidance?” Duffy asked Cordray.

Cordray said that it’s hard to make a rule at this point. The CFPB is trying to gain more experience in the matter first, “and that’s what we’ve done,” he said.

“You may think in retrospect it wasn’t the right answer. Maybe years from now, I’ll look back and think it wasn’t the right answer. But that’s how we’ve tried to proceed.”

Duffy also asked whether the CFPB had ever considered rulemaking as a way of potentially banning dealer reserve.

“We haven’t ruled it out, but we haven’t done it yet,” Cordray said.

The CFPB’s 2013 auto lending bulletin advises that lenders develop policies for dealer reserve or eliminate it altogether by issuing dealers flat fees for arranging customers’ auto loans.

Still, the bulletin doesn’t suggest what the CFPB believes to be a fair amount of dealer reserve. Dealers and lenders shouldn’t have to assume what a fair rate is based on caps enforced in other settlements.

The CFPB should consider a rule, or at least guidance beyond the 2013 auto lending bulletin, to give auto lenders and the dealers they work with some clarity.

You can reach Hannah Lutz at -- Follow Hannah on Twitter: @hm_lutz

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