As for deception, dealerships need to keep a close watch on required disclosures in advertising, said Carole Reynolds, senior attorney with the Federal Trade Commission's Division of Financial Practices.
Disparate impact refers to the concept that what counts is the end result of finance practices -- the impact on a protected class, such as women or minorities -- even if an auto lender or dealer didn't intend to discriminate.
That concept got auto lenders and dealers in trouble in anti-discrimination lawsuits in the late 1990s and early 2000s.
A central issue is that lenders traditionally leave it up to dealerships to set the final interest rate customers pay on their indirect auto loans arranged by dealerships.
Theoretically, that creates potential for a disparate impact because rates can vary, even for borrowers with similar credit histories.
As a result of wide-reaching settlements in those earlier cases, many auto lenders imposed caps on dealer reserve; the amount dealers are allowed to add to the final interest rate as compensation for having arranged the loan.
Benoit said last week most caps are around 2 percentage points, but he said data from the National Automobile Dealers Association show that in actual practice, dealer reserve averages less than 1 percentage point on top of the wholesale buy rate.
Meanwhile, without referring specifically to auto lending, the new Consumer Financial Protection Bureau in April said that it intends to use disparate impact as a "legal avenue ... to pursue lenders whose practices discriminate against consumers."
The bureau has also said it intends to hold lenders accountable for any disparate impact in their portfolios. That includes indirect loans via dealerships, Benoit said. Hypothetically, that could affect how dealerships get compensated for arranging loans, Benoit said.
Benoit said he doesn't think the Consumer Financial Protection Bureau would prohibit dealer participation completely. But he said dealerships should "stay tuned" to see what happens. "I'm not sure the CFPB wants to get into managing the operations of finance companies," he said. "It could be that they do, but I just don't expect to see that."
In her presentation, the FTC's Reynolds cited recent cases where the FTC accused five dealerships around the country of deceptive advertising. The most prominent accusation was that several ads misled consumers into thinking that customers wouldn't be responsible for the remaining balance on their trade-ins.
The FTC also accused dealerships in some cases of violating advertising rules that require disclosures for annual percentage rates and lease terms. The dealerships entered consent settlements agreeing not to engage in deceptive practices.
Reynolds cited the "Four P's" as a good rule of thumb for whether disclosures are sufficient. They are:
- Prominence -- Can consumers notice and read it?
- Placement -- Is it where consumers would look?
- Proximity -- Is it near the claim it qualifies?
- Presentation -- Is the wording and format easy for consumers to understand?
Said Reynolds: "It's a handy way of remembering what this is all about."