"What the CFPB wants is for everybody to pay the same at every dealership," said Chris Willis, an Atlanta-based attorney whose clients include banks in auto lending.
CFPB Director Richard Cordray left no doubt the bureau takes a dim view of any dealer discretion in determining a customer's final interest rate on a car loan -- a by-product of dealers' practice of adding interest to lenders' wholesale rates and keeping the add-ons as profit. The add-on, called dealer reserve, is factored into the customer's retail interest rate.
According to the bureau, allowing dealers to set the customer's final interest rate opens the door to discrimination, even if it's accidental.
"People deserve the chance to finance a car purchase at a fair price," Cordray said in a speech March 22 at the National Community Reinvestment Coalition Annual Conference in Washington.
"The time is always right to do what's right," he said immediately after, quoting 1960s civil rights leader Martin Luther King Jr.
Cordray also said the bureau was working to "uphold the fundamental dignity and self-respect of every consumer."
In a bulletin on March 21, the bureau said flat fees could be an acceptable alternative to dealer reserve.
In written responses to that bulletin, trade groups for dealers and auto lenders adamantly denied that their members discriminate. The National Automobile Dealers Association, in a joint statement with the National Association of Minority Auto Dealers, added that changing the way auto loans are traditionally negotiated could raise the cost of consumer credit because the current structure is so competitive.
Dealership indirect lending transactions for prime risk car customers typically work like this: The dealership negotiates a deal with a customer then transmits the customer's credit application to several of the store's preferred lenders. Lenders that find the application acceptable reply with an offer to purchase the loan from the dealership at a wholesale interest rate, called the buy rate.
The lender that purchases the loan allows the dealership to tack an additional percentage of interest -- dealer reserve -- onto the buy rate as compensation for arranging the deal. The dealer reserve is factored into the customer's retail interest rate.
Lenders usually limit the additional interest to no more than 2 percentage points. In practice the amount is often less, dealer and lender groups say. The dealer reserve is paid to the dealership in a lump sum immediately after the loan is purchased by the lender.
In the March 22 speech, Cordray said dealers deserve "fair compensation" for handling finance transactions, but he objected to what he considered a lack of transparency as well as the potential for discrimination.
"When consumers set out to buy a car, they are often unaware of what their financing options are. They may think that everyone like them is offered the same interest rate and do not realize that the rates may be marked up," he said.
"Our experience indicates that there is a significant risk that this discretion may result in pricing disparities on the basis of race, national origin and potentially other prohibited bases."
Last week Cordray repeated earlier bureau statements that it doesn't matter whether the discrimination is accidental. All that's necessary to prove discrimination is that pricing policies had a disparate impact on legally protected groups -- that is, protected groups such as minorities or women paid more.
"Such discrimination may not be consciously intended," Cordray said, "but for consumers who are disadvantaged by these policies, the result is the same."