LAS VEGAS -- As the Consumer Financial Protection Bureau sharpens its message to auto lenders to take action on the dealer reserve, the National Automobile Dealers Association is petitioning the retail industry to ask elected officials for a review of the CFPB's methods.
The dealer reserve is the discretionary amount dealerships tack on to customers' interest rates as payment for arranging the loan.
The CFPB wants auto lenders either to switch to flat fees and eliminate the dealer reserve entirely or to scrutinize loans arranged at dealerships to guarantee that legally protected classes of borrowers, such as minorities, don't pay higher interest rates as a result of dealers tacking on the dealer reserve.
But in a speech this week at an F&I conference in Las Vegas, the head of the National Automobile Dealers Association reiterated that the CFPB's insistence on flat fees would make financing more expensive and less accessible.
"We all know this is a great system, but some people in Washington don't seem to realize that," said David Westcott, NADA chairman and the owner of David Westcott Buick-GMC in Burlington, N.C.
Westcott called on dealers, lenders and associated businesses such as F&I administrators to contact their elected representatives and encourage them to question the CFPB's methods.
The CFPB's view on the dealer reserve isn't new. A compliance bulletin issued by the bureau in March warned auto lenders that the bureau believes dealer discretion in setting consumer interest rates increases the likelihood of discrimination in the form of higher interest rates, also known as a disparate impact.
Now, however, the CFPB has sharpened the message that lenders ought to choose one or the other: flat fees or closer supervision of dealerships. The bureau is also re-emphasizing that it holds lenders liable for decisions taken at dealerships and that ignorance is no excuse.
"Lenders should not assume that they may be liable only when they have actual knowledge of discrimination by a particular dealer," Patrice Ficklin, fair lending director for the CFPB, said in an Aug. 6 Webinar co-sponsored by the CFPB, the Federal Reserve Board and the U.S. Department of Justice.
Ficklin said lenders must analyze their auto loans dealer by dealer as well as on an aggregated basis, across the lender's entire portfolio.
Clarity
Michael Mallow, a partner with Loeb & Loeb law firm in Los Angeles, which has clients in auto financial services, says clarity from the CFPB cuts both ways.
"The CFPB is saying what it expects on its Web site, in a manual, in its guides -- and in a sense that's great. Companies know what's expected. They can comply or at least risk-assess more knowledgeably," he said in a phone interview last week. "The downside is that the excuse 'we weren't sure what you wanted' is not viable."
Before this year, lenders frequently complained the CFPB wasn't specific enough about its views on auto lending.
Like some other legal firms who advise lenders and dealers, Loeb & Loeb says dealerships should adopt a fixed amount for dealer reserve, document any time a customer gets a discount from that fixed amount, and then justify the exception in terms of sound business reasons that can't be interpreted as discrimination.
For example, in theory a discount is justified if a dealership offers a lower rate to match a competitor's offer.
"You've got to demonstrate your company is taking steps to stay compliant. If you don't, it's difficult to persuade regulators your company is interested in becoming compliant." said Mike Thurman, another Loeb & Loeb partner, in a Webinar the firm co-sponsored last week with Consolidated Asset Recovery Systems Inc.
In its August Webinar, the CFPB's Ficklin said the CFPB is OK with dealers getting compensation; however, the bureau is not OK with dealer discretion in setting rates.
"Dealer compensation is not the problem," she said. "The bureau is not saying dealers should do work and add value for free. Auto dealers provide important services to both lenders and consumers and are entitled to be compensated.
"Only one particular method of compensation out of several creates the Fair Lending risk we address in the compliance bulletin," she said. And that is the dealer reserve.
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