WASHINGTON -- Richard Cordray, director of the Consumer Financial Protection Bureau, said he wants more "openness and transparency" for the agency's oversight of auto lending, but added that the agency still has strong concerns about how dealerships arrange loans.
The remarks, made during a Senate hearing this afternoon, were Cordray's most detailed public remarks on the subject, and showed an effort to strike a balance in the way the bureau regulates transactions in the auto market.
On the one hand, the agency wants to flex its muscle in the market to protect consumers from abusive loan practices. But it also wants to extend an olive branch to dealers and auto lenders, who say the CFPB is pushing them into changing their loan practices without showing the data to explain why.
Auto lending is a topic of "considerable sensitivity, it appears," Cordray said during the hearing of the U.S. Senate Banking Committee.
"We're going to make sure that we're engaging with key stakeholders in that area," he added. "I think that's an area where I would agree with some of the criticism. I'd like to have a little more openness and transparency, and we're going to provide that."
The debate over the CFPB's involvement in auto lending has simmered for months.
In a bulletin in March, the agency said it had detected bias in the auto lending market in the form of higher interest rates for women and racial minorities.
Dealers are exempt from direct supervision under the Dodd-Frank financial reform law that created the CFPB. But the agency has jurisdiction over auto lenders, and it has urged them to compensate dealers with flat fees rather than letting the dealers mark up interest rates.
This has drawn a backlash from dealers, some of whom have come to rely on the "dealer reserve" for profits as new-car margins have shrunk. They argue that the switch to flat fees would encourage dealers to seek out lenders that pay the highest flat rate and hurt car buyers by stopping dealers from offering a lower interest rate to make a sale.
How are rates set?
Cordray said today that the agency still worries that dealer reserve is leading to exorbitant markups on auto loans.
Many lenders have put a cap on the amount of dealer reserve they will allow -- say 3 percentage points -- but Cordray said the agency still is concerned that a consumer could be approved for a loan with a 4 percent interest rate and end up with effective rate of 8, 10, or 12 percent, because they are not told how the rates are set.
During the hearing, Sen. Jerry Moran, R-Kan., echoed the concerns raised by groups such as the National Automobile Dealers Association, which have criticized the methods used by the CFPB to detect patterns of discrimination.
Cordray stood by the methods.
"Anything we do could ultimately be tested in court," he said, "and the court would have to have confidence in our methods."