"As you know, the CFPB has authority over nearly every kind of consumer loan, but the big exception is car loans," Warren told CFPB Director Richard Cordray during a Senate Banking Committee hearing in Washington this month.
"The CFPB has done great work in this area, as best it can," Warren said. "But it makes no sense to me that there should be any exception here for consumers who are being tricked out of billions of dollars every year on car loans."
Leaning on lenders
After intense lobbying by the National Automobile Dealers Association, Congress "carved out" franchised new-car dealers from the bureau's jurisdiction when it was set up in 2010. Buy-here, pay-here dealers were made subject to the CFPB. So, of course, were auto lenders.
Today, since the CFPB can't regulate dealers directly, it is leaning on lenders to monitor dealerships much more closely. At issue is dealer reserve, the additional bit of interest rate added to the lender's buy rate on an auto loan to compensate the dealership for originating the finance contract. Within limits imposed by lenders, and subject to competition, the dealership sets its own dealer reserve.
In the CFPB's view, that creates a situation in which lenders give dealers an incentive to charge the highest rate possible. Furthermore, the CFPB says dealers are prone to charge more for legally protected classes of borrowers, such as minorities. That allegedly produces a disparate, or uneven, impact on protected classes.
Since last spring, many dealerships have received letters from lenders threatening possible termination because the lender's analysis of finance contracts originated at the dealership showed a disparate impact against legally protected groups.
Instead of the current system, the CFPB told lenders this year they should switch to flat fees or some other form of compensation that takes pricing discretion away from dealerships, such as a flat percentage of the amount financed.
Meanwhile, the National Automobile Dealers Association and the National Association of Minority Automobile Dealers deny that their members tolerate discrimination.
At the Senate Banking Committee hearing, Warren said she would like Congress to overturn the auto dealer carve-out -- which she characterized as a "loophole" -- and give the CFPB the power to regulate dealerships directly.
She cited a study by the Bipartisan Policy Center, a Washington think tank, which advocates that the CFPB should regulate dealers directly, instead of regulating them via auto lenders.
"So my question is: Do you think that would be good for consumers?" Warren asked Cordray, clearly implying she thought it would.
Warren is closely associated with the CFPB. She was the CFPB's first interim director, but Senate Republicans objected so strongly to her as a nominee for permanent CFPB director that in July 2011 President Obama nominated Cordray instead. He wasn't confirmed as the permanent director until July 2013.
In the interim, Warren was elected to the U.S. Senate as a Democrat from Massachusetts and she is now serving with some of the same senators who objected so strenuously to her running the CFPB.
Compromise was struck
Cordray didn't answer Warren directly whether he thought direct CFPB regulation of auto dealers would be good for consumers. However, he sounded as if the carve-out was regrettable.
"The law that we have is the law that we're working with and when Dodd-Frank went through -- and I wasn't in Washington at the time -- I didn't see the fascinating events unfolding that led to the enactment of that law," Cordray said.
"There was apparently a compromise struck where auto dealers would not be subject to the jurisdiction of the consumer bureau but instead would be covered by the FTC. But auto lenders were, very explicitly, made subject to the jurisdiction of the consumer bureau.
"Our efforts here are to carry out what we understand to be our responsibility to monitor the practices of auto lenders, who if they set up a program, whether it's direct or indirect lending, remain responsible for the effects of that program. And that's what we're trying to do here."
So far, it appears there has been no action to change the status quo. NADA regulatory counsel Paul Metrey says he's not aware of any legislative bill that's been proposed that would change the carve-out for franchised new-car dealers.