Auto finance regulation will stay on the front burner in 2014, with conclusions likely from investigations that began in 2013, according to attorneys who specialize in the area.
Several auto lenders disclosed in 2013 that the Consumer Financial Protection Bureau had asked them for information regarding “certain retail practices,” language that was almost certainly shorthand for dealer reserve or dealer markup. Yet none of those CFPB investigations has produced any public statement from the CFPB or any additional word from the lenders so far.
“We do know the CFPB is investigating several lenders. Maybe there will be a conclusion -- maybe several” in 2014, Joseph Karam, a staff attorney for RouteOne said during a phone interview last week.
Ally Financial Inc., American Honda Finance Corp. and Toyota Motor Credit Corp. all disclosed in 2013 filings with the Securities and Exchange Commission that they were under CFPB review. Several banks, including Chase Auto Finance and Bank of America, have sent letters to dealerships warning them about discrimination, almost certainly in response to issues raised by the CFPB.
In March 2013, the CFPB said it believes lenders are responsible for policing dealers more closely to make sure legally protected classes such as minorities and women pay the same amount of dealer reserve as everyone else.
The dealer reserve is the small amount of interest that lenders allow dealerships to add into a customer’s interest rate on an auto loan to compensate the dealership for arranging the loan. The CFPB calls it a “disparate impact” if legally protected classes pay more as a result of dealer discretion in setting dealer reserve.
The CFPB suggested lenders could switch to paying dealerships flat fees, a flat percentage of the amount financed or some combination of approaches. But the CFPB doesn’t want lenders to allow what the CFPB sees as dealers determining their own compensation.
Judging by recent history in other rulings, conclusions from the CFPB investigations now under way could include consent orders in which lenders agree to comply with additional direction from the CFPB, without admitting any violations.
Paul Metrey, chief regulatory counsel for financial services at the National Automobile Dealers Association, said it “remains to be seen” how consent orders -- if there are any -- would affect the marketplace. Lenders have said they don’t want to switch to flat fees unless their competitors switch, too.
“While many commentators anticipate that the CFPB could enter into consent orders with large banks to resolve disparate impact allegations, it is by no means inevitable that finance sources will move in lockstep to adopt whatever pricing parameters may result from any such consent orders,” Metrey told Automotive News in an e-mail last week.
Another shoe that’s expected to drop in 2014 is the outcome of an independent study recently launched by the American Financial Services Association, a lender trade group, into the economic impact of reforms recommended by the CFPB, including flat fees.
CFPB Director Richard Cordray said recently the CFPB had not performed such a study. Opponents of flat fees, including the NADA, have said flat fees could raise the cost of credit.
Metrey said the AFSA study is “filling a huge need by actually considering how the Bureau’s actions could affect the cost of credit for consumers.”