Last month's consent order between Ally Financial Inc. and the Consumer Financial Protection Bureau seems to answer one question raised by the CFPB's campaign against dealer reserve. But it leaves other important questions unanswered, especially those relating to the nitty-gritty details of how the CFPB analyzes auto loans.
The dealer reserve is the small amount of interest a lender allows a dealership to add to the buy rate on a consumer auto loan as compensation for negotiating the loan. The lender pays the dealer reserve to the dealership in a lump sum.
The CFPB, which calls dealer reserve "dealer markup," wants lenders to take discretion in setting consumer interest rates away from dealerships.
In March 2013, the CFPB said it would apply the "disparate impact" theory to auto lending. That is, the CFPB would hold lenders responsible if the CFPB determined that dealerships had added higher amounts of dealer reserve to loans they negotiated for minorities and other borrowers who are legally protected against discrimination.
That prompted groups representing lenders and dealers to ask the CFPB whether there was a specific level of disparate impact it deemed unacceptable. For example, would a lender be obligated to act if protected borrowers paid, say, an additional 50 basis points -- that is, one-half of 1 percent? How about if they paid an extra 10 basis points or even 1 basis point?
The CFPB hasn't replied directly. But the Ally consent order implies the bureau's threshold for disparate impact is low.
In the Ally case, the CFPB and U.S. Department of Justice analyzed the "dealer markup" on about 800,000 nonsubvented contracts that Ally purchased from dealerships between April 2011 and March 2012, according to the consent order. The analysis showed African-American borrowers had paid an average of 29 basis points -- or about $300 over the life of the loan -- more than "similarly situated" non-Hispanic whites. Hispanic borrowers paid an average of 20 basis points, or about $200 more. Asian or Pacific Islander borrowers paid an additional 22 basis points, which also worked out to about $200, the consent order said.
Those price differences are "statistically significant," according to the CFPB, and not related to creditworthiness or risk.
But the discrepancies appear much smaller when viewed in conjunction with the average length of an auto loan. In the first quarter of 2012 -- part of the period covered by the CFPB analysis -- the average loan term was 64 months for a new vehicle and 59 months for a used vehicle, Experian Automotive data show. So in terms of monthly payments, the numbers imply African-American customers on average paid less than $5 a month extra over the life of the average new-vehicle loan and Hispanic or Asian-Pacific Islander borrowers paid an extra $3.13 per month.
In a written statement, Ally Financial said it agreed to the terms of the consent order, including increased dealership monitoring and a total of $98 million in restitution and penalties. But the lender also said: "Ally does not engage in or condone violations of law or discriminatory practices, and based on the company's analysis of its business, it does not believe that there is measurable discrimination by auto dealers."
Following the consent order, the National Automobile Dealers Association complained that the CFPB still hasn't provided what the dealer association considers sufficient detail as to the CFPB's methodology.
"Regrettably, in today's announced enforcement action, the CFPB continues to withhold the secret methodology it uses to determine whether unintentional discrimination has occurred," the dealer association said in a written statement.
The statement didn't say so, but unanswered questions include what factors the CFPB takes into consideration to determine that two different borrowers are "similarly situated" so that by process of elimination any difference in pricing can only be attributed to discrimination.
The Ally consent order also left open the question of flat fees. The order says Ally may -- not must -- submit what the CFPB calls a "Non-discretionary Dealer Compensation Plan."
In its March 2013 guidance the CFPB suggested flat fees as one way lenders could avoid dealer discretion in setting consumer interest rates. Since then, though, CFPB spokespeople on several occasions have said that the bureau is not seeking to mandate flat fees. Instead, the bureau said it would listen to other proposals such as a fixed amount of the amount financed.
NADA, in its written statement, said dealers were "encouraged" that the consent order doesn't mandate flat fees: "A flat fee system would eliminate consumers' right to save money by negotiating lower interest rates with their local car dealers."