The lack of specific guidance from the Consumer Financial Protection Bureau on what constitutes price discrimination in auto loans has led several lenders to revamp their dealership monitoring programs based on the $98 million consent order in the Ally Financial case, auto finance law specialist Ken Rojc says.
The CFPB said in December that Ally’s policy of allowing dealerships to vary the amount of their interest rate profit on auto loans resulted in higher interest rates for minorities. Ally paid $80 million in restitution and $18 million in penalties, although it denied tolerating discrimination.
Lenders allow dealerships to add an amount of interest -- typically up to 3 percentage points -- to the buy rate on an auto loan as compensation for acting as middleman. The added interest, called the dealer reserve, is paid to the dealership in a lump sum.
Rojc said several major auto lenders -- he wouldn’t name them -- noted that the CFPB cited Ally for interest rates for three minority groups that were at least 20 basis points, or two-tenths of a percent, higher than the rates paid by similarly situated nonminority borrowers. The lenders are using 20 basis points as a benchmark, assuming that amount is a trigger for the CFPB, Rojc said. They have set their own benchmarks below 20 basis points. So, for example, if a lender’s analysis found that loans originated at a particular dealership show an unexplained pricing disparity for a protected group of, say, 10 or 15 basis points, it could trigger the lender to send a warning to the dealership, he said.
Rojc (pronounced Royce) said he is not advocating that lenders take any particular approach in response to the CFPB; rather, he said, lenders should consult their own attorneys.
“Part of the challenge here for everyone is the CFPB has been in some sense very upfront about what it wants but very vague in absolute terms,” Rojc told Automotive News in a phone interview last week.
What’s clear is that the CFPB wants lenders to drop dealer reserve and adopt flat fees or some other form of compensation in which dealerships can’t set the amount. If lenders stick with dealer reserve, the CFPB wants them to monitor loans originated by dealerships closely to detect any unexplained disparities in pricing for legally protected groups.
The National Automobile Dealers Association, lender groups, and some members of Congress complain that the CFPB hasn’t provided enough detail about how it figures out which consumers belong to protected classes.
They also complain the bureau won’t say whether there’s a specific number for pricing disparities that triggers a response from the CFPB. Rojc called that number a “bright line” that lenders aren’t supposed to cross. He said that’s part of the reason why lenders are looking to the Ally consent order for guidance.
“We’re unlikely to see any bright-line test from the CFPB” or a “safe harbor” number below which the CFPB won’t act, Rojc said. “I think they’re intentionally keeping it flexible.”