SAN FRANCISCO -- Dealers who get warning letters from lenders accusing them of loan discrimination should resist the temptation to stick the letters in a drawer or, worse, fire off angry replies on their own, said panelists last week at a legal compliance workshop for dealers here.
“You must answer,” said panelist Patty Covington, a partner at Hudson Cook law firm in Hanover, Md.
For sure, “you want to respond to the finance source that you don’t engage in discrimination,” Covington said, but you need to consult an attorney first, she and other panel members said at the workshop held during the National Automobile Dealers Association convention.
Panelist Bill O’Flanagan, a dealership general manager, agreed: “It goes without saying: A dealer should not sit down and rip off a letter” in the heat of the moment. “You must go outside” for legal advice, said O’Flanagan, president of Reedman Toll Auto World in Langhorne, Pa.
Panelist Vincent Santivasi, of Zurich North America, told Automotive News after the workshop that many dealers seem to be confused about their next step after getting a letter. The No. 1 question from dealers is: “What do I do with these letters I’m getting from banks?” said Santivasi, vice president of F&I business development for Zurich North America Commercial’s Direct Markets business.
In an interview with panel members after their remarks to attendees, Santivasi said one possible dealer response could be to ask the lender: “How did you arrive at these numbers?” Covington said she agreed that’s a relevant question for dealers to ask but said she doesn’t recommend that dealers try to refute the numbers as such.
Since March 2013, several big banks have sent letters to certain dealerships warning that loans originated at the dealerships had higher amounts of dealer reserve for legally protected borrowers, such as minorities, than for nonprotected borrowers who had similar credit histories. Dealer reserve is an amount of interest, usually capped at 2 or 3 percentage points, that lenders allow dealerships to add to car buyers’ loans as compensation for arranging the loans.
Some lenders’ letters warn dealerships they could be terminated. Panelists from last week’s workshop said they’re not aware of any dealerships that have been terminated, but they said they were aware some dealerships stopped using a lender after getting a warning.
The Consumer Financial Protection Bureau is leaning on lenders to stop allowing dealerships to add dealer reserve, which the CFPB contends can result in protected classes paying higher interest rates. Instead, the bureau wants lenders to switch to some other form of compensation, such as flat fees, in which dealerships have no discretion over the customer’s rate.
Dealers can probably expect warning letters from even more lenders in 2015 as the CFPB extends its jurisdiction to nonbank auto lenders, including automakers’ captive finance companies and larger independent finance companies. Larger banks were already under the CFPB’s supervision.
The CFPB officially published its proposed rule to supervise larger nonbank participants in auto lending in October. The bureau defines larger nonbank participants as lenders that originate at least 10,000 car loans and/or leases a year.