MIAMI BEACH, Fla. -- The room was nearly packed when a senior official from the Consumer Financial Protection Bureau and a colleague spoke at the annual conference of the National Association of Minority Automobile Dealers here on Wednesday, July 8.
It was the first time for a CFPB official to address dealers directly in public. The agency, which by law has oversight over lenders but not dealers, has sent officials to lender conferences -- but not to dealer gatherings.
But if Patrice Ficklin, the CFPB’s assistant director for fair lending and equal opportunity, and Steven Rosenbaum, chief of the housing and civil enforcement section of the Department of Justice’s Civil Rights Division, thought the reaction from the mostly minority audience would be warm and fuzzy, that wasn’t the case.
Conference attendees let them know that dealers, including minority dealers, feel that the agency is coming after them. Here are a sampling of the exchanges.
In her opening remarks, Ficklin said it was important to remind folks that the CFPB has consistently stated that dealers deserve to be compensated for the work that they do.
“We have not forbidden dealer reserve,” she said. “Instead, what the bureau has recommended is that banks and captives and other indirect auto lenders take steps to ensure they are operating in compliance with the Equal Credit Opportunity Act, whether they maintain discretionary policies or not.”
While the agency has cited flat fees as one way of reducing the risk of discrimination, Ficklin stressed that flat fees aren’t the only way auto lenders can pay dealers for arranging loans. “There could be a variety of possible alternatives,” she said.
But she also said switches by BB&T Dealer Finance and BMO Harris Bank in Chicago to a flat fee from dealer reserve “were voluntary moves on their part.”
How ‘not to be sued by us’
Rosenbaum opened his remarks by saying: “It’s a pleasure to speak to an audience of people who we could potentially sue but we also have lots in common with. My remarks are: Here’s what to do not to be sued by us.”
He later explained that he had “jokingly” said his agency, as part of the Justice Department, can sue dealers because it has the authority to investigate them and enforce the Equal Credit Opportunity Act.
Rosenbaum reiterated that a dealer “deserves fair compensation” for putting consumers and lenders together and that the agency’s only task is to “prevent and end discrimination in the credit market.”
“There have been some bugaboos in the press that we’re engaging in things other than ferreting out discrimination and addressing it,” he said. “We are not looking to take money away from dealers.”
Both Ficklin and Rosenbaum said most of the problem stems from the discretionary buy rate. Also known as dealer reserve, that is the additional interest rate, above the lender’s buy rate, which is the share of a car buyer’s interest-rate payments that the dealership earns for arranging the loan.
They said borrowers typically don’t understand they can negotiate the difference between the buy rate and the final rate.
Rosenbaum said minority buyers often end up on the short end of the stick because “discretion is not being managed.”
He questioned what direction is being given to F&I professionals and whether dealers have policies about when to mark the buy rate up or down and terms of negotiation. He also asked them to consider how they train employees on policies and if they monitor the results.
“That’s the basic idea behind having a compliance management system,” Rosenbaum said.
He said a third method of compensating dealers for arranging loans would allow for a markup that would be much lower than the typical markup of 200 to 250 basis points.
Rosenbaum said the lower cap structure still allows for discretion but would reduce or eliminate disparities between minority and nonminority borrowers.
The lower-cap model, he said, also would allow the lender to have a lower cap, which could affect the individual borrower’s contract rate, and a flat fee on top of that. “I can say with some confidence that the systems that we are describing can be executed in a way that don’t affect individual dealer compensation,” he said.
When the Q&A period began, a dealer wanted to know whether Rosenbaum was suggesting that dealers should have some type of audit system to monitor the spread that dealers charge consumers.
For example, say an F&I manager has a maximum or cap of 2 points that he or she can charge. Some customers are charged 1 point, some 1.5 points and others 2 points. The differences are based not on creditworthiness but on the manager’s ability to get customers to say yes to the payment. Is that a violation?
Rosenbaum said yes. “You should be monitoring it because it could be exercised in a way that produces disparities based upon race or national origin in your customer base,” he said.
The dealer responded: “So there are 10 people” with the same 750 credit scores. “Five, I charge a 2-point spread; five, I charge a 1-point spread. What’s the violation?”
Rosenbaum retorted: “The five you charge 1 point — well, why?”
The dealer said, “Because they wouldn’t say yes to the higher payment.”
Rosenbaum explained: “That would be the second level of the [feds’] inquiry: the justification for the disparities.”
What’s my obligation?
Another dealer pressed Rosenbaum further. “Being minorities, we don’t want to see discrimination happen,” he said, “but is it our job to inform the customer, ‘By the way, you can get 6 percent’?
“Secondly, many times lower-income people are not as sophisticated, and it’s printed right there on the contract what the terms are, and they agree to it, no manipulation. In a free-enterprise system I’m trying to figure out -- how you can allege discrimination.”
He added: “I’m trying to understand what a businessperson’s obligation is to inform consumers of options.”
Rosenbaum replied: “One way [discrimination] takes place is if the African-American customer gets a piece of paper that says 6 percent and they sign it, and the white customer gets a piece of paper that says 5.5 percent and they sign it, and that’s the pattern. At the very least you’d expect a government agency looking at that to ask for an explanation. What’s going on?”
Another dealer challenged Ficklin’s statement that the CFPB doesn’t oversee dealers.
“By you scrutinizing the lenders, all you’re doing is scrutinizing the dealers in a roundabout way,” he said. “I’m a dealer that does business with Ally. So now I have to go through compliance.”
Once a quarter, he said, “they come in with their documentation” and “they go contract by contract, and if we’re off at all then we have to bring that into line.
“My question to you is: Is it fair for you to get to us through the lenders?”
Ficklin stood her ground. “I am not trying to get to you. But I would ask you, would it be fair for me to turn my head from the discriminatory outcomes of lenders’ policies? Part of my obligation is to enforce the Equal Credit Opportunity Act.
“The Equal Credit Opportunity Act governs the activities of those lenders and they have those discretionary policies in place; those policies are resulting in discrimination. It sounds like you are asking me to turn my head on that for fear of potentially reaching you all as a business partner of these lenders. I can’t do that. I have to meet my responsibilities.”
Then things got a bit testy.
Dealer: “You all feel like discrimination is going on in the marketplace?”
Dealer: “Well, all dealers do not discriminate.”
Rosenbaum: “We agree.”
Ficklin: “I hope not.”
Dealer: “But we’re all being painted with the same brush because of the policies and procedures you all are putting into place.”
Ficklin: “It’s hard for me to see increased fair-lending compliance for lenders as a bad thing. It sounds like a bad thing when Ally visits you guys and engages in that type of compliance.”
Dealer: “I didn’t mean it was bad. [But] if you think they’re coming in because I’m out of compliance, you’re wrong.”
Ficklin: “I didn’t say that and I wouldn’t say that.”