Dealers, learn your lenders’ fair lending policies and polish your own.
That’s legal experts’ advice to retailers looking to prepare for the Consumer Financial Protection Bureau’s final larger participant rule, which takes effect Aug. 31.
The rule will allow the CFPB to supervise and examine any nonbank finance company that originates, in aggregate, at least 10,000 auto loans and leases a year. There are 34 nonbank auto lenders, including automakers’ captive finance companies, in that group. Together, they generate 90 percent of nonbank auto loans and leases.
The rule will indirectly affect dealers since the CFPB will have authority over more of their lenders. Those lenders, in turn, will monitor more closely dealers’ discretionary markups on customer auto loans.
“The kinds of communication dealers have received from large lenders, they will receive in a larger quantity from the 34 nonbanks,” Randy Henrick, associate general counsel for Dealertrack, told Automotive News.
“The CFPB will review and audit lenders and will require large lenders to send communications to dealers and do analyses of their portfolios,” Henrick added.
Be organized, proactive
The CFPB has told lenders to put into place a system for monitoring dealers on loan markup, said Nick Smyth, a financial services regulatory attorney at Reed Smith law firm in Pittsburgh.
“Dealers will want to be very organized about knowing exactly what the markup policies are for every lender they work with,” Smyth said, adding: “When it comes down to it, it’s about individuals making decisions sale by sale.”
After the CFPB contacts the top 34 nonbank lenders, the lenders will likely send their dealer clients a letter to explain that they expect dealers to be compliant and follow a fair lending program, Henrick said.
Dealers should “be proactive when they get the first letter,” Henrick said. “If the dealer has implemented the National Automobile Dealers Association’s fair lending policy, they should let the lender know that in response.”
If dealers haven’t adopted NADA’s policy, they should, he said.
NADA’s Fair Credit Compliance Policy & Program recommends dealerships adopt a set method for determining the amount of compensation they earn for arranging customer financing. Examples include charging each customer a fixed number of basis points over the lender’s buy rate on the credit contract, or a fixed percentage of the amount financed, or a fixed dollar amount. In cases where the dealership reduces the pre-set amount of compensation, it must document the reason, such as a lower rate to meet a competitor’s offer. NADA recommends dealerships identify in advance each condition for which it might reduce its pre-set amount of compensation.
The CFPB requires lenders to analyze dealership-arranged financing on a regular basis to check for disparities. If lenders find that a dealership’s average finance compensation was, for example, 20 basis points higher for an Asian-American consumer than a non-Hispanic white consumer, “the lender would send [the dealer] a letter saying, ‘We’ve noticed a potential disparity. This is prohibited, and you must avoid it in the future,’” Smyth said.
If dealers receive a letter after they’ve outlined their fair lending programs, however, Henrick advises that they push back.
“Challenge lenders on their statistical study. Press them for details. Invite them in to look at deal jackets,” he said.
A lender may limit a dealer’s finance compensation if disparities continue. If the dealer refuses to make a change, Smyth said, the lender may stop working with the dealer.