Compliance experts believe the Federal Trade Commission's handling of a New York dealership case, in which the store agreed to pay $1.5 million for a slew of illegal and unethical practices in the finance and insurance office, may have far-reaching implications. Federal regulators in particular cited dealership-arranged financing, also called indirect financing, as a business practice considered deceptive by nature.
In May, Bronx Honda settled FTC charges that it discriminated against African American and Hispanic car buyers. The store was accused of charging well above the legal cap on document fees and adding fees and markups. The FTC also alleged Bronx Honda management instructed employees to target these groups "due to their limited education" but not attempt the same practices with white customers.
FTC Commissioners Rebecca Kelly Slaughter and Rohit Chopra argued that the commission should exercise its rule-making authority to crack down on dealerships for what they considered discriminatory algorithms and practices.
The commissioners say the difference between the amount lenders offer to dealerships to buy auto loan contracts and the rate negotiated between the dealer and car buyers exposes the customer to pricing disparities, which could lead to higher markups for Black or Hispanic customers.
"Although this matter involves extreme conduct that may make it seem like an outlier, the tricks and traps that Bronx Honda used against consumers are all too prevalent at auto dealerships across the country," Slaughter wrote in a statement. "In my view, far-reaching structural reform to the automobile-financing and -salesmarkets is long overdue and urgently needed: First and foremost, the Commission can start by initiating a rulemaking, under the Dodd-Frank Act, to regulate dealer markup."
Disparate impact — referred to as a business practice resulting in unintentional discrimination — was among the concerns addressed in the case. Regulators postulate that lending algorithms can be calibrated against consumers, charging customers more based on their skin color.
Hudson Cook lawyer Jean Noonan argued in a blog post that the discrimination outlined in the complaint appeared intentional and not the result of accidental overcharges involved in cases of disparate impact.
"The allegation was that the dealership charged some consumers more specifically because of their race or ethnicity. This is discriminatory treatment, pure and simple, not disparate impact," Noonan said.
Dave Robertson, executive director of the Association of Finance & Insurance Professionals, said no matter where a consumer acquires financing, there are three expenses associated with an auto loan: loan origination expense, or the cost of soliciting qualified buyers and arranging terms; loan servicing expense, the cost of collecting monthly payments and providing customer service; and finally, lending expense. When banks shoulder all three expenses, cost is passed onto the customer in the form of a less desirable finance rate. If the dealership arranges the financing, the dealership incurs that expense and has to be reimbursed by whomever buys the contract.
"There's no logic to the argument that there's some kind of extra expense," Robertson said. "We've got to remember regulators deal in worst-case scenarios."