The Consumer Financial Protection Bureau (CFPB) has yet to put out any auto lending regulations or sue any auto lenders, but last week it gave the clearest picture yet of how it thinks auto lending should change.
Automotive News reported that dealers and lenders have been clamoring for such guidance in the wake of a March bulletin from the CFPB on discrimination in auto lending and subsequent disclosures by lenders that they are under investigation.
The peek behind the curtain started Nov. 12 when CFPB chief Richard Cordray testified at a Senate Banking Committee hearing and continued Thursday at a CFPB auto lending forum in Washington. According to Automotive News, the main takeaways were:
The CFPB wants to show it has found evidence of bias.
Patrice Ficklin, the agency’s fair-lending director, said Thursday statistical analysis of loan data shows that even with factors such as credit scores held constant, interest rates on the car loans financed by a lender can be 10, 20 or 30 basis points higher on average for minority buyers than for white buyers. An extra 30 basis points can translate into $216 over a five-year loan, she said, amounting to “tens of millions of dollars in overpayments each year.”
The CFPB is still investigating lenders with the Justice Department.
“The order of the day on those things is confidentiality unless or until you get to the point of taking some sort of public action,” Cordray said. Prodded by Sen. Jerry Moran, R-Kan., on the reliability of the CFPB’s statistical methods, he added: “Anything we do could ultimately be tested in court, and the court would have to have confidence in our methods.”
The CFPB’s priority is ending dealers’ discretion to set interest rates.
The agency wants to replace the “dealer reserve” model, which gives them that discretion, but says there are several ways to do it. Though the March bulletin suggested dealers could be paid with a flat fee — say, a few hundred dollars per car — the agency is open to other payment schemes. Eric Reusch, the CFPB’s program manager for auto and student loans, said Thursday that a sliding scale based on the total amount financed or a “hybrid” system that takes into account the duration of a loan, both look OK at first blush.
Industry representatives expressed major concerns about Consumer Financial Protection Bureau (CFPB) guidance on dealer-assisted financing during a forum the agency held on Nov. 14 in Washington, DC.
According to a press release, the Recreation Vehicle Dealers Association (RVDA) was among those in attendance at the forum, where dealer and lender representatives questioned the CFPB methodology used to determine that dealership participation in interest rates on vehicles loans could create a “significant risk” of discrimination.
RVDA and its allies argue that the CFPB has not released the complete statistical methodology it uses to determine whether discrimination is present in vehicle finance. For example, it is unknown if the analysis accounts for variables such as credit score, the amount financed, term of the loan, or special finance incentives.
The CFPB has also acknowledged that the agency has not studied the potential impact its guidance on dealer-assisted financing could have on the broader vehicle market or whether that guidance could limit credit availability.
“RVDA and its allies believe that dealer-assisted financing is enormously successful in increasing access to and reducing the cost of credit for millions of Americans,” the release stated.
In another development this week, the American Financial Services Association (AFSA) is launching an independent study into the effects of the indirect lending model on consumers and the industry.
AFSA, a Washington, D.C.-based trade association that includes many auto and RV lenders, said the study would include an analysis of the costs and benefits of the status quo versus changes, such as flat fees, outlined by the bureau.
For RVDA’s position on this issue, please click here.
This week was shaping up to be a showdown on auto finance. But from a U.S. Senate hearing Tuesday (Nov. 12) on the work of the Consumer Financial Protection Bureau (CFPB), it became clear that CFPB Director Richard Cordray wants to thaw the agency’s icy relationship with auto lenders and dealers.
Automotive News reported that Cordray, who was confirmed by the Senate in July, stood by the auto lending bulletin that the CFPB circulated in March, warning auto lenders that the agency had detected bias against women and racial minorities in interest rates. He said the agency still has “an ongoing investigatory effort” into auto lending with the Justice Department. The Recreation Vehicle Dealers Association (RVDA) is closely monitoring proceedings, as regulations could also affect third-party lending in the RV industry.
But the former Ohio attorney general also struck a conciliatory tone. Asked about the wisdom of tossing out today’s predominant auto finance model and instead paying dealers flat fees to arrange car loans, Cordray said he wants to avoid any step that would throw a wrench in car purchases or create new problems.
He also promised more “openness and transparency,” saying he agrees with the critics who say the CFPB has been too opaque in its handling of auto lending.
“We want to propose the right protections to make sure people are treated fairly, and we particularly want to make sure they’re treated on a nondiscriminatory basis, but we don’t want to dry up access to credit,” Cordray said of car loans during the Senate Banking Committee hearing. “Maintaining that balance is quite important.”
The question is whether it would be possible to reach any compromise.
To read the full story click here.
Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), said he wants more “openness and transparency” for the agency’s oversight of auto lending, but added that the agency still has strong concerns about how dealerships arrange loans.
Automotive News reported that the remarks, made during a Senate hearing this afternoon, were Cordray’s most detailed public remarks on the subject, and showed an effort to strike a balance in the way the bureau regulates transactions in the auto market. The Recreation Vehicle Dealers Association (RVDA) is closely monitoring proceedings, as regulations would also affect third-party lending in the RV industry.
On the one hand, the agency wants to flex its muscle in the market to protect consumers from abusive loan practices. But it also wants to extend an olive branch to dealers and auto lenders, who say the CFPB is pushing them into changing their loan practices without showing the data to explain why.
Auto lending is a topic of “considerable sensitivity, it appears,” Cordray said during the hearing of the U.S. Senate Banking Committee.
“We’re going to make sure that we’re engaging with key stakeholders in that area,” he added. “I think that’s an area where I would agree with some of the criticism. I’d like to have a little more openness and transparency, and we’re going to provide that.”
The debate over the CFPB’s involvement in auto lending has simmered for months.
In a bulletin in March, the agency said it had detected bias in the auto lending market in the form of higher interest rates for women and racial minorities.
Dealers are exempt from direct supervision under the Dodd-Frank financial reform law that created the CFPB. But the agency has jurisdiction over auto lenders, and it has urged them to compensate dealers with flat fees rather than letting the dealers mark up interest rates.
This has drawn a backlash from dealers, some of whom have come to rely on the “dealer reserve” for profits as new-car margins have shrunk. They argue that the switch to flat fees would encourage dealers to seek out lenders that pay the highest flat rate and hurt car buyers by stopping dealers from offering a lower interest rate to make a sale.
To read the entire article click here.
The ongoing confrontation between the Consumer Financial Protection Bureau (CFPB) and automotive retailers and lenders is heating up, with two events in Washington this week and a disclosure from Ally Financial Inc. last week that illustrates the growing tension.
Automotive News reported that CFPB Director Richard Cordray likely will face some critics in the U.S. Senate on Tuesday (Nov. 12) when he gives the Senate Banking Committee the bureau’s semiannual report. Some senators — including six of the 20 committee members — and U.S. representatives have exchanged letters with Cordray in recent weeks, pressing for more details on the bureau’s methodology — an implied criticism of what the CFPB’s detractors see as a lack of transparency.
Then on Thursday, the bureau plans to host an auto finance forum at its Washington headquarters. The event comes in the wake of Ally’s disclosure, in a filing with the Securities and Exchange Commission (SEC), that the CFPB believes Ally and “other automobile finance companies” have failed to fulfill what the CFPB defines as the lenders’ obligation to prevent dealers from engaging in discrimination.
Ally has acknowledged in SEC documents this year that the CFPB was “investigating certain of our retail financing practices.” But the latest filing provides more detail and puts the case in more serious terms.
“In connection with these investigations, the staff of the CFPB has recently advised us that they believe we have an obligation to prevent independent automotive dealers with which we do business from engaging in certain retail financing practices that the CFPB staff believes violate the anti-discrimination provisions of the Equal Credit Opportunity Act, and that they believe we have failed to fulfill this obligation,” the filing said.
To read the full article click here.
Editor’s Note: The following is a letter sent to Recreation Vehicle Dealers Association (RVDA) members concerning action by the Consumer Financial Protection Bureau (CFPB) on dealer-assisted financing.
Twenty-two U.S. Senators — 11 Republicans and 11 Democrats — are asking the Consumer Financial Protection Bureau (CFPB) for greater transparency to justify its effort to eliminate motor vehicle dealers’ ability to discount a customer’s loan interest rate. This is a potentially significant development toward CFPB transparency since a Senate bipartisan letter signals to the CFPB that this is not a partisan issue, and emphasizes the need for greater clarity in its decision making.
The letter, led by Sens. Rob Portman (R-Ohio) and Jeanne Shaheen (D-N.H.), comes after several prior congressional inquiries by House democrats and republicans asking whether the bureau had studied the impact on consumers if the extraordinary competitive benefits of in-dealership financing are eliminated.
RVDA supports efforts by these U.S. Senators and others in Congress for more agency transparency. For more on RVDA’s position on the CFPB guidance click here.
In March, the CFPB — without public comment or formal rulemaking — issued fair lending “compliance guidance” that pushes lenders to eliminate the ability that dealers currently have to “meet or beat” a competitor’s rate, and suggests a flat rate paid to dealers as a preferred solution over the current system of dealer participation.
The CFPB refuses to explain to Congress or the public the need to restructure a highly competitive and efficient marketplace that saves car, truck, and RV buyers enormous amounts of money every year.
The Portman-Shaheen letter follows two separate letters sent to the bureau this spring by Rep. Terri Sewell (D-Ala.) and 12 House Financial Services Committee democrats and former House Financial Services Committee Chair Spencer Bachus (R-Ala.) and 34 House republicans.
The bipartisan group of 22 senators is pressing the CFPB for additional information, because “unfortunately, the bureau has not provided complete responses to several of the questions presented to it by our House colleagues,” according to the letter.
For the full text of the letter, including the full list of senators who support the effort, click here.
Editor’s Note: The following is a column authored by Recreation Vehicle Dealers Association (RVDA) President Phil Ingrassia offering an update and on the maneuverings by the Consumer Financial Protection Bureau (CFPB) concerning dealer-arranged loans. The article appeared in the latest issue of RV Executive Today.
Last month, RVDA met with several groups trying to make sense of the Consumer Financial Protection Bureau (CFPB) guidance to lenders regarding dealer-arranged – or indirect – financing. In a nutshell, the CFPB has taken a series of actions that appear to be designed to change the way banks, finance companies, and credit unions compensate dealers for arranging vehicle loans. Dealers are exempt from regulation by the bureau, but lenders are subject to CFPB oversight.
The CFPB, while acknowledging that dealers should get compensated for arranging financing, has addressed policies that allow dealers to negotiate interest rates with consumers. The agency believes this negotiation process creates a “significant risk” of discrimination against certain groups of consumers. Instead, the CFPB wants finance sources to compensate dealers by paying them a flat fee per transaction.
The CFPB is attempting to bring about this change through a disputed theory of liability under the Equal Credit Opportunity Act (ECOA) known as “disparate impact.” This theory of liability does not involve intentional discrimination. It focuses on fixing lender policies that may result in certain groups of consumers paying more for financing than others.
If that seems like a stretch to you, you’re not alone. RVDA, NADA, and other groups believe the CFPB is trying to remedy a problem that doesn’t exist. As I write this column, the agency has not provided the industry or Congress any data showing a pattern of discriminatory lending.
Congress asks for information
Since the CFPB issued its guidance to lenders, more than 50 congressional leaders from both parties have questioned the agency about its decision-making process and the data collection the guidance is based on.
Rep. Spencer Bachus (R-Alabama) has asked for consumer data the CFPB cited to issue the guidance. Last month Sen. Mike Crapo (R-Idaho) requested that the Government Accountability Office (GAO) investigate what he called the “big data” collection effort being undertaken by the CFPB on consumer spending habits. So the agency is being pressed to provide answers.
Keep asking the questions
RVDA and its allies will keep demanding answers to fundamental questions and continue pointing out the facts.
There’s no indication the bureau has examined the effect changes in dealer- assisted financing could have on the cost or availability of credit for consumers. The indirect financing market is not broken. There has been no “market failure” that calls for change. In fact, the indirect financing model is competitive and efficient – and car, light truck, and RV sales are improving.
In the United States, we don’t (or shouldn’t) assume a problem is present, create a hidden process for measuring it, and advance a remedy without researching what impact the “fix” will have on those it is designed to help. We’re making it clear that dealers strongly oppose all forms of discrimination in the marketplace.
RVDA will continue to push for the CFPB to be transparent and provide the full details concerning the data, methodology, and research it’s relying on to support its guidance to lenders that could fundamentally alter the way RVs and other vehicles are financed in this country.
The Recreation Vehicle Dealers Association (RVDA) filed its fourth set of federal comments this week with the Consumer Financial Protection Bureau (CFPB), asking for clarification on the issue of whether RVs constitute “dwellings” and, more importantly, whether the CFPB has the legal authority to regulate RV dealers under Regulation Z.
According to an article in RV Executive Today Online, RVDA provided numerous justifications why all RV sales should be treated as motor vehicle sales and not as mortgage-type transactions, and why RV dealers should face only one set of regulations enforced by the FTC, rather than an additional set of rules and regulations administered by the CFPB.
In 2010, RV dealers were given an exemption from CFPB oversight in return for more vigorous scrutiny and enforcement by its current regulators – the Federal Trade Commission enforcing rules established by the Federal Reserve. Now, however, it appears that the CFPB is formalizing a back route to regulate RV dealers when they sell RVs to full-timers, since this may be seen as a mortgage type transaction on a dwelling rather than a traditional vehicle sale. This would bring RV dealers back into CFPB oversight. RVDA is highlighting the difficulties and expenses this would cause to the industry.
RVDA said that RV dealerships, which are overwhelmingly small-business enterprises, would face unconscionable financial risks and logistical difficulties when selling an RV to a full-timer unless the CFPB clarifies that an RV is not a dwelling when sold to a small market niche of RV enthusiasts.
The Recreation Vehicle Dealers Association (RVDA) is investigating why the Consumer Financial Protection Bureau (CFPB) intends to regulate recreational vehicles even though Congress specifically exempted traditional RV dealers and the products they sell from CFPB oversight.
In 2010, RV dealers were given a pass from CFPB oversight in return for more vigorous scrutiny by the Federal Trade Commission (FTC). Now, however, RVDA said it appears that the CFPB is formalizing a back route to regulate RV dealers when they sell RVs to full-timers.
The bureau intends to adopt a slightly modified version of the Truth-In-Lending-Act’s Regulation Z that may draw RV dealers back into its purview in certain sales transactions. At issue, once again, is whether recreational vehicles are considered dwellings.
RVDA is drafting its fourth set of federal comments to clarify the “dwelling” issue and, more importantly, whether the CFPB has the legal authority to regulate RV dealers under Regulation Z.