For stores and groups that depend on dealer reserve as a crucial piece of F&I income, industry associations are already out to keep indirect financing in place as legal experts see the latest move from the Consumer Financial Protection Bureau putting it in jeopardy.

The CFPB made the connection between dealer reserve and potential discriminatory practices, a move Tom Hudson expected to see within the guidance last week’s CFPB bulletin contained.

“There wasn’t anything in the bulletin that the bureau hadn’t been signaling for weeks,” said Hudson, chairman of Hudson Cook, the Hanover, Md., firm that specializes in auto finance law. “The bureau representatives have been out to industry conferences and giving presentations where they’ve essentially signaled that this was coming.

“The problem with the guidance they’ve put out is the banks and finance companies that are going to have to try to comply with the guidance aren’t being given an awful lot of direction on how to do so,” Hudson continued. “We’re going to go through an interesting and difficult period for the next couple of years while banks and finance companies try to figure how they’re going to operate in the indirect auto space.

“The dealers are likely the ones to put up the biggest fight here,” he added.

Hudson’s projection came to fruition, as both the National Automobile Dealers Association and the National Association of Minority Automobile Dealers refuted the CFPB’s position. Auto Remarketing recapped the agency’s bulletin here.

“The guidance issued by the CFPB attempts to force auto finance sources into changing the way they compensate dealers without any indication that the bureau has examined the effect this change could have on the cost of credit for consumers,” association officials said. “The dealer-assisted financing model (indirect auto lending) has been enormously successful in both increasing access to, and reducing the cost of, credit for millions of Americans. Consumers overwhelmingly choose optional dealer-assisted financing because it’s convenient and competitive.

“The CFPB’s attempt to eliminate the dealer’s ability to discount the APR that it offers to consumers will only weaken the consumer’s ability to secure financing at the lowest possible cost,” they continued. “This anti-competitive approach is not in the interests of consumers and should not be accomplished through guidance and enforcement actions that lack transparency, the opportunity for public comment, and the benefits of a data driven analysis into the effects they would have on consumers and the automobile financing marketplace.

“It also should not be accomplished without the full participation of the Federal Reserve Board and the Federal Trade Commission, which are the two agencies that Congress vested with authority over auto dealers engaged in indirect lending,” they went on to say.

Both NADA and NAMAD emphasized that they strongly oppose any form of discrimination in auto lending and agreed how the CFPB guidance appropriately explains that unlawful discrimination has no place in the marketplace.

“However, it is relying on a theory of discrimination that is based on a statistical analysis of past transactions — not intentional conduct — and the CFPB has not provided any information about how it is conducting its analysis,” the associations said. “Without such basic information as how the CFPB is identifying different groups of consumers, how it is controlling for factors that can affect finance rates but are unrelated to the consumer’s background, and what constitutes a finding of disparate impact, one can have little confidence that the CFPB is conducting its analysis in a statistically-reliable manner.

“Regrettably, no one is well served by such an opaque process,” officials continued. “While NADA and NAMAD stand ready to work with all of the federal agencies with responsibilities in this area, NADA and NAMAD encourage the CFPB to approach this issue in a more considered, transparent and coordinated manner.”

What Could Be Ahead for Dealer Reserve

Hudson offered an assessment of where the outlook for dealer reserve might be headed in light of the CFPB possibly making a concerted effort to stop it.

“If you read between the lines, I think you would conclude that the bureau would just as soon see dealer participation go away, but they stopped short of banning it,” Hudson said. “In effect, what they’ve done is make dealer participation programs awfully time-consuming and bothersome for banks and finance companies because what they’ve done is put the banks and finance companies in the business of policing the dealers they deal with.

“So the banks and finance companies are going to have the choice of going to just a flat rate participation or else really getting into the operations of the dealer they buy paper from,” he added.

CFPB Reiterates Importance of Dealers

In prepared remarks during the National Community Reinvestment Coalition Annual Conference in Washington, D.C., last Friday, CFPB director Richard Cordray emphasized the position the agency made with the bulletin.

“Consumers can easily comparison shop for the price of the car, but less so for the financing. If an interest rate is quoted, consumers often cannot easily ascertain whether that quote accurately depicts their position in the loan market,” Cordray said. “Dealers play an essential role for car buyers nationwide. They provide value, and they deserve fair compensation for their work. But lenders are responsible for ensuring that the compensation system they are using does not result in unlawful discrimination.

“When lenders have policies that provide incentives to charge higher interest rates, it can lead to unequal, discriminatory access to credit,” he continued. “We saw similar issues in the mortgage market with yield spread premiums. Discretionary markup policies create a significant risk of pricing disparities, and research indicates that such policies may result in African-American and Hispanic borrowers paying more for auto loans than other customers. We are also concerned that similar risks may exist for pricing disparities based on other prohibited bases under federal fair lending laws.

“Such discrimination may not be consciously intended, but for consumers who are disadvantaged by these policies, the result is the same,” Cordray went on to say. “Every consumer, regardless of race, gender, national origin, or other characteristics protected by federal law, should have equal access to credit and loan pricing that is free from unlawful discrimination. People deserve the chance to finance a car purchase at a fair price.”

Steps Dealers Can Take

With the debate likely to continue for the foreseeable future, Auto Advisory Services offered some recommendations that dealer managers can do now.

Rob Cohen, co-author of Auto Dealer Law and president of Auto Advisory Services, indicated that dealers can reduce exposure to potential violations of the Equal Credit Opportunity Act by having dealer participation. His three recommendations included:

—Adopt a fair lending policy that includes mandatory usage of what the firm calls a “Standard Rate Exception Report.”

—Train all sales and finance managers on this policy.

—Monitor for compliance with and enforce the policy.

“Based on this most recent CFPB bulletin, as well as communication from lending partners like Chase, dealerships must be proactive about protecting themselves against lending discrimination claims moving forward,” Cohen said.

Cohen added that subscribers to Auto Dealer Law have full access to a customizable fair lending policy and the newly created Standard Rate Exception Report form. To purchase a copy, visit www.autodealerlaw.com.

For more information on Auto Advisory Services, go to www.autoadvisory.com.

Nick Zulovich can be reached at nzulovich@autoremarketing.com. Continue the conversation with Auto Remarketing on both LinkedIn and Twitter.