When the Consumer Financial Protection Bureau issued guidance regarding the auto finance market in March, many legal observers and dealer principals saw it as a direct attack on dealer participation, a strong income driver for stores’ F&I revenue.

However, Dealertrack Technologies associate general counsel Randy Henrick attempted to quell fears that federal regulators were going to directly or indirectly make dealer participation a thing of the past.

“We believe rate participation is not going to end, at least not any time soon,” Henrick said. “Large banks would be the lenders most likely to implement flat-fee per transaction pricing. Small banks, credit unions and non-bank finance companies are less likely to do so since the CFPB has less authority over them, and their large numbers and inability of the CFPB to gather statistical information against them will make it difficult for the CFPB to bring actions against every lender that maintains rate participation.”

Even before the CFPB made this regulatory move in the auto space, Henrick indicated some large lenders already started monitoring and training programs for dealers on fair lending and disparate impacts.

“But it is unlikely that dealers — especially dealers that implement compliance policies of their own — will be compelled to send contracts only to flat-fee lenders,” Henrick said. “Dealers always have discretion to send contracts to lenders they choose and where dealers send their contracts will have an important effect on the success or failure of any lenders who adopt flat-fee pricing.”

Explanation of Disparate Impact

Thanks to the Dodd-Frank Act of 2010, Henrick explained, the CFPB can audit and enforce consumer protection laws such as the Equal Credit Opportunity Act.

Under the act, “disparate impact” credit discrimination can occur when, as Henrick noted, a “seemingly-neutral business practice,” such as a minimum income requirement, has a disparate effect on a protected class of persons under ECOA. Those protected classes include race, color, religion, national origin, sex, age, marital status, receipt of public assistance or exercise of consumer credit rights.

“For example, minimum income could have a disparate effect on women,” Henrick said. “If this appears to be the case, a creditor must demonstrate that the challenged practice was necessary to achieve a legitimate business interest, which could include business account acquisitions or profits.

“If so, the burden then shifts to the regulator to show that the same business interests could have been obtained by practices having a less disparate impact, such as using loan:value ratio instead of minimum income to reduce the disparate impact on women,” he continued.

“It is purely a statistical analysis; only the numbers matter, not the intent or even the knowledge of the creditor,” Henrick went on to say.

Eyeing Markups at the F&I Office

Henrick believes the CFPB’s recent guidance finds “without explanation” that lenders allowing and compensating dealers for marking up buy rates presents “a significant risk that they will result in pricing disparities on the basis of race, national origin and potentially other prohibited bases.”

Bloomberg reported back in February that the CFPB was gearing up to sue four large auto finance lenders for disparate impact credit discrimination based on dealer rate markups. Auto Remarketing confirmed through filings with the Securities and Exchange Commission that Ally Financial was taking steps to comply with a CFPB investigation.
Henrick acknowledged that should the agency proceed with these lawsuits, saying “doing so will give teeth to the Guidance and advance the CFPB’s policy, which seems to be to want to eliminate dealer participation.”

Building a Complaint Database

Besides its Guidance, the CFPB is building its arsenal against dealers and lenders based on complaints accumulated in its database.

In late March, the CFPB went live with the nation’s largest public database of federal consumer financial complaints, opening up to consumers across the country information on more than 90,000 individual complaints on financial products and services.

“By sharing these complaints with the public, we are creating greater transparency in consumer financial products and services,” CFPB director Richard Cordray said. “The database is good for consumers, and it is also good for honest businesses. We believe the marketplace of ideas can do great things with this data.”

Agency officials said the launch expands the Consumer Complaint Database significantly from about 19,000 credit card complaints to more than 90,000 complaints on mortgages, student loans, bank accounts and services, other consumer loans such as vehicle contracts and credit cards. In many cases, it includes the subcategory of products. For example, for mortgages it includes reverse mortgages, conventional fixed mortgages, conventional adjustable mortgages and home equity loans or lines of credit.

The database allows the public to see what consumers complained about and why, as well as how and when the company in question responds. It has more than 1 million data points, covering approximately 450 companies. It includes the type of complaint, the date of submission, the consumer’s ZIP code, and the company that the complaint concerns.

The database also includes information about the actions taken on a complaint by those companies – whether the company’s response was timely, how the company responded and whether the consumer disputed the company’s response. A consumer’s identity and other personal information is not included in the data.

“The live database updates daily. So as the CFPB handles more complaints, more will be added,” officials said. “When the CFPB accepts consumer complaints about other financial products and services, they will be put on the database after a period of time. For example, credit reporting complaints, which the CFPB recently began to accept, will be included in the database in the near future.”

The CFPB pointed out complaints are listed in the database only after the company responds to the complaint or after they have had the complaint for 15 days, whichever comes first.

“Importantly, while the allegations in the complaint are not verified, a commercial relationship between the consumer and the company is substantiated before the complaint is added to the database,” officials said.

What Dealers Can Do

Henrick reminded dealers that the CFPB has working arrangements with the Federal Trade Commission and the Department of Justice, both of which have jurisdiction over dealers.

The Dealertrack Technologies legal expert recapped that DOJ settled a “disparate impact” case with a lender last year and then drilled down to sue the dealer that had originated the offending retail installment sales contracts (RISCs).

“Reportedly, the CFPB is seeking similar detail on dealers in its investigations of large indirect auto finance lenders,” Henrick said. “If the CFPB settles with one or more of the national lenders, it is possible it will obtain details on dealer RISCs that it believes show a disparate impact and refer those matters to the FTC or DOJ for action against the dealerships.

“In effect, the CFPB is making lenders the cops on the beat to identify dealers whose RISCs the CFPB would find discriminatory and take appropriate action against those dealers,” he added.

For dealers wanting to continue being compensated by dealer participation arrangements, Henrick stressed that it is important to develop and implement fair lending policies that affirm the dealer’s commitment to equal credit opportunity for all, and then proactively take steps to train employees and manage rate markups.

For example, F&I managers could mark up all contracts by a set amount such as 200 basis points, and that amount would be both a floor and a ceiling for rate markups.

“If an F&I manager wanted to discount the set markup amount, he or she could do so only for competitive reasons that needed to be documented deal by deal,” Henrick said. “Adopting a fair lending policy and implementing such an arrangement would be one way to favorably position your dealership in the event of an audit by your lenders or a regulator.

“In addition, continually monitoring your dealer’s compliance alongside this policy is a must,” he concluded.
 

Editor's Note: This article appears in the May 1-14 print and digital versions of Auto Remarketing magazine as part of our coverage on the Subprime Resurgence. Stay tuned to this issue for more. Check out the most recent news from the CFPB and its changes to senior leadership, reported Wednesday in our sister publication SubPrime Auto Finance News.

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