The ongoing debate over how the F&I process should unfold inflamed again in the heart of the Midwest.

As consumer advocates and attorneys made scathing accusations about unscrupulous activities that amounted to practices such as payment packing, yo-yo financing and spot delivery, representatives from the American Financial Services Association and the National Automobile Dealers Association pushed back against those charges and more during the latest auto finance field hearing hosted by the Consumer Financial Protection Bureau.

CFPB director Richard Cordray opened the event by recapping the series of moves the bureau made in advance of the event at Hine Hall Auditorium on the Indiana University – Purdue University Indianapolis campus. Cordray reiterated his stance about how vehicle purchases — especially transactions involving consumers with subprime credit histories — must be completed in a transparent way that complies with federal regulations.

“It is important that the financing of these purchases does not come at an unjustifiably high cost,” Cordray said. “The Consumer Bureau will continue to work to ensure that people can get fair access to credit, on terms that reflect their actual creditworthiness, that marketing is honest and factual, that the terms of the deal can be made plain and readily understood, that companies are not furnishing wrong information about their customers, and that people are treated with respect and dignity in the debt collection process.”

Following Cordray’s prepared remarks, the event moved on to a panel discussion that included about a dozen individuals, including AFSA executive vice president Bill Himpler and Paul Metrey, who is chief regulatory counsel for financial services, privacy and tax for NADA. The remainder of the panel also included Consumer Bankers Association general counsel Steve Zeisel, CFPB officials, Center for Responsible Lending senior vice president Chris Kukla and Chrystal Ratcliffe, president of the Greater Indianapolis Chapter of the National Association for the Advancement of Colored People (NAACP).

In structuring questions, regulators often referenced the rise in subprime lending, even though finance companies’ appetite for subprime risk appears to be waning, judging by the softening trends Experian Automotive earlier this summer. According to its latest State of the Automotive Finance Market report, Experian determined that the percentage of new-vehicle loans to subprime and deep subprime borrowers began to level off in the second quarter.

“There may be an uptick in lending to subprime customers, but that’s not necessarily a bad thing,” Himpler said. “We need to remember that credit is an opportunity. What the uptick demonstrates is that following the crisis lenders are willing to, based on performance, go deeper to help folks who need access to transportation to get to jobs. Nobody would question extensions of credit to someone who is carrying around a (Black American Express) card, but in the subprime space we don’t have any problem talking about wanting to ratchet back because they may be taken advantage of.

"At the same time as regulators you need to be diligent to be sure that they’re treated fairly. But we do need to remember we’re a credit economy going all the way back before our country was founded. Credit is a good thing. It helps people build wealth, get jobs and we can’t lose sight of that,” Himpler went on to say.

In their prepared remarks, both Himpler and Metrey emphasized how much AFSA, NADA and their members are against discrimination of any kind, regardless of credit status, ethnicity or gender. But the final hearing attendee given an opportunity to make a two-minute statement offered one of the most predatory accusations of the entire two-hour event.

Judith Fox now is a clinical professor of law at the University of Notre Dame School of Law and also runs the Economic Justice Clinic for impoverished consumers in Indiana. While her biography and resume on the school website doesn’t list specific organizations, it does state that prior to attending law school, Fox was a loan officer at banks in both Pennsylvania and Indiana.

“I became a lawyer because before I was a lawyer I bought loan paper from dealers,” Fox told the audience. “We used to have a game in our office that when we looked at the interest rate that came in to guess the race and sex of the buyer. And we were never wrong.

“If it was over 20 percent, it was an African American woman. If it was 7 percent, it was a white male. That’s why I became a lawyer,” she continued.

“If you want to know what consumers need to know when they go into a dealer, they think they’re going into a loan broker who is doing the best they can to get them the cheapest rate. They need to know who their loan was shopped to, what rates they were offered, what rates you’re giving. Dealers need to make money, and I understand that. But the consumer needs to know they could have gotten a 7 percent loan, but you’re going to give it to me for 12 percent,” Fox went on to say

Incidents like what Fox alleged are part of the reason why Cordray and the CFPB are targeting dealer markup so strongly.

“And in our supervisory experience, we have found that when an indirect lender has a policy allowing the dealer to use its discretion to mark up the loan without regard to the actual credit profile of the consumer, and to benefit from that markup, the risk of discrimination increases,” Cordray said.

“Whether this is done openly and expressly, on the one hand, or silently and implicitly, on the other hand, does not change the fact that the consumer has been financially disadvantaged in violation of the law. Unbeknownst to the consumer, the discretion to charge distinctly different rates can dramatically increase the risk of unlawful discrimination,” he continued.

Whether dealer markups continue or flat fees become the norm, Metrey attempted to emphasize that neither choice eliminates the potential for dealer discretion.

“As long as dealers have multiple finance source partners who are competing with each other, you’re not going to eliminate dealer discretion,” Metrey said. “You may shift the exercise of it, but whether it’s on the buy rate, the wholesale buy rate or flat fees, or anything else, as long as you have multiple finance sources competing for the dealers’ business and the dealer decides who is the one they send the paper to, you have an exercise in discretion.

“In this arena, our hope is that bureau will not focus its effort on the false hope that you can eliminate discretion,” he added.

Earlier during the hearing, Metrey also attempted to explain what the auto financing industry thrives already thanks to the structures currently in place.

“Once you really look at how (auto finance) compares to other asset classes, if you look at asset-backed securities, look at delinquencies, look at defaults, it is exceeding strong because it’s based on an extremely strong underwriting model,” Metrey said. “They’re not looking at speculation that the collateral will increase in value. You’re looking primarily at the repayment ability of the borrower. They’re honed in on precisely the right factor and the results are reflective of that fact.

“It is a highly competitive marketplace, and that’s a good and healthy thing,” he went on to say. “It benefits customers. It requires businesses that want to survive in that market to deliver superior customer service, to provide very competitively priced products and to have a very strong efficiency of operations.”