Federal Attack on Dealer’s Interest Rate Discretion

October 7, 2015Articles Are We There Yet? - Transportation Law Blog

Dealers should see the recent Consumer Financial Protection Bureau actions against indirect auto lenders as a concerted attack on their discretion to set the finance rates for car buyers. Consider the following:

  • $18 million victim compensation action against Fifth Third Bank – September 28, 2015
  • $24 million action against American Honda Finance – July 15, 2015
  • $48 million fine and restitution package against L.A.-based Westlake Services and Wilshire Consumer Credit – October 1, 2015

Understanding the CFPB’s push against indirect auto lenders is critical to projecting the future of your F&I income stream.

The CFPB claims that indirect auto lenders are passively sanctioning racial discrimination through dealer reserve discretion. They reason that the dealer’s markup of an indirect lender’s rate is being used to disparately charge minorities a higher interest rate on their car purchases. Though there is significant disagreement over what constitutes accurate evidence of ‘fair lending’ in indirect auto finance, the CFPB is hitting hard.

The CFPB has no jurisdiction over car dealers, thanks to a carve-out in the statute that grants the bureau its authority. Though many regard these headline-inducing enforcement actions as an attempt to regulate dealers indirectly through the lenders they work with.

The Takeaways

  • Expect more federal oversight and investigation of dealership lending practices.
  • Expect your discretion to set interest rates from indirect lenders to be severely reduced or entirely eliminated.
  • Expect the pass-through as these major lenders absorb huge fines into their cost structures.
  • Make sure that your dealership has effective F&I compliance processes in place to prevent discrimination.

Whether it is the CFPB or the Department of Justice, this administration is telling us through their actions that cracking down on dealer lending practices is a priority.

Follow-Up Reading….

  • The National Auto Dealers Association’s reaction to the CFPB push against dealer markups, including proposed federal legislation.
  • American Banker’s article alleging that the CFPB grossly overestimates the discriminatory effect behind these multi-million dollar enforcement actions.