Last week, Richard Cordray, the Director of the Consumer Financial Protection Bureau, issued a statement praising BMO Harris Bank and its decision to compensate auto dealers for originating indirect auto loans based on a non-negotiable percentage of the loan amount. Director Cordray stated, “It is encouraging to see BMO Harris taking this proactive step to protect consumers from discrimination. When people go to buy a car, they should not have to worry whether they’ll pay more for their auto loan because of their race, gender, or ethnic background. The CFPB is committed to creating a fair marketplace for all consumers, and we recognize that many lenders share that commitment as well.”
Recently, the CFPB has been very involved in fair lending issues affecting the setting of dealer markup, including its 2013 bulletin, which cautioned lenders offering auto loans through dealerships to remain accountable for complying with fair lending laws in their indirect lending programs. The CFPB and other regulators have been critical of “dealer participation” programs that prevail in the indirect lending industry where dealers are allowed to set, and consumers are allowed to negotiate, the amount of markup a dealer receives for originating an auto finance deal. The CFPB believes that allowing “discretion” in pricing by dealers of financing can lead to violations of the Equal Credit Opportunity Act, with some groups being charged, on average, more than other groups. On occasion, our Troutman Sanders Regulatory Compliance lawyers have commented about the CFPB’s agenda to eradicate discretion in dealer pricing of financing and thereby fundamentally reform a basic business practice in the indirect lending industry. If nothing else, Cordray’s statement confirms that this is, in fact, the CFPB’s desired goal.
BMO Harris announced that its new fee for dealerships will be 3 percent of the amount financed, up to a maximum fee of $2,000, for contracts that are 36 months or longer. BMO Harris, which offers auto loans via franchised dealerships in 25 states, appears to be the first auto lender of significance to announce a change to non-negotiable fees. Despite Director Cordray’s effusive praise of BMO Harris’s decision, from another perspective, this move can hardly be characterized as a pro-consumer event, particularly given that the 3 percent markup selected by BMO Harris is well above the 2-2½ percent maximum rates that generally prevail in the industry. In other words, BMO Harris now mandates that dealers mark up financing by 3 percent, whereas financing sources typically cap the maximum at a lower percentage and allow dealers to offer lower percentages to boot.
It is unclear whether BMO Harris’s move will trigger a wave of moves by other dealers. As some have experienced, the CFPB will altogether cease the practice of compensating dealers based on discretionary pricing markups, if dealers are not willing to comply. In short, those in the auto financing industry need to continue to watch events closely.