The Consumer Financial Protection Bureau, through its announcement on September 17 of the “larger participant” rule for auto lenders, has made clear that it intends to tighten its regulatory grip on the auto lending industry in the United States. In a separate special “Supervisory Highlights” report, also issued on September 17, the CFPB indicates that it intends to use its expansive powers to push forward fundamental reforms in the indirect auto lending industry.
In the report, the CFPB sets out its case that its review of the indirect lending activities of the large banks currently under its supervisory authority have uncovered concerning widespread credit discrimination against protected groups. In reaching these conclusions, the CFPB utilized several statistical models, described separately here. So far, the CFPB’s “resolutions” of specific findings of discrimination have resulted in $136 million in “redress” paid to up to 425,000 consumers, according to the CFPB. In light of the CFPB’s findings during its investigations of the auto finance industry, achieving a “nondiscriminatory auto lending market’ is a “priority” to the CFPB, according to the report.
The CFPB promises in its report that every indirect lender in its jurisdiction can expect a fair lending examination by the CFPB, and that number is expected to increase significantly, particularly in light of the CFPB’s issuance of proposed regulations that would extend its supervision authority to the larger participants of the nonbank auto finance market.
In addition, the report sets forth several specific options for reform that the CFPB is seeking from the indirect auto lending industry as a way to address perceived discrimination:
- Abolishing “discretionary” pricing by auto dealers, under which dealers are allowed to “mark up” the quoted interest rate at varying levels, with lenders compensating dealers on a flat rate per deal or based on the size or terms of the financing pursuant to a formula;
- Limiting the discretionary markup to 100 basis points, as compared to markup caps of 200 or 250 more typically seen in the industry; or
- Implementing a robust “compliance management system” under which indirect lenders take responsibility for providing close oversight of a dealer’s use of markup discretion, which oversight would include statistical monitoring, dealer training, and financial remuneration for consumers if any disparities are detected.
While the report appears somewhat evenhanded among the three options, the CFPB has signaled that it would prefer the industry to move to the flat rate compensation strategy. For example, at a field hearing (discussed in a separate post) held on September 18, CFPB representatives mentioned more than once that the credit discrimination concerns could be fully addressed by flat rate pricing.
The effectiveness of the CFPB’s efforts to change industry practices is yet to be seen. So far, only one significant indirect lender has capitulated to the CFPB’s desire to abolish discretionary pricing by dealers. Similarly, any effort by the CFPB to reduce the “cap” to 100 basis points may be difficult for the CFPB to implement as a general rule covering the entire industry.
The impact of the CFPB’s efforts likely will be manifested by increased activity by indirect lenders to impose at least some aspects of the CFPB’s recommended “compliance management system” over their indirect lending programs. The report provides a detailed and comprehensive summary of the elements that the CFPB expects in a compliance management system – anyone in the industry, particularly those under the current or future supervisory thumb of the CFPB, would be well-advised to study this part of the report closely and quickly.