My colleague, Chris Willis, posted his reaction to CFPB Bulletin 2013-02, which provides guidance as to how the CFPB will apply ECOA and Reg B to dealer rate participation in the auto finance business. Except for Chris’ concern that the CFPB might be saying that disparate impact alone is sufficient to violate ECOA and Reg B without applying the three-part test set forth in Reg B which enables the auto finance company to argue a business justification for the practice, the guidance does not really change the CFPB’s already well-articulated position on this issue.
I beg to differ with the Bureau when it says that this guidance will further level the playing field in the auto finance industry. This is why I disagree.
First, the CFPB does not regulate, supervise or have the authority to investigate or initiate enforcement actions against auto dealers. The Federal Reserve Board has the authority to amend Reg B or the Official Staff Commentary thereunder so that it expressly addresses how dealer rate participation applies to auto dealers. The Federal Trade Commission is the only federal agency that has the right to investigate and bring enforcement actions against auto dealers for violating ECOA and Reg B. Neither the Fed nor the FTC has spoken yet on this subject.
Second, the CFPB does not yet have supervisory and examination authority over non-bank auto finance companies and it won’t have such authority over even part of the industry until it proposes and finalizes a “larger participant” rule applicable to them. That likely won’t happen until later this year. But, even then, the CFPB will only be able to supervise the very largest auto finance companies. While the CFPB theoretically has the authority right now to investigate and bring enforcement actions against non-bank auto finance companies, regardless of size, the CFPB has limited resources in its enforcement division and it will not be able to issue CIDs to all or even a large number of the auto finance companies that are using dealer rate participation. Some of these companies may continue to use dealer rate participation unless and until they are subject to supervision by the CFPB or receive a CID from it.
Finally, the CFPB cannot supervise and examine or investigate or bring enforcement actions against banks having less than $10 billion in assets. While those banks are subject to supervision and enforcement by the OCC, FDIC or Fed, those agencies, at least so far, don’t seem to be as committed as the CFPB to curbing dealer rate participation.
So what is the net result here? I believe that the CFPB’s guidance has a disparate impact on the large banks. The large banks will certainly feel more pressure than the small banks or non-banks to stop using dealer rate participation. While the large banks may increase their “buy rate” and agree to pay the dealers a flat dollar amount without giving the dealers any discretion to set rates, will that enable them to fairly compete with the other banks and non-banks that continue to use dealer rate participation? I’m skeptical of this.
The bottom line here is that the CFPB’s action does nothing to level the playing field. If anything, it underscores how the current polyarchical regulatory regime make it impossible to do anything to level the playing field when it comes to dealer rate participation.
I also question whether the CFPB’s position really helps car buyers. Will the “new” compensation arrangement which the Bureau seems intent on foisting upon the industry, or at least the large banks, lower interest rates or increase them? Will it cause car dealers to increase the sale prices of the automobiles they sell? Will it create more competition or less competition? And, what impact will it have on the availability of credit for persons who have less than perfect credit? None of that is addressed in the guidance, which focuses myopically on contract APRs in a vacuum without considering the other aspects of auto purchases and their financing components. The CFPB holds itself out as a data-driven agency. As such, it should have sought answers to the questions I have raised before issuing CFPB Bulletin 2013-02.