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How the CFPB’s stance on ECOA in auto finance will raise consumer prices

Posted in CFPB Enforcement, Fair Lending, Hot Issues, Vehicle Loans

Ever since the CFPB’s release of its bulletin relating to disparate impact analysis of dealer rate participation last week, the press and consumer advocacy groups have been buzzing about the Bureau’s stance and its potential impact on the industry and consumers.  Alan Kaplinsky and I previously blogged about the bulletin and its associated issues here, here and here.  More recently, Jeff Sovern posted a blog entry over on the Public Citizen blog that caught my attention, and I wanted to respond to Jeff’s comments.

Jeff’s blog post takes issue with auto dealer industry representatives’ belief that consumer prices will rise as a result of the CFPB’s contemplated pursuit of enforcement actions against the purchasers of retail installment contracts.  He posits that, if all indirect auto finance companies bought contracts only when priced at their “buy rates,” all consumers would pay the same, lowest rate.  And he makes the point that, if some consumers paying higher rates are subsidizing consumers paying lower rates, isn’t that something we should want to eliminate?

I think that Jeff’s comments on this issue miss the point in two important ways.  First, the CFPB’s approach to this issue – using the threat of enforcement as a way to eliminate dealer rate participation – necessarily adds cost into the financing system, and that cost will have to be reflected in interest rates paid by consumers.  If you look at the recommended compliance steps outlined in the Bulletin, it will require purchasers of retail installment contracts to undertake expensive and time-consuming monitoring of dealer behavior.  This will be difficult at best, since no purchaser is likely to have more than a handful of contracts from a given dealer in a given time period, and large banks may have relationships with thousands of auto dealers, who now must be “policed” for fair lending violations.  Moreover, indirect auto finance companies are being instructed to conduct expensive statistical analyses of their portfolios, both portfolio-wide and on a dealer-specific level.  The laundry list of compliance steps recommended in the CFPB’s bulletin will increase the costs for both indirect auto finance companies and auto dealers, and those costs will inevitably be passed along to consumers.  And, in addition, the expense associated with defending and/or settling the enforcement actions that the CFPB is expected to bring under ECOA also increases the costs to purchasers of retail installment contracts, and redistributes money from future auto-buying consumers to those who purchased in the past – the same kind of cross-subsidy that Jeff’s post identifies as undesirable.

The second point that is absent from the analysis here is the impact of eliminating dealer rate participation on the sale price of automobiles.  If dealers are forced to accept less compensation for originating retail installment contracts, there is no reason to believe that they will simply absorb the loss; it is more likely that they will become less generous in discounting the prices of automobiles they sell.  This is an area where substantial negotiation (or, “discretion,” as some would say) occurs today, and will continue to occur, regardless of what the CFPB does with respect to dealer rate participation.  Indeed, one of the analytical flaws in the CFPB’s approach is that it fails to take this important element of the transaction into account, presuming that consumer harm occurs based on analyses of APR alone, when an examination of the sale prices of the cars might show that no such harm actually exists.  But, to Jeff’s point about increased consumer costs, those costs can easily come about in the prices of automobiles. 

For these reasons, I am confident that the CFPB’s actions will ultimately increase the costs for all car-buying consumers.  Those increased costs are unlikely to be tracked or quantified by anyone, but they will nonetheless be real.