At the CFPB’s auto finance forum on November 14, Director Cordray and other CFPB officials reiterated their distaste for dealer finance charge participation as a method of dealer compensation in the indirect auto finance market. (As readers know, dealer participation involves dealers setting the finance charge above the rate at which a bank or finance company has indicated it might be willing to buy a contract; the dealer keeps a portion or all of the difference.)
Director Cordray and Patrice Ficklin, Assistant Director of the Office of Fair Lending, used their remarks to make the case that dealer participation is irreparably flawed because it allows dealers a level of discretion that frequently results in statistically significant disparities in rates paid by African American, Hispanic and Asian car buyers compared to rates paid by Caucasian buyers with similar credit characteristics and, at best, requires costly, ongoing monitoring and remediation of this alleged discrimination by the purchasers of such contracts. However, Ms. Ficklin was emphatic that compensating dealers on a flat-fee basis is not the only other option, saying that “the CFPB believes there are a variety of alternatives to discretionary markups.”
Although court challenges to the disparate impact theory continue, sometime next year, we expect that the CFPB and DOJ will bring and settle several cases against large banks and indirect auto finance companies alleging that the practice of dealer finance charge participation has a disparate impact against members of protected classes in violation of the Equal Credit Opportunity Act. We expect that these settlements will require the entities involved to employ alternative dealer compensation systems to mitigate fair lending risk.
During the forum’s first panel, comprised of regulators from the CFPB’s “sister agencies,” Steven Rosenbaum, the Housing and Civil Enforcement Section Chief at the Department of Justice, reported that the DOJ and CFPB are pursuing “a number” of joint indirect auto finance investigations. Earlier in the same panel, Ms. Ficklin said that the Bureau has found statistically significant disparities in rates exceeding 10, 20 or 30 basis points, amounting to overpayments of tens of millions of dollars.
Closing remarks by Eric Reusch, the Program Manager for Auto and Student Loans in the Division of Research, Markets and Regulations, appear to indicate that the CFPB is studying whether alternatives to dealer participation—including compensation in the form of a flat percentage of the amount financed or a fixed percentage that is tied both to the amount financed and the duration of the contract—effectively mitigate fair lending risks for consumers while also “fairly” compensating dealers. (We presume that these models would require auto finance companies to exercise controls to prevent allegations that consumers are steered into larger amounts financed.) As the Bureau proceeds with any studies, we hope that it will disclose its methodology.
Mr. Rosenbaum from the DOJ and Donna Murphy from the OCC also fired shots across the bow to auto finance companies and dealers regarding their Servicemembers Civil Relief Act (SCRA) compliance, saying that their agencies are keenly focused on detecting and taking action against SCRA violations.
On November 20, Ballard Spahr attorneys and Deepak Gupta will conduct a webinar, “Why the Disparate Impact Theory May Not Matter to Fair Lending Supervision and Enforcement at the CFPB.” A link to register and more information is available here. On December 12, Ballard Spahr will host a webinar, “Understanding the CFPB’s Defense Strategy on Military Lending.” A link to register and more information is available here.