I was so excited to report back the positive news I heard at the American Financial Services Association’s (AFSA) annual Vehicle Finance Conference. But before I could put my paws to the keyboard, the Consumer Financial Protection Bureau (CFPB) struck. But even that news hasn’t deterred my feeling that the industry is staring at a huge opportunity to bring about some positive changes.
About a week after I returned from the conference in Orlando, Fla., the CFPB, as reported by Bloomberg, issued warnings to “at least four” banks that they faced lawsuits under the Equal Credit Opportunity Act (ECOA). The article said the bureau is looking at bank policies related to how we in the F&I office mark up interest rates. What the CFPB is checking on is whether our markup practices have caused a disparate impact on minorities, causing them to pay higher interest rates.
I know you’re thinking you’ve never treated anyone unfairly because of their race, religion, sex, etc. Unfortunately, that doesn’t matter, because the CFPB, by using the disparate impact theory, is saying that violations under the ECOA can be pursued based solely on statistics that suggest an otherwise neutral policy disparately impacted minorities. What that means is regulators don’t have to prove intent to launch claims related to the ECOA. The good news is no federal court of appeals has determined whether the ECOA permits disparate impact claims, although two have questioned its appropriateness.
My legal friends speculate the CFPB is going to examine bank portfolios to see if discrimination has taken place. But since most finance sources never see the customer face to face, it’s going to be your markup policies that will come under scrutiny. And you can bet the Federal Trade Commission (FTC) will be notified of the bureau’s findings.
The problem with the CFPB’s approach is it lends itself to false positives. For example, what happens if two dealers with differing customer demographics apply the same pricing policies, but one charges a higher rate? So, what was the good news I wanted to report? Well, after sitting through a couple of panels at the AFSA’s conference — one of which included Richard Hackett, the CFPB’s assistant director for installment lending markets — I felt like we passed the regulators’ first sniff test.
As recalled at the AFSA’s conference, the industry did a good job of producing proof of the indirect channel’s value to consumers during the FTC’s three roundtables back in 2011. Those sessions brought together industry reps, attorneys and consumer advocates to discuss perceived issues in our business.
And well, the NADA trotted out an analysis of new-vehicle loans originated between 2008 and 2010. What it did was take data collected by the Federal Reserve Board and compared it to transaction data collected by J.D. Power and Associates. According to the NADA’s findings, consumers who chose the indirect channel vs. going direct saved, on average, $635.40 in 2008. In 2009, the average savings climbed to $779.40, then again to $1,162.20 in 2010. In total, dealers helped consumers save $21 billion on new-vehicle financing during those three years.
There also is some history behind us. If you recall, a number of captives faced similar charges of discrimination early last decade. They settled, but out of those cases came a court-accepted standard for markups: 2 percent for contracts with a term of more than 60 months, and 2.5 percent on contracts with terms of 60 months or less. States like California employ that standard, which means regulators understand that dealers should be compensated for services rendered.
At the AFSA’s conference, Hackett mentioned recent settlements in the mortgage industry involving how brokers determine which banks to direct home buyers to. As he described, the CFPB wanted to ensure that determination was based on what’s best for consumers, not a broker’s commission. But Hackett sounded more like a man after a solution than someone with an ax to grind. As he said, he wants to collaborate with finance sources, but “not on a ‘gotcha’ basis.”
Keep in mind that the 15-day letter finance sources reportedly received are part of the process. As Hackett described, the CFPB will issue a letter in response to complaints received. The finance source then has 15 days to respond. If everything checks out, the CFPB will move on, he said. So, what’s that opportunity I speak of? Well, I think we can prevent a lot of issues by doing a better job of educating consumers about vehicle financing. And since most customers like to shop online, our websites can serve as the vehicle to deliver the information our customers need.
