The Consumer Financial Protection Bureau and Responding with a Fair Credit Compliance ProgramJune 29, 2015
Christopher S. Ernest, CPA, MSM
Automotive dealers were largely exempt from the Consumer Finance Protection Bureau’s (CFPB) jurisdiction after a long and tumultuous battle on Capitol Hill, but that has not stopped the CFPB from finding ways to regulate dealers. In 2013, the CFPB undertook an effort to focus on regulating auto loans by targeting banks under its jurisdiction. Concerns particularly surrounded “dealer-assisted financing” or “dealer participation”, the process whereby a dealership arranges an auto loan or lease with a bank, credit union or other financial institution. These processes typically provide the dealer with the discretion to increase the rate offered by finance providers as compensation for acting as an intermediary between the institution and the consumer. The CFPB believes that dealers’ discretion with respect to rate mark-up, known as dealer reserve, creates an opportunity for discrimination and violation of the Equal Opportunity Credit Act (ECOA). Ally Financial, for example, was investigated and eventually settled with the CFPB for nearly $100 million after the CFPB concluded that dealer reserves for certain minority consumers were greater than similarly positioned non-minority customers. In addition, the CFPB has indicated that it has taken nonpublic actions against auto finance companies that returned another $56 million to approximately 190,000 car buyers.
Based on the results of its findings with respect to auto loans issued by banks, the CFPB issued guidance in 2013 that threatens to eliminate dealers’ flexibility to adjust the interest rate offered to consumers to finance vehicle purchases by recommending that lenders:
- eliminate dealer discretion to markup rates and fairly compensate dealers using another mechanism, such as a flat fee per transaction that does not result in discrimination, or
- impose controls on dealer markup and compensation policies, or otherwise revise dealer markup and compensation policies, to monitor for and address unexplained pricing disparities on prohibited bases.
Lenders have indicated that they would lose market share under a flat fee model unless all of their competitors were required to move to such a model at the same time. Further, lenders and dealers alike argue that moving to a flat fee model would hurt consumers as there are often legitimate reasons for rate markups or discounts, including credit risks, competition and inventory constraints.
The CFPB guidance was issued without prior public comment or hearing and admittedly without fully analyzing its impact on consumers. In response, several bills have been introduced in Congress which aim to nullify the guidance and require public participation in developing future CFPB guidance before it is issued. The bills have garnered bipartisan support and the endorsement of the National Automotive Dealers Association (NADA), state dealership associations and automotive dealers nationwide, but none have been enacted to date. Meanwhile, Senator Elizabeth Warren (Democrat - Massachusetts) is drafting legislation that would give the CFPB the authority it needs to oversee dealers as a result of their sale of financial products and loans. She has compared the automotive financial product market to the pre-recession housing market, saying that, “auto loans are the most troubled consumer financial product.” Given that Republicans control both chambers of Congress, passage of Senator Warren’s proposed bill in the near future is highly unlikely, but her remarks have certainly gotten the attention of dealers across the country.
Regardless of the outcome of the political efforts surrounding the jurisdiction of the CFPB and guidance issued to automotive dealers and lenders, dealers can expect more scrutiny of their activities whether by federal or state regulators or finance providers, who are under pressure from the CFPB to monitor dealers more closely. Fortunately, NADA has developed and released a useful tool known as the Fair Credit Compliance Policy & Program (the Program), to help dealers navigate the scrutiny of rate participation policies and compliance with ECOA; the areas of CFPB focus. The Program is based on a 2007 Department of Justice consent agreement which sought to address alleged rate discrimination at two dealerships. Dealers using the Program establish a preset amount of compensation included in financing offers to every customer and would only offer discounts based on legitimate factors that can affect finance rates such as budget constraints, competition or incentive programs, among others. Dealers would then document any deviation from the preset amount of compensation, an important procedure designed to respond to inquiries from lenders or regulators about their pricing practices. Through its fair credit website (https://www.nada.org/faircredit/), the NADA has provided dealers with all of the guidance and templates necessary to successfully implement the Program, working with their legal counsel. In addition, they have provided guidance on establishing a monitoring process to ensure compliance with the Program, which includes periodic audits of credit offerings by individuals who are not routinely involved in such transactions.
NADA Chairman Bill Fox has implemented the Program within his own Fox Dealership Group in upstate New York and has strongly urged dealers everywhere to consider doing so as well. He notes that this voluntary approach to compliance is designed to help dealers promote their commitment to fair credit compliance and demonstrate that they have taken a consistent approach to the pricing of consumer credit. Further, public dealer groups have been receptive to the Program. Group 1 Automotive, for example, has indicated that it would implement the program across all of its stores, while Auto Nation, Inc. is piloting the program within selected stores. The Department of Justice has effectively endorsed the Program, as it is based on their 2007 consents, and even CFPB Director, Richard Cordray, has referred to it as “encouraging”.
There is no doubt that the environment surrounding dealer-assisted financing and participation is changing. Dealers should not sit on the sidelines watching the battles in Washington, but rather take a proactive approach to compliance management. Implementation of the Program is a legitimate step towards compliance with ECOA and can provide protection against not only the CFPB, but also other federal and state regulators. The Program is flexible in that it allows dealers to develop reasonable and allowable standard rate deviations but ensures the approach to all credit offerings is consistently applied, documented and retained. The Program puts dealers in a better position to respond when faced with a situation in which pricing decisions are being questioned and they could otherwise be accused of discriminating against a customer. Every dealer should review the resources made available by the NADA and consider implementation of the Program within his or her store(s). By making fair credit a priority, dealers ensure that the needs and expectations of all of their customers are met, which is just good business.
Christopher Ernest, CPA, MSM, is a manager with BlumShapiro, specializing in providing accounting and business advisory services to the automotive industry. BlumShapiro is the largest regional business advisory firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. The firm, with over 400 professionals and staff, offers a diversity of services which includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plan audits, litigation support and valuation. The firm serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.