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Auto Lending Change: Unlikely or Possible?

cfpbThe Consumer Financial Protection Bureau and the Justice Department have been hand in hand in confronting lenders and auto dealers about the discretionary markups tacked onto loan amounts, which in effect allegedly abuses minority borrowers.

In December last year, Ally Financial, one of the biggest auto lenders in the U.S., reached a $98-million settlement with the CFPB. The deal offered incentives to Ally to employ a flat-fee system.

With a flat-fee pricing model in effect, the dealer will receive a fixed amount as compensation for each loan they arrange, thereby eliminating dealers’ discretion over the sum they will receive.

But Ally CEO Michael Carpenter firmly made it clear that his company will stay with the old way of doing things in the auto lending industry.

“We are not going to be the Trojan horse for driving industry change…That is obviously not what the CFPB wanted to hear. They thought we were going to cave,” he told the Automotive News.

According to the bureau, it does not seek to remove the dealer markup—sometimes called the dealer reserve or the dealer rate participation. But it has suggested other options that would also end the discretion auto dealers have.

CFPB Director Richard Cordray said earlier this year in a congressional hearing, “What we think is problematic is when, if creditworthy determination has been made and there’s a rate that is gauged, that somehow that rate will be pushed up because of financial incentives for people to push up higher at the expense of the consumer.”

The consent order with Ally stated that an average African-American borrower of the auto-lending giant paid over $300 additional interest over the life of the loan, not like a white borrower with the same credit standing.

It gave the Detroit-based lender unpleasant choices: to take away pricing discretion from its dealers or to execute a monitoring program which may require the lender to write minority borrowers checks if they are deemed to have paid more than what they should.

An Ally spokeswoman has said that the company does not believe there is “measurable discrimination by auto dealers.” It also believes that the dealer income is essential in keeping the dealership businesses strong and allows dealers to offer competitive APRs or annual percentage rates.

The CFPB continues its scrutiny over lenders. But recently, the U.S. Chamber of Commerce has sent a letter to the bureau, calling for a comprehensive “compliance handbook” for auto lenders. The chamber has been a critic of the bureau since the latter’s creation in 2010.

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