The Consumer Financial Protection Bureau (CFPB) met with representatives from the auto lending industry last week to discuss the agency’s discrimination concerns. Separately, CFPB Director Richard Cordray fielded questions from U.S. Senate lawmakers who expressed concern that guidance released by the bureau earlier this year could constrict auto credit.
In March, the CFPB released a bulletin on indirect auto lending pertaining to dealer markup. Dealer markup occurs when a third-party auto lender provides an auto dealer with an interest rate for a particular customer, but the dealer offers the consumer a higher rate and pockets the difference.
The bulletin expressed concern that dealer markup could lead to pricing disparities based on race or national origin. The bureau encouraged auto lenders to revise policies that permit dealers to mark up interest rates when arranging financing for consumers. Lenders could provide auto dealers a flat fee for their services, the agency suggested. The bureau also said lenders should monitor and address the effects of markup policies as part of a robust fair lending compliance program.
The agency hosted an auto finance forum at CFPB headquarters on Nov. 14. Cordray told industry participants the agency will make every effort to root out unlawful, discriminatory lending practices.
“We intend to create a fair marketplace for all consumers,” Cordray said. “Illegal discrimination in all forms is simply wrong.”
Cordray explained in a letter to U.S. House Democrats this summer that the agency uses proxy methodology to monitor for potential fair lending issues in the auto lending market. He said the bureau is encouraging lenders who are not currently doing so to “select a reasonable proxy method” to monitor their fair lending risk.
Industry participants were immediately concerned about the CFPB’s guidance. They argued the bureau was creeping into forbidden territory because the Dodd-Frank Act explicitly bars the agency from regulating auto dealers. U.S. House Republicans feared the bureau’s flat-fee suggestion could constrict credit. They wrote a letter to the bureau seeking detailed information on the CFPB’s fair lending proxy methodology. They also criticized the bureau for not reaching out to industry participants on the issue.
Cordray addressed several of these concerns during a Nov. 12 hearing before the Senate Banking Committee. He said the CFPB’s proxy methodology is “time honored and well tested,” and the bureau is working to ensure that the methodology produces accurate results.
“We have scrubbed the proxy methodologies that are used. We’ve refined them to some degree to include some elements of census track as a further refinement in an attempt to render more precise data,” Cordray said. “Anything we do could ultimately be tested in court and a court would have to have confidence in our methods.”
Cordray also said Congress’s explicit effort to wall off auto dealers from CFPB oversight complicated its efforts to gain feedback from industry stakeholders.
“Some of the reaching out we might have naturally done has been difficult for us because we don’t want to be greeted by: ‘There they go, they think they now control auto dealers,’” Cordray said. “We’re trying hard to observe the line Congress drew. It’s not a natural line, but it’s in the law and that’s something that we’re trying to be careful about.”
He also said the bureau would work to balance fair lending concerns with the need to ensure consumers’ access to auto credit.
“We understand that credit means opportunity for a lot of consumers if it’s used responsibly. We also want to make sure that when a consumer goes in to get a loan to buy a car, they aren’t unwittingly being forced to pay more based on assumptions made about their racial or ethnic background,” Cordray said. “We will be taking great care as to how we move forward here, but we think that there are some key core American principles at stake.”