Jim Radogna is the President of Dealer Compliance Consultants and answers this months question.
Will rulings by the Consumer Financial Protection Bureau impact the amount of reserve dealerships can make on sales transactions?
Despite NADAs landmark victory in getting most auto dealers exempted from direct oversight by the Consumer Financial Protection Bureau (CFPB), it looks like the agency has found a back-door way to make life more difficult for dealerships. The Bureau recently announced that lenders that offer auto loans through dealerships will be held responsible for unlawful, discriminatory pricing at the dealership level.
The Bureau has indicated that it sees a potential for discriminatory pricing caused by the policies of some indirect auto lenders that allow auto dealers to mark-up lender-established buy rates and that compensate dealers for those markups in the form of reserve. Their rationale is that because of the incentives these policies create, and the discretion they permit, there is a significant risk that they will result in pricing disparities on the basis of race, national origin, and potentially other prohibited bases. A central issue is that lenders traditionally leave it up to dealerships to set the final interest rate customers pay on their indirect auto loans arranged by dealerships. The CFPB guidance calls for additional compliance burdens on lenders who purchase Retail Installment Contracts from dealers and expects those lenders to take remedial action with dealers when necessary. As the old saying goes, stuff rolls downhill.
Heres the problem: the CFPB is citing the concept of disparate impact - which is purely a statistical analysis - in evaluating potentially discriminatory dealer rate markups. Only the numbers matter, not the intent or even the knowledge of the creditor. So, even if a lender or dealer didn't intend to discriminate, they may still be held liable for perceived discrimination against protected classes. You can be doing everything completely neutral or unbiased but if there is a statistically significant adverse impact on a protected class, you can still be held responsible under the Equal Credit Opportunity Act (ECOA).
The CFPB further recommends that indirect auto lenders take steps to ensure that they are operating in compliance with fair lending laws as applied to dealer markup and compensation policies. These steps may include revising dealer markup policies, eliminating dealer discretion to markup buy rates, and compensating dealers using a different mechanism that does not result in discrimination, such as flat fees per transaction.
As a result of these announcements, at least one major bank has already sent a letter to dealers indicating that it will periodically review dealer portfolios, addressing indications of potential discrimination. The letter also stated in part if you are unable to provide any explanation for the pricing differences, or if we continue to identify unexplained differences in your pricing to protected classes on a prohibited basis, we will consider taking further action.
Who knows what these actions could include - perhaps disruptive audits or even demands for repurchase of a dealers entire portfolio?
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The Article Ask the Expert | June 2013 appeared first on Automotive Digest.