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CFPB Supervisory Highlights Report on Indirect Auto Lending

Posted in Auto Lending, CFPB

On September 17, 2014, the CFPB issued a supervisory highlights report concerning discriminatory practices in automobile lending. The report focused on so-called “indirect auto lending” which the CFPB defines as “when a consumer secures vehicle financing through the dealer, which typically originates the loan to the consumer and arranges financing through a third-party financial institution.” The report notes that, as a result of alleged discrimination uncovered during supervisory reviews, unnamed entities have agreed to pay $56 million to provide redress to over 190,000 consumers who were discriminated against on the basis of race in automobile loans and leases.

The supervisory report explains that there is concern about “dealer markups” or the spread between the interest rate that the lender is willing to accept, and the rate the dealer is permitted to charge the consumer. Dealer markups are often a factor in dealer compensation. The dealer discretion over interest rates, coupled with the financial benefit of charging higher interest rates, the CFPB believes, may result in African American, Hispanic, and Asian and Pacific Islander borrowers paying higher interest rates on auto loans than similarly situated non-Hispanic white borrowers.

The supervisory report includes a few practical suggestions for reducing risk of discriminatory conduct, while being careful to note that the CFPB is not dictating a specific course of conduct that businesses must adopt. Those steps include:

  • Eliminating dealer discretion in interest rates charged to borrowers;
  • In the alternative, limiting dealer discretion in marking up interest rates. The supervisory report notes “supervisory experience suggests that significantly limiting discretionary pricing adjustments—for example, imposing limits of 100 basis points, rather than the more common limits of 200 or 250 basis points—may reduce or even effectively eliminate pricing disparities”; and
  • Ceasing to use dealer markups as a factor in dealer compensation.