The 2013 Consumer Financial Protection Bureau (CFPB) regulation which held financial institutions responsible for potential discriminatory lending practices at dealerships was repealed by the President on Monday. The original 2013 CFPB bulletin was intended to address the potential for racial discrimination at dealerships by encouraging lenders to cap interest rate markup at 150 basis points, as opposed to the industry standard of 250 basis points. This was all based on disparate impact theory, which refers to practices that adversely affect protected classes of individuals, even though employer rules and practices are meant to be neutral. The CFPB used this theory to make the argument that dealer markup practices could result in unintentional discrimination during the credit process, and must therefore be reined in.
During its five-year existence, the directive prompted the implementation of flat fees as well as millions of dollars in fines charged to financial groups in the form of consent decrees. The root of the CFPB guidance took issue with the practice of dealers placing the buyer into a higher-interest deal than the lender had originally approved, and then the dealership collects the difference.
Thanks to some fancy footwork by Senator Pat Toomey (R-Pa.), who asked the Government Accountability Office (GAO) to review the CFPB’s guidance, and Senator Jerry Moran (R-Ks) for putting S.J. 57 onto the floor for a vote, the regulation, and its guidance, has ceased to exist. And, if you ask some, all is now right with the world.
Groups on many sides of the situation took issue with the ruling. Auto industry trade groups argued that the bureau used its guidance to indirectly regulate the activities of dealers, which are mostly exempt from the bureau’s oversight under the Dodd-Frank Act. In addition, they argued that the guidance would ironically have an adverse effect on the groups of people it was trying to protect by limiting a dealer’s ability to secure competitive funding. Banking and financial groups reaffirmed their commitment to fair lending practices, saying they have been regulated for years and were not to blame for dealer actions that may or may not result in unintentional discrimination.
While dealer markups are back in play, it’s important to not throw the baby out with the bathwater. After investing millions of dollars in updating compliance procedures, it is unlikely that the industry will undertake a complete reversal of that investment. For example, Toyota Financial Services (TFS) was approved for early termination of its 2016 consent order and the lender intends to raise markup caps immediately. However, they are not planning on returning to the rate markups of old. In fact, TFS plans to raise that limit to 2% for finance terms of up to 72 months and 1.5% for terms up to 84 months, according to Auto Finance News.
As a lender, what’s your next move? EFG encourages all of its lender clients to maintain their high standards of compliance, and serve as a guidepost for their dealership partners. You are an expert in compliance and regulations, and your insight can be invaluable during this transition.
Don’t fall into the trap of going back to relying on rate to compete in today’s auto finance market. Instead, focus on the value you provide to your consumers. One of the best ways to differentiate your institution beyond rate is with consumer protection products, like a vehicle service contract or vehicle return protection. These products have the potential to not only increase loan volume, but also insulate your loan portfolio from the risk of default.
With more than 40 years in innovating and implementing proven go-to-market strategies in the dealership space, EFG Companies understands the balance between ensuring complete compliance, and retaining and building profit margins. That balance lies in the value proposition. Which is why EFG structures its products and services to not only provide value to you, but also to the end-consumer. Contact us today to discover how our unmatched client-engagement model goes well beyond simple product innovation to mitigating liability through superior claims processes, and continuous training and auditing practices.