The Dodd-Frank law of 2010 that created the Consumer Financial Protection Bureau included an amendment that specifically exempted auto dealers from regulation by the new entity. Despite that prohibition, the CFPB has taken steps to indirectly regulate the industry by proposing new rules applicable to the banks that work with auto dealers to provide auto financing. Congress is expected to take action this session to limit this alleged overreach.
Dealer-assisted financing represents about 85 percent of all auto loans nationally, according to the CFPB. Typically, dealers who connect the buyer to a third-party financing entity add a percentage point or two to the lender’s interest rate. For example, a loan with a base rate of 4 percent would have 1 percent added to it. The buyer then pays a total interest rate of 5 percent. The difference in price is the compensation earned by the dealer for the service of connecting the two parties.
Though such arrangements are legal and have long been common practice, the CFPB has claimed they are problematic. Allowing dealers to negotiate interest rates with buyers, according to the CFPB, has allowed latent and overt racism to creep into the transactions. They claim that objective data supports the conclusion that minorities tend to have higher add-on interest rates. Instead, the CFPB has urged the use of flat interest rates.
The Reforming CFPB Indirect Auto Financing Guidance Act was introduced in the House last year. It eventually had 149 co-sponsors from across the political spectrum and is expected to be introduced again this year. The 2014 bill (found here) was the result of more than 400 auto dealers and dealer association executives from across the country lobbying Congress to keep the CFPB from overreaching its mandate. The bill required the CFPB to provide a public comment period before issuing any guidance on auto finance, and also required the Bureau to make public any studies, data and/or analyses used to determine future auto finance guidance. This requirement calls to mind reports of dubious analysis at the CFPB. Also, the bill would repeal all previous CFPB guidelines issued in the past two years.
Auto dealers claim that the variances in interest rates are attributable to circumstances in the local markets, not to discrimination. The National Automobile Dealers Association (NADA) argues that low-end automobile sales have such thin margins that sometimes the interest rate add-on is the only profit the dealer makes. In addition, local specials and market conditions demand flexibility. NADA has proposed a dealer compensation structure of its own, discussed here, based upon a consent decree the Justice Department entered into with two car dealers to resolve accusations of unintentional discrimination. NADA claims that its plan complies with the law, while the latest guidance issued by the CFPB amounts to overreach based upon a very narrow reading of the Dodd-Frank exemption for auto dealers. That reading may have to have its day in court.