The U.S. Consumer Financial Protection Bureau is being asked to provide greater detail regarding its regulatory advances on the automotive lending industry.
In a recent letter to CFPB Director Richard Cordray, the U.S. Chamber of Commerce called for the bureau to provide auto lenders with specific rules - something amounting to a universal handbook - for all financing plans arranged by dealerships. The idea is to apply uniform guidelines and allow regulations to be enforced with fewer discrepancies, while simplifying the compliance processes for lenders and dealerships alike, Automotive News reported.
In its 16-page letter dated Feb. 12, the chamber asked the CFPB to provide standards for the disparate impact and liability within the context of indirect auto lending, as well as definitions for so-called abusive acts or practices that bureau has stated a desire to eliminate. Also addressed was the need for a standardized liability for lenders who work with service providers like collection agencies or repossession agents.
Eliminating gray areas
A frequent critic of the bureau since its inception in 2010, the chamber called the CFPB's current approach to monitoring the auto lending industry "regulation by enforcement settlement," with its tactics further muddled by brief guidance statements that, when issued, make it "virtually impossible for companies to determine in advance what they should do to comply with the law."
"When the CFPB uses enforcement actions to send a signal to the broader regulated community, the message doesn't always get through in a way that's useful for a person sitting at a compliance desk," Jess Sharp, managing director of the U.S. Chamber's Center for Capital Markets Competitiveness, told Automotive News.
Rather than issuing consent orders, such as the one provided to Ally Financial in December 2013, the chamber suggested that the bureau and the U.S. Department of Justice aim to follow more traditional rule-making procedures and produce "detailed, practical guidance - following public comment and meaningful economic analysis - that both protects consumers and preserves access to credit and gives regulated businesses the clear, understandable standards they need to ensure that they are complying with the law."
While declining to publicly respond to the Chamber of Commerce letter, CFPB spokespersons have issued various statements since it was penned. Patrice Ficklin, the bureau's assistant director, expressed her disagreement with the assertion that CFPB guidance for auto lenders was too vague when he spoke as part of a question-and-answer session at the American Financial Services Association (AFSA) Vehicle Finance Conference in New Orleans.
During the Q-and-A, AFSA Chief Executive Officer Chris Stinebert asked Ficklin whether the consent order provided to Ally should be considered a reliable blueprint to be followed by other companies in the future, implying that it was too vague to be applied in other situations.
"I could not go out and implement a program based on that agreement," Stinebert told Ficklin.
Ficklin contended that the CFPB has in fact provided specific direction, not only in the orders issued to Ally but in industry-wide guidance it provided last March.
"While we may not answer every question to the nitty-gritty 'nth' degree ... I think if someone takes the time to carefully read the consent order, they'll be surprised how much is in there," she said.
The Ally issue
Ally ultimately paid $98 million in consumer restitution penalties as part of a settlement with the CFPB and the Justice Department, which had alleged discriminatory practices in which dealerships set customer interest rates by way of the "dealer reserve" compensation method. Also known as a dealer markup, the practice involved added interest that allowed dealerships to add a buy rate to a given auto loan as compensation for facilitating the deal.
According to the CFPB, Ally's tendency to allow the dealerships with which it was working to set the dealer reserve price often led to higher interest rates and overall borrowing costs for minority borrowers. As a result, the bureau suggested the company either switch to a dealership compensation program that eliminated third-party discretion in setting those rates or adopt a loan-monitoring program designed to detect dealer-reserve differences and report those findings directly to the regulatory bodies.
Ally accepted the consent order but denied tolerating or presiding over any discrimination. The firm opted to stick with its dealer reserve program, monitoring auto loans and providing monthly reports to the CFPB, according to its CEO Michael Carpenter.
Ficklin went on to tell the New Orleans gathering that the bureau has provided lenders with a robust compliance management system, which includes reminders of the Equal Credit Opportunity Act, training for dealerships, loan analysis for any that originate at the dealerships and prompt refunds for affected customers.
Whether any sort of uniform guidebook, such as what was requested by the Chamber of Commerce, is in the works remains to be seen.