Congress, Federal Agency Clash on Auto Loans
House Financial Services Committee members indicated last week that they might resist efforts by the Consumer Financial Protection Bureau (CFPB) to impose various restrictions on auto lenders. A recent series of stories in American Banker suggests that the CFPB has overestimated the extent of discrimination by auto lenders and might be advocating restrictions that could drive consumer prices higher. Mainly, members of Congress complained that the CFPB was relying on guesswork and unreasonable assumptions in pursuing auto lenders and dealers on allegations of “unintentional discrimination” in lending. In some cases, the CFPB alleged discrimination based on the borrower’s surname or geographic location, or both.
Rep. David Scott (D-Ga.) alleged that the CFPB assumed that if higher interest rates were assigned to consumers with surnames like Johnson, Williams, or Robinson, “or maybe even Scott,” it was on account of racial discrimination. He claimed that such assumptions are racist and hamper lenders’ ability to discount their loans.
Rep. Sean Duffy (R-Wisc.) noted an American Banker story that alleged CFPB officials met in 2013 to discuss “a market-tipping settlement that would resolve the discriminatory disparities caused by dealer markup by eliminating markup at many major auto lenders.”
The “dealer markup” is the difference between the interest rate set by the lender and that agreed to between the dealer and the purchaser; the dealer pockets the difference. CFPB director Richard Cordray told the House Financial Services Committee that his office had discussed eliminating the dealer markup on auto loans, but he now believes that limiting it would be a better option. Auto lenders and dealers suggest that dealers must be allowed some discretion with regard to the markup as a way of keeping overall prices down.
The impact of this Congressional scrutiny on the consumer remains to be measured. However, it’s clear that the CFPB is keeping a sharp eye out for real or perceived lender/dealer discrimination on auto loan interest rates—and that it’s getting some pushback from Congress.
At the hearing, Cordray asserted that the CFPB is allowed by statute to regulate non-bank auto loans. However, Representatives criticized its enforcement actions, which have been seen as arbitrary and high-handed.
Commenting on the situation, the American Financial Services Association (AFSA) issued the following statement:
We support the efforts of the Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Justice (DOJ) to ensure that predatory lending and discrimination do not occur because they have no place in our society. But fairness can be accomplished without sacrificing the competitive atmosphere that is so critical to providing consumers with the lending options they need. Unfortunately, some of the changes being suggested to address alleged discriminatory lending issues will have a negative effect on consumers, ultimately increasing their total financial costs by reducing competition and flexibility in the industry. This would make credit options completely unavailable or less available to consumers—particularly those who are in low-to-moderate income brackets.