The Consumer Financial Protection Bureau (CFPB) and the Justice Department are clashing with lenders and dealerships over efforts to change the way auto loans get priced at U.S. car dealers. Regulators are focusing on the discretionary markups that salesmen add to the price of loans, with the central concern being the impact of the pricing system on minorities.
The CFPB in December reached a $98 million settlement with automobile lender Ally Financial, in a deal that offered incentives for the company to use a flat-fee pricing model. Under it, dealers would receive a fixed amount of compensation for each loan instead of a sum that depends on negotiations with each car buyer. Ally CEO Michael Carpenter, however, emphasized that the company will still use the markup system. A consent order gave the company the choice either to switch to a system that takes pricing discretion out of the equation or implement a monitoring program that may require that checks be sent on a rolling basis to minority borrowers who are found to have overpaid. Ally has chosen the second option.
The CFPB and the Justice Department are investigating cases where legally protected classes of borrowers, including racial minorities, may have paid larger markups than other consumers with similar credit. Investigations have found that the average African-American car buyer who received an Ally loan paid more than $300 in additional interest over the course of the loan's term than a similarly situated Caucasian borrower.
Officials say the CFPB is not out to end the markup system, also called dealer rate participation, or to insist that lenders switch to a flat-fee system. The regulator has suggested other options that would remove discretion from dealers.
"What we think is problematic is when, if creditworthy determination has been made and there's a rate that is gauged, that somehow that rate will be pushed up because of financial incentives for people to push that up higher at the expense of the consumer," CFPB director Richard Cordray said during congressional testimony last month.