In a recent speech, CFPB Director Richard Cordray gave his views that the law specifies that the CFPB generally does not have jurisdiction over auto dealers and their practices, but the CFPB does have jurisdiction over the largest auto lenders and their lending programs. Director Cordray reminded the audience that the CFPB had issued a bulletin to clarify the boundaries of the CFPB’s authority over auto lending and to provide guidance to indirect auto lenders about compliance with the law.
Director Cordray noted that lender mark-up policies, which allow dealers to exercise discretion over the interest rates they charge consumers and provide direct financial incentives for charging higher prices, may lead to fair lending violations. His belief is that when lenders provide this type of discretion and incentives the CFPB believes it creates significant risk of illegal pricing disparities based on factors like race or national origin.
Director Cordray discussed steps auto lenders might consider taking to ensure they are in compliance with the Equal Credit Opportunity Act and Regulation B. One approach is to develop robust fair lending compliance management systems to monitor for disparate impact and promptly remedy consumer harm on an ongoing basis when it is identified. He noted the bulletin also stated that lenders could take steps to comply with the law by adopting some other pricing mechanism that fairly compensates dealers for their work but avoids the fair lending risks that are inherent in pricing by discretionary markup.
According to Director Cordray, there may be several such mechanisms that would work in practice: a flat fee per transaction, or a fixed percentage of the amount financed, or other nondiscretionary approaches that market participants may devise that would work to address these concerns. The precise details of any such approach bear further analysis, but the central points are twofold. First, Director Cordray noted the CFPB recognizes that auto dealers play a valuable role in much auto lending that occurs in this country, and they deserve to be compensated fairly for the work they do. Second, he also offered that the CFPB is aware that the structure of indirect auto lending programs can greatly affect the risks of discrimination that harms consumers and violates the law.
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