Banks' Letters to Auto Dealers Focus on Fair-Lending Practices

Lenders' Letters to Auto Dealers Focus on Fair-Lending PracticesAuto loans for new and used cars have accelerated over the last several months, but auto dealers are directly exempt from the authority of the Consumer Financial Protection Bureau, created under Wall Street reform of 2010.
The agency, however, is targeting discriminatory markups in auto lending that can add up to tens of millions of dollars in consumer harm each year. They are doing so by warning of potential government lawsuits against dealerships or the financial arms of automakers.
In a bulletin earlier this year, the CFPB recommended that indirect auto lenders within its jurisdiction take steps to ensure that they are operating in compliance with fair lending laws, especially when it comes to dealer markup and compensation policies.
The CFPB found that many lenders have “weak or nonexistent fair lending compliance programs” for consumer loans outside the mortgage market, Richard Cordray, the CFPB’s director, said in a June letter to House lawmakers.
While consumers may seek auto loans directly from a financial institution, many seek financing from the auto dealer. The dealer may provide that financing directly or it may facilitate indirect financing by a third party, such as a commercial bank, a nonbank affiliate of a depository institution, an independent nonbank, or a “captive” nonbank (an auto lender whose primary business is to finance the purchase of a specific manufacturer’s automobiles).
In recent months, thousands of dealers have received letters from banks warning them of the need to comply with fair-lending laws, The Wall Street Journal reported, according to people familiar with the situation. Automotive News first reported that banks were sending letters to dealers.
In one such letter from Bank of America, a dealership was told it had charged women borrowers an average of a third of a percentage point more for handling the loan than it did for all loans sent to the bank, the Wall Street Journal said.
The bank warned that “if pricing discrepancies persist for individual dealerships, we may take further action.” That action includes the creation of a flat fee for the dealer. A flat fee could effectively cap the dealer’s profit from the loan.
Automotive News said it has obtained copies of letters sent by Chase Auto Finance and Bank of America. The letters state “that the dealership charged a higher average dealer reserve on loans to protected classes, such as minorities, compared with loans to everyone else,” Automotive News reports.
Wells Fargo J.P. Morgan Chase, BB&T, and Fifth Third Bancorp also sent dealers letters outlining anti-discrimination policies or warning of potential violations, according to letters to dealers.
Both the Consumer Financial Protection Bureau and the U.S. Department of Justice are looking at major automakers’ in-house finance divisions for possible discrimination in lending, according to regulatory filings.

Leave a Reply

Your email address will not be published. Required fields are marked *