Senators Challenge CFPB On Indirect Auto Finance Guidance

Posted on October 31st, 2013 in Consumer Finance, Federal Issues By BuckleySandler

On October 30, a bipartisan group of 22 Senators sent a letter to the CFPB raising concerns about CFPB guidance affecting the indirect auto financing market and auto dealers’ ability to negotiate retail margins with consumers. The guidance at issue, contained within CFPB Bulletin 2013-02, advised bank and nonbank indirect auto financial institutions about compliance with federal fair lending requirements in connection with the practice by which auto dealers “mark up” the financial institution’s risk-based buy rate and receive compensation based on the increased interest revenues.

In August, the CFPB responded to a similar inquiry from House members. The Senate letter asserts that the CFPB still has not explained a basis for alleging that discrimination under a “disparate impact” theory of liability exists in the indirect auto financing market.  Nor, the letter continues, has the CFPB released the statistical methodology it uses to evaluate disparate impact in an indirect auto lender’s portfolio.

The Senators request details concerning the CFPB’s statistical methodology and also seek information about: (i) coordination among the CFPB, Federal Reserve Board, and FTC regarding the CFPB’s fair lending guidance to financial institutions; (ii) the decision to issue the guidance via a bulletin without public comment rather than employing the Administrative Procedures Act rulemaking process; and (iii) any cost-benefit analysis conducted into the affect that industry adoption of a flat-fee dealer compensation mechanism would have on the cost for consumers across the credit spectrum.

The letter comes on the heels of a related inquiry to the FTC last week, which urged the FTC to investigate, among other things, auto dealer practices regarding interest rate markups and requested information on the FTC’s auto dealer markup enforcement activity.

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