Before breaking for its August recess, the House Financial Services Committee delivered a potential blow to the Consumer Financial Protection Bureau’s oversight of non-bank lenders.
The bill, "Reforming CFPB Indirect Auto Financing Guidance Act of 2015," sponsored by New Hampshire Republican Frank Guinta, advanced with a bipartisan vote of 47-10. If passed by the House and Senate, it would repeal a CFPB bulletin from 2013 that targeted discriminatory auto loan lending practices. Critics claim the Bureau’s approach was misguided, lacked transparency and served only to curtail discounted rates for good customers with good credit.
The bill requires the Bureau, when issuing future bulletins, to engage in a full notice and a public comment period before issuing guidance; make public data that was reviewed when formulating that guidance, and perform a cost-benefit analysis.
The 2013 bulletin alleges that potentially discriminatory markups in auto lending may result in tens of millions of dollars in consumer harm each year. When consumers finance automobile purchases from an auto dealership, the dealer often facilitates indirect financing through a third party lender, it explains. Indirect auto lenders often allow the dealer to charge the consumer an interest rate that is costlier for the consumer than the rate the lender gave the dealer. This increase is typically called “dealer markup” and the lender shares part of the revenue from that increased interest rate with the dealer.
“As a result, markups generate compensation for dealers while frequently giving them the discretion to charge consumers different rates regardless of consumer credit worthiness,” the CFPB wrote. “Lender policies that provide dealers with this type of discretion increase the risk of pricing disparities among consumers based on race, national origin, and potentially other prohibited bases.”
The CFPB recommended that indirect auto lenders monitor and address the effects of markup policies as part of a fair lending compliance programs, while eliminating dealer discretion to markup buy rates.