Editorial: Auto Lending: Regulator Must Be Reined In
Congress must rein in the Consumer Financial Protection Bureau, which has overstepped its mandate by squeezing banks and finance companies to limit dealership profits, apparently based on questionable assumptions of widespread discrimination in auto lending.
Last week there were signs that Congress is paying attention. Thirteen members of the House Committee on Financial Services asked the bureau to produce information about allegations, the origination of the bureau's investigation and its methodology. In other words: If you think there is discrimination, show your work.
When the bureau was created as part of the Dodd-Frank financial reform law, Congress -- after strong lobbying on behalf of dealers -- exempted dealerships from bureau oversight except for buy-here, pay-here stores. After avoiding the issue of auto loans during the last election cycle, the bureau has come out swinging.
Claiming there is evidence that suggests racial minorities have paid higher interest rates on loans than other people with similar credit situations, the bureau began pressuring lenders to limit how much dealerships can earn for arranging a loan on behalf of a customer. Banks and finance companies, over which the bureau has oversight, have been encouraged to permit dealerships to charge only a flat fee, rather than allowing dealerships to mark up the retail interest rate and take a
share, typically known as the dealer reserve.
But most major lenders long ago capped dealer reserve. Some already have moved to a flat-fee system. As a result, the amount earned for arranging loans accounts for only about 20 percent of finance and insurance income at a typical dealership. The rest comes from selling products such as extended-service contracts and prepaid maintenance plans.
So, naturally, the bureau has expanded its investigation to include how much profit should be allowed on the sale of those products, usually financed as part of the retail loan.
Some dealers have used reprehensible practices in the F&I office, some of which may discriminate against minorities. But that may be difficult to prove since auto lenders are barred from collecting racial information about borrowers.
The bureau seems to be driven by stereotypical assumptions that dealerships routinely take advantage of minorities, military personnel, consumers with poor credit histories and the unsophisticated.
At least a portion of that stereotype has been debunked. According to a bureau report filed by Holly Petraeus, assistant director for the Office of Servicemember Affairs, vehicle or consumer loan complaints accounted for just 2 percent of complaints from military families in the first quarter.
It is time to be reasonable and set stereotypes aside.
Source: Automotive News
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