May 30 (Bloomberg) -- Thirteen Democrats in the U.S. Congress have asked the Consumer Financial Protection Bureau for details on how it plans to enforce new rules on discrimination in auto lending.
In a May 28 letter to the agency, the Democrats, all members of the House Financial Services Committee, demanded “any and all background information” about its investigation into alleged discrimination in the business, according to a copy of the letter.
The group, five of whom are members of the Congressional Black Caucus, also asked for details on the methodology the agency is using to assess the presence of discrimination. And it asked for additional information on how lenders will have to comply with the rules.
“Consumers must be able to shop for credit without fear of discriminatory practices, and the consistent enforcement of anti-discrimination statutes is an essential part of ensuring that consumers have access to affordable credit,” Democratic Representative Terri Sewell of Alabama and 12 other members wrote.
The letter concerns supervisory guidance the CFPB released on March 21 that directs lenders to avoid funding discriminatory loans made by auto dealers. The agency, created by the 2010 Dodd-Frank law, oversees banks with assets above $10 billion and enforces the Equal Credit Opportunity Act of 1974.
Dealers won an exemption from the bureau’s authority under Dodd-Frank, so the guidance concerns loans financed by lenders but made in key respects by dealers. Auto and truck loan originations have risen as the economy recovers from the 2008 credit crisis. They hit $89.4 billion in the fourth quarter of 2012, up 4.2 percent from the third quarter, according to the Federal Reserve.
The CFPB rules take aim at a practice the agency refers to as “dealer markup” and auto dealers call “dealer participation” or “dealer-assisted finance.” In this system, banks function as indirect lenders and allow dealers to add to the interest rate the banks charge and pocket the difference.
Consumer groups charge the practice gives dealers an incentive to move buyers into more-expensive loans, and that minorities are at greater risk of this treatment.
Dealers say the markup is a reasonable price for their services, including bringing in customers and handling paperwork. They’ve also criticized the agency for targeting the auto-lending market without being clear on the basis for its decision.
“The CFPB is refusing to share how they came to the conclusion that dealerships have unintentionally discriminated or why,” Damon Lester, president of the National Association of Minority Automobile Dealers, said in an e-mailed statement. “The CFPB is fundamentally changing the multi-billion dollar automobile marketplace and yet the bureau is not clear on how their actions will impact auto lending, consumers or the economy.”
The letter’s signers also included Democratic Representatives Joyce Beatty of Ohio, William Lacy Clay of Missouri, Gregory Meeks of New York and David Scott of Georgia. They are all members of the black caucus.
The market for auto loans is fragmented, with no lender controlling more than 6 percent, according to data compiled by Experian Plc, the Dublin-based company that manages databases that enable credit granting and monitoring. At the end of 2012, Wells Fargo & Co., Ally Financial Inc. and JPMorgan Chase & Co. were the top lenders. Other banks among the top 20 auto lenders include Bank of America Corp., Fifth Third Bancorp, U.S. Bancorp, SunTrust Banks Inc. and Capital One Financial Corp., according to Experian.
Some banks have already received notices from the consumer bureau warning that they may face possible enforcement action. Ally announced in a March 1 regulatory filing that CFPB was investigating certain retail financing practices.
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