The CFPB Finds a Way to Regulate Car LoansBy
In one of the most heated battles over the creation of the 2010 Dodd-Frank financial reform law, Congress exempted auto dealers that make loans and offer leases to consumers from being supervised by the newly created Consumer Financial Protection Bureau. The CFPB is finding ways to regulate car loans anyway. On Wednesday the bureau announced that it plans to supervise the nonbank lenders that fund the loans dealers make.
The CFPB began focusing on regulating auto loans last March, when it said it would look at the loans funded by banks the agency already supervises. But banks make up only part of the market. Nonbank lenders, including “captive lenders” owned by carmakers and independent finance companies, account for more than 40 percent of the market, according to data (PDF) from Experian. The nonbank lenders also have higher delinquency rates, Experian data show.
As with the bank lenders, the CFPB’s efforts specifically mention investigating whether the loans give less favorable terms to minorities. The risk comes when lenders give dealers some discretion in setting the interest rate they offer consumers. These so-called dealer markups let auto dealers make more money on loans with higher rates. In a new “supervisory highlights” report (PDF) on what it’s found with bank lenders, the bureau said the markups “often resulted in disparities” based on race and national origin that “could not be explained by a legitimate business need.”
The bureau says it’s punished banks for this behavior through one public enforcement action, as well as through nonpublic remediation agreements. But as Bloomberg News has reported, the industry has resisted many changes, hoping to profit from the recent growth in auto lending. It has challenged both the CFPB’s legal authority to regulate the lenders, which don’t interact directly with consumers, as well as the methods the bureau uses to determine if the loans violate fair-lending laws. Now, a whole slew of lenders may join the fight.
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