ONTARIO, Calif.—The CFPB’s focus on buy-rate financing won’t eliminate dealers’ ability to pass on higher loan rates to borrowers at their discretion, according to the National Auto Dealers Association.
The CFPB has been taking action against lenders that participate in buy-rate financing. Buy rate, also referred to as dealer mark-up, is when the lender provides the dealer with its rates, then allows the F&I department to mark up the rate at their discretion.
During CU Direct’s latest State Of The Credit Union Auto Lending Market report, Paul Metrey, NADA chief regulatory counsel, said the CFPB crackdown on dealer mark-up will do little to protect borrowers at the dealership, which is the intent of the agency’s focus on buy rate, Metrey reminded.
Flat Rate Standard
Metrey said that all that will result from the CFPB’s actions is that flat-rate dealer incentives will become the standard, and that dealers will simply choose the funding source has the higher flat fee and often the higher rate. A flat fee is based on the loan amount, typically around 1%, and is the dealer incentive used the most by credit unions.
“We are concerned with the ‘fallacy of flats,’” said Metrey. “We are concerned with the false assumption that if a finance source goes to a flat fee that somehow that removes discretion from the entire indirect lending process, and that is not true. Dealers typically have more than one finance source. If each dealer had one finance source and received a flat fee then everyone who came into that dealership would pay the same amount (based on their credit history). That would take care of the issue of differential pricing.”
As previous reports have indicated, the CFPB has been coming down on dealers for differential pricing and has turned its attention now to include big auto lenders. The CFPB cites buy rate as being unfair, deceptive and sometimes discriminatory.
The CFPB recently took action against Fifth Third Bank, and has also settled with American Honda Finance, Toyota Motor Credit Corp., Nissan Motor Acceptance Corp. and several large banks, including Ally Financial.
Auto industry experts say this will help level the indirect playing field for CUs, which typically do not offer buy-rate financing and instead pa
y dealers a flat fee based on the loan amount. Some, however, have stated this will result in a flat fee war.
Only Shifting The Problem
Metrey reiterated that “compelling the whole world to go to flat fees” is shifting the form of discretion, not eliminating it.
“The CFPB is taking a simplistic approach,” said Metrey. “This crackdown on buy rate does not take care of the Bureau’s concern around discriminatory pricing at the dealership. Had the CFPB put this guidance out for comment, we could have pointed this out. Unfortunately, that did not occur.”
Metrey added that the statistical testing methods the CFPB has used in cases where lenders have been fined for dealer mark-up may be flawed. He noted that a group of independent statisticians that reviewed a sample of the CFPB data used in evaluating certain lenders found controls were lacking to determine if a pricing differential was made due to a person’s ethnic background or as a result of their credit history.
“They found that the CFPB was not applying those important controls to make sure the agency was isolating the person’s ethnic background as a reason for a pricing differential,” Metrey said.