Everyone loves watching a good boxing match, but being in the ring is a different story.
When the Dodd-Frank Act was initially passed by Congress in 2010, retail automobile dealers breathed a sigh of relief. After all, auto dealers were carved out of the Act by virtue of Section 2019. Even though “buy here, pay here” auto dealers were not exempt—because financing of the consumer credit transaction is an integral part of the sale transaction—traditional auto dealers believed they were exempt from CFPB supervision. In other words, auto dealers had a free ticket to watch the fight from the stands. But, over time, auto dealers have been getting closer and closer to the ring.
In the last few weeks, the retail auto industry has been hit with what is called a “2 – 3 – 2” punch combination.
First came the right cross on discrimination by the CFPB. The Bureau determined that similar to employment law discrimination, credit extension decisions violate the Equal Credit Opportunity Act if the effect of the credit extension decision adversely affects protected classes of persons under the law. The expansion of the “effects test” into consumer credit law had been anticipated, though certainly not welcomed, by industry.
Next, the left hook directive came down from the CFPB that lenders would be responsible for any discriminatory conduct of the auto dealers whom they financed; and with the realization that auto sales simply do not exist without financing, it quickly became apparent that lenders would have to seriously monitor the compliance of their auto dealer customers, whether they wanted to do so or not. So, car dealers found themselves right in the middle of their lenders’ compliance management; and, lenders have since spent countless hours and dollars trying to determine whether auto dealer practices have unintended, discriminatory effects.
And now, the right cross—again! The CFPB has intimated that it will directly challenge the “larger participants” in the market for automobile sales—approximately 40 companies— over the issue of “buy rate” as a form of discrimination. Historically, the finance and insurance employee at the auto dealership searches for the best financing source and quotes the customer a spread over the buy rate—with the difference between the buy rate that the financing source offers, and the sale rate which it quotes to the customer, as profit to the dealership. The CFPB is taking the position that this type of activity by car dealerships is inherently unfair, deceptive or abusive to consumers, as they do not understand the process, are not equal to the finance and insurance employee in knowledge and expertise, and suffer as a result of the disparity in bargaining position.
Now, stay tuned for the knock-out punch. The CFPB has announced that it is concerned about the add-on products that are typically being offered at the dealership and that are added to the financing agreement. Director Corday recently said, “Consumers should not be lured into a deal by misleading statements about the benefits of the product they are being sold. And consumers should get clear and intelligible contracts centered on terms they can understand.”
Auto finance industry, lace up your boxing gloves.