The CFPB has released a bulletin explaining its belief that certain lenders that offer auto loans through dealerships are responsible for unlawful, discriminatory pricing. According to the CFPB, potentially discriminatory markups in auto lending may result in tens of millions of dollars in consumer harm each year, and the bulletin provides guidance to indirect auto lenders within the CFPB’s jurisdiction on how to address fair lending risk.

It’s not a black and white area.  As some have pointed out,  the CFPB does not regulate, supervise or have the authority to investigate or initiate enforcement actions against auto dealers.  Nonetheless, we predict headaches for auto dealers.

But the CFPB explains the problem like this: When consumers finance automobile purchases from an auto dealership, the dealer often facilitates indirect financing through a third party lender. The dealer plays a valuable role by originating the loan and finding financing sources. In this indirect auto financing process, the lender usually provides the dealer with an interest rate that the lender will accept for a given consumer.

Further, according to the CFPB, indirect auto lenders often allow the dealer to charge the consumer an interest rate that is costlier for the consumer than the rate the lender gave the dealer. This increase in rate is typically called “dealer markup.” The lender shares part of the revenue from that increased interest rate with the dealer. As a result, markups generate compensation for dealers while frequently giving them the discretion to charge consumers different rates regardless of consumer creditworthiness. Lender policies that provide dealers with this type of discretion increase the risk of pricing disparities among consumers based on race, national origin, and potentially other prohibited bases.