Lenders May Get Picky About Which Dealers to Work With

Automotive lenders will get picky about which dealers to do business with because of stepped-up government scrutiny, a finance company executive predicts.

“Regulators are increasing their scrutiny,” says Praxis Finance CEO Daniel A. Parry, who has more than 20 years of experience in consumer financing and risk management.

“The more regulators pressure lenders, the more lenders will seek out quality dealers,” he says. “Lenders will seek closer relationships with upright dealers with good records.”

That’s traditionally been the case, but it has intensified since 2010’s Dodd-Frank financial reform act created the Consumer Financial Protection Bureau.

The bureau directly oversees lenders, and, because of that, it indirectly affects dealers who act as middlemen between most car buyers and lenders. Nearly 80% of auto loans are through dealers. 

“Regulators are trying to regulate dealers through finance companies,” Parry says at this year’s Automotive Resource Network conference in Hollywood, FL.

The CFPB has extracted settlements from three major lenders – Ally, Honda Financial and Fifth Third Bank. Those cases concern alleged unintended discrimination that traces back to dealer-arranged loans.

The CFPB alleges certain minorities such as blacks and Hispanics were discriminated against in connection with lenders allowing dealers to add to the percentage rate of car loans as compensation for arranging them.

Trade groups such as the National Automobile Dealers Assn. vigorously defend the longstanding practice. They say the CFPB used faulty methodology to reach its conclusions on alleged disparate impact. That means a practice is considered discriminatory if it disproportionately affects a minority, even without intent.

“If the CFPB is looking for disparate impact, they’re going to find it,” Parry says.

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