Regulatory Relief Might Be Less Than Auto Dealers Think

The Consumer Financial Protection Bureau came out swinging in 2011when it began operating as a creation of the Dodd-Frank Financial Reform Act.

It went after various auto lenders, most notably Ally, which in a consent agreement on alleged discrimination against minority borrowers, agreed to pay $80 million in restitution to about 235,000 auto buyers. Honda’s and Toyota’s financing units were next on CFPB’s fight card. In similar consent settlements regarding the same allegation, they agreed to pay lesser amounts, but still in the millions of dollars.

The gung-ho CFPB has made many lenders and auto dealers nervous in the past six years. And mad. On whether Richard Cordray might stay on as CFPB director during the Trump admin., Frank Salinger, a financial industry lobbyist said at a recent auto-industry conference, “I’d like to see him dragged out of the building kicking and screaming.”

Some auto dealers think regulatory avidness will abate with Donald Trump as president and business-friendly Republicans controlling Congress.

But such dealers may end up disappointed, says Jenny Rappaport, chief marketing officer for EFG Companies, a provider of dealership finance and insurance products, services and training. 

“Most dealers expect this massive shift of the compliance cloud now that Trump is president, but we don’t anticipate that,” she tells WardsAuto. “The perception of dealers is that it will be a lot less onerous. The reality isn’t going to be quite what they’re hoping for.”

She and EFG CEO John Pappanastos explain why.

Lenders “not looking to go back to a point of exposure,” Rappaport says.

First, regulatory agencies are many, varied and firmly entrenched in Washington. About 55 compliance-related agencies “will keep agendas moving forward,” Rappaport says.

Then there are the actions financial institutions have undertaken to comply with more rigorous industry oversight stemming from the Dodd-Frank legislation that followed the financial crisis of 2008-2009.

“Lenders cleaned house and sharpened their saws,” Rappaport says. “They’re not looking to go back to a point of exposure.”

To comply with stricter standards, “they have trained people, established protocols and invested millions of dollars,” she says. “They’ll stay the course for some time.”

Soon after opening shop, the CFPB stunned the auto-lending and auto-retailing industries by alleging a data analysis it did indicated many minority consumers –

including African Americans and Hispanics – were charged higher auto-loan rates than were non-minorities.

In making the accusation, the CFPB criticizes the long-standing reserve system in which dealers increase loan rates, with lender approval, by varying percentage points. It is done as compensation for acting as middlemen between lenders and car buyers.

But the CFPB claimed the add-on practice was the culprit in its rate-discrimination allegations. Critics vigorously questioned the methodology of the analysis that led to that conclusion, claiming that relying on borrowers’ last names and zip codes was an inaccurate way to establish minority status. Ethnicity is not recorded on a loan application.

“What’s funny about the CFPB is that its motives and intent are noble,” Pappanastos says. “The problem is that you can’t analytically verify what it’s doing. It’s hard to go to them and say, ‘Let’s see what happened here.’ Their designation of an individual as an ethnic minority is less than 25% accurate.”

Stories abound of white people, mistakenly identified as minorities, receiving Ally restitution checks. “I know Caucasian people that got those checks, and one of them is as Caucasian as it gets,” Pappanastos says.   

Noble motives, flawed execution, Pappanastos says of Consumer Financial Protection Bureau.

He says the Honda and Toyota cases involved those automakers’ captive finance arms allegedly charging minorities loan rates that were about 25 basis points higher than those charged to whites.

Even if the allegations were true, the rate differences were minuscule. “It’s the difference between charging someone 3% or 3.25% on a loan,” Pappanastos says. “That amounts to about $50 on a 5-year car loan.”

In other auto-retailing issues, the two EFG executives see the pace quickening for a burgeoning trend of featuring F&I online, particularly on dealership websites.

“It will move online faster than many people think it will,” Pappanastos says.  

Adds Rappaport: “The pressure for digital transactions is coming from consumers who say, ‘You’ve got to figure this out.’ From an F&I standpoint, it hasn’t been fully worked out yet.”

She also foresees a movement towards greater online transparency of F&I product pricing, calling it another Internet-driven trend. “F&I prices had been behind the curtain, but now some dealerships are making them part of their virtual showrooms.”

Many online car shoppers early on want to know the full price of a vehicle transaction, including the cost of F&I products such as vehicle service contracts, gap insurance and wheel-and-tire protection plans.

“You’re going to see online consumer self-calculators involving F&I products,” Rappaport predicts.

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