Predatory lending moves into car loans

David Dayen with an eye-opening piece:

Congress prevented CFPB from regulating auto dealers because of an amendment to the Dodd-Frank law authored by Rep. John Campbell, R-Calif., himself the former CEO of three auto dealerships in Orange County, who still makes millions renting out properties to used car dealers.  Beyond actual plants in Congress, the political power of auto dealers, wealthy constituents who have a presence in nearly every congressional district, cannot be ignored.

But despite this freeze-out, CFPB has not stopped trying to protect consumers from price-gouging on auto loans. While they cannot regulate dealers, they can regulate any financial company with over $10 billion in assets. They’ve used this indirect power to try to get the financers to police the dealers.

In March, CFPB released a bulletin to auto lenders, warning them that they would be held accountable for discriminatory pricing. Studies find a close correlation between heavy markups on auto loans and race. African-American and Hispanic borrowers encounter higher rates for auto loans than whites, with some increases of over 300 percent. Under the Equal Credit Opportunity Act, CFPB can penalize lenders for discriminatory lending practices on the basis of race, color, religion, national origin, sex, marital status and age. At an auto lending forum earlier this month, CFPB director Richard Cordray said, “We have a clear duty to address any discriminatory practices that result from the loan programs established by auto lenders, whether they are lending directly to consumers or instead are lending indirectly through intermediaries,” aka dealers. This has had early success: Large banks have written to dealers to warn them about discriminating against customers on any loans they finance. “The money is put on the table by the lenders, not the dealers,” said Stuart Rossman of the NCLC. “By controlling the spigot, CFPB can avoid having a mess on the floor.”

While indirect policing shows promise, the lack of transparency creates challenges. It’s hard to get information about the size of dealer markups, as well as demographic statistics. (CFPB uses data from the Census Bureau and the Social Security Administration.) In addition, using fair lending laws to enforce markups could lead to dealers spreading them out to everyone. Moreover, the competition for the auto lending market – outstanding auto loans total $783 billion, making it the third-largest source of household debt – makes it difficult to stop the markup scam. Once you stop one lender, another can pop up.

For example, CFPB has floated the idea of flat fees for auto dealers, instead of discretionary markups. But you would need to enforce that across all lenders. Stuart Rossman explained that in the early 1990s, Nissan created the “Customer First Program,” mandating a flat fee on dealer markups, which meant cheaper financing for borrowers. “Within six months they lost 60 percent of their business,” Rossman said. “Why would a dealer accept a flat fee when Acme Finance wouldn’t put any limits on them?”

In order to get sector-wide enforcement on markups, lawmakers and advocates want Congress to close the loophole, and allow CFPB to monitor auto dealers directly. Sen. Elizabeth Warrenquestioned CFPB director Cordray about this earlier this month, and Cordray demurred, saying “the law we have is the law we’re working with,” and vowing to focus regulation on auto lenders, where they have explicit responsibilities. Warren replied, “It makes no sense to me that there should be any exception here for consumers who are being tricked out of billions of dollars every year on car loans.”

CFPB clearly wants to minimize abusive practices in this critical area of financial transactions. But without standardized conduct for auto dealers, as CRL’s Chris Kukla says, “Anyone walking into a dealership can get hit with an unjustified expense without even knowing it.”