Four Years After Dodd-Frank, Feds Decide That Auto Lenders Are Like Banks After All & Add Oversight

June 11, 2015

We all have stories about that one lousy schmuck who ruined things for the rest of us. The guy who took greedy fists full of candy from the Halloween bowl on the neighbor's porch. The student who hid formulas behind her calculator, which meant that on future math tests, everyone had to remember long division.

The same thing has happened to some of America's biggest auto lenders. According to Detroit News, 34 of them -- including the financing arms of Ford, General Motors, Honda, and Toyota -- are about to get a taste of federal oversight because some of them can't behave.

CLOSING THE LOOPHOLE

The Consumer Financial Protection Bureau was created in 2011 as an independent federal agency. Its purpose is to ensure that banks and other lenders treat consumers fairly and operate transparently. The CFPB was born from the Dodd–Frank Wall Street Reform and Consumer Protection Act, which was written to rein in freewheeling financial institutions and prevent a repeat of the Great Recession.

But a curious thing happened on Dodd-Frank's way to the president's desk. The CFPB was given plenty of authority to regulate traditional banks, credit unions, securities firms, debt collectors, and even payday lenders. But somehow, some way, lobbyists convinced members of Congress that auto lenders were different. As a result, those companies haven't had to report to the CFPB.

That's about to change -- at least for the larger outfits. The new rules finalized by the Obama administration put institutions that provide more than 10,000 auto loans or leases per year under the watchful eye of the CFPB. The 34 companies affected will now have to comply with federal guidelines, including the Truth in Lending Act, the Equal Credit Opportunity Act, and Dodd-Frank's many rules that prevent unfair and/or deceptive lending practices.

Why the change? The administration hasn't given much in the way of specifics. Surely many banks and credit unions were angry that they were being held to higher standards than some of their competitors. But what likely tipped the balance were the numerous cases of abuse and discrimination in auto lending that have made headlines in recent years. 

The underlying problem in most of those cases has been the markup that auto dealerships add to the interest rate they're quoted from their lending partner. (For example, a lender might approve a customer for a three percent auto loan, and the dealership may add one percent or so to generate revenue for itself.) It's a practice that's perfectly legal and serves as a sort of "finder's fee" for the dealer. However, the markup is added and adjusted at the discretion of the dealership, and discretion opens the door to discrimination.  

The CFPB shifted its reform efforts into high gear last year, and the agency's new rules go into effect this August. For now, the CFPB doesn't plan to go as far as New York State, which is angling to get rid of markups altogether. However, we wouldn't be surprised if the agency proposed such a change if auto lenders don't fall in line. 

If you're in the market for a new car and you're planning to finance your purchase, we strongly encourage you to do your homework before hitting the showrooms. Go prepared, or prepare to spend extra

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