The Consumer Financial Protection Bureau was created in 2011 to ensure that lenders treat borrowers fairly and transparently. However, a curious legal loophole prevented the CFPB from overseeing car dealerships, even though those dealerships broker billions of auto loans each year.
The loophole tightened in June, after charges of discrimination were leveled at several major dealer networks. Most of those networks were accused of altering their "dealer reserve" or "markup" based on borrowers' race.
If you're not familiar with the "markup" concept, it works like this: when you apply for a loan at a dealership, the dealership calls its lending partner to secure an interest rate for you. Dealers frequently increase that rate as a sort of "finder's fee", and to generate a bit of income for themselves. So, for example, if a lending partner looked at your application and quoted a loan at three percent, the dealer might boost that to four percent, with the extra one percent going to the dealership.
That's not technically illegal. However, because the markup occurs at the discretion of a dealership, and because the process isn't entirely transparent, it creates a possibility for discrimination.
This week, the U.S. House took action to dial back the CFPB's move toward regulation of dealer loans.
They did so via a bill dubbed the "Reforming CFPB Indirect Auto Financing Guidance Act". The bill wouldn't directly undermine the CFPB's oversight of America's 34 largest dealership lenders. Instead, it would hinder the CFPB's ability to offer guidance (i.e. suggestions for "best practices") to auto lenders. If passed, it would require the CFPB to:
- provide for a public notice and comment period before issuing the guidance in final form;
- make publicly available all information relied on by the CFPB;
- redact any information exempt from disclosure under the Freedom of Information Act;
- consult with the Board of Governors of the Federal Reserve System, the Federal Trade Commission, and the Department of Justice; and
- study the costs and impacts of the guidance to consumers and women-owned, minority-owned, and small businesses.
The bill is strongly supported by the National Automobile Dealers Association. It passed the House overwhelmingly in a 332-96 vote, but analysts predict a tougher fight in the Senate.
President Obama is opposed to the bill because he believes that it opens the door to discriminatory lending practices. If the bill were to pass the Senate and the president were to veto it, it's uncertain whether the House and Senate could muster the two-thirds majority needed for an override.
We readily admit, this is a very complicated issue, and there are no easy answers.
On the one hand, dealerships need to be competitive. They're companies that provide jobs and services to the community, and they deserve to have a range of tools at their disposal to help attract customers.
Also, as much as it pains us to say it, people are always going to discriminate. We discriminate against strangers, friends, family members, tall people, short people, blonde people, bald people and on and on and on. That's just part of being very imperfect human beings. Regulation can't stop people from being dumb or unfair.
On the other hand, the fact that people are inherently discriminatory doesn't excuse the practice. In fact, as we've seen time after time after time, when companies aren't properly regulated and overseen, it allows patterns of discrimination to emerge. (And that's to say nothing about the effects that unregulated and under-regulated businesses can have on the economy here and abroad.)
To put it in terms that your grandparents might understand, a few bad apples can spoil the bunch. And also: give some folks an inch, and they'll take a mile.
As some of us see it, there's no way to ensure that dealer markups aren't used for discriminatory purposes. Of course dealers can discriminate with other perks, too, like incentives, complimentary service, and the like, but those are more transparent. When a dealer offers you a discount, you know how much you're saving. With markups, what you're gaining (or losing) remains a mystery.
Bottom line: oversight of dealership loans may not be the best solution. It adds red tape, arouses suspicions, and doesn't truly address the underlying issue of transparency.
Rather than push for regulation of dealer loans, it might be best to outlaw markups altogether. Until that happens, we recommend that you shop around for auto loans before heading to your local dealership -- at least then you'll have some options. Remember: go prepared, or prepare to spend extra.