Is Auto Lending The New Sub-Prime?
Several trends are converging to make auto lending in general, and indirect auto lending in particular, the next battlefield for a regulatory skirmish between the CFPB, lenders and, to a lesser extent, Congress. First, the CFPB is criticizing indirect lending practices. Second, Bloomberg is reporting this morning that car underwriting standards are being lowered as lenders look for higher yields (http://www.autonews.com/article/20131113/FINANCE_AND_INSURANCE/311139989/frothy-subprime-borrowing-drives-u-s-sales-raises-alarms); and, last but not least, credit unions are more dependent than ever on auto loans (http://www.cutimes.com/2013/11/12/auto-loans-set-to-end-year-on-high-note?ref=hp).
Most importantly, the CFPB will be holding a forum tomorrow morning on indirect lending practices. I know most of you who read this blog know what that is, but this deals specifically with the situation where credit unions and banks act as third-party lenders to auto dealers who are authorized to provide loans to consumers that meet baseline criteria.
In a March guidance on the issue (CFPB Bulletin 2013-02), the CFPB was critical of policies that allow auto dealers to mark up lender-established rates. The CFPB is concerned that this discretion may have a discriminatory impact and thus run afoul of the Equal Credit Opportunity Act. This concern pre-dates the CFPB. There have been several lawsuits contending that minorities disproportionately end up with more expensive car loans when sales people are given discretion in negotiating lending terms.
In late October, a bi-partisan group of Senators wrote a letter to the CFPB (http://www.cfpbmonitor.com/files/2013/10/Auto-Finance-Letter-.pdf) asking it to explain what evidence it has that lender incentives in indirect lending have a disparate impact. As can be seen from this recent CFPB blog (http://www.consumerfinance.gov/blog/category/auto-loans/), the Bureau is not shying away from its criticism of these indirect lending programs. It is strongly encouraging lenders that enter into third-party relationships to insist that the dealerships only provide flat rate compensation to their indirect lending sales force.
This conflict has particularly important implications for credit unions. Indirect lending is tricky enough, but when credit unions engage in it, they have the added concern of making sure that the person taking the loan is eligible for and becomes a member of the credit union. In addition, whether you agree or disagree with the stance taken by the CFPB, it is correct to point out that lenders have a responsibility to clearly delineate the contractual obligations of the dealerships with whom they are entering into a third-party indirect lending relationship and to monitor these relationships on an ongoing basis.
Conversely, the lenders and dealerships have legitimate gripes as well. No one should tolerate lending discrimination, but these allegations should not be lightly tossed around. Implicitly suggesting that someone is discriminating against another person is an awfully big deal and regulators, and lawyers for that matter, should be held to a high standard when making these claims.