CFPB Deputy Director Steven Antonkes said last week the agency will move ahead with a proposal to expand the regulator’s supervisory authority to cover nonbank auto lenders as part of an effort to address fair lending risks.
“For some time now, we have expressed concern that discretionary pricing in auto finance, coupled with financial incentives to mark up interest rates—practices that are akin to the now-banned yield spread premiums in the mortgage market—create serious risks,” Antonakes said before the Consumer Bankers Association. “Such risks include that consumers will receive different pricing based on prohibited characteristics such as race, ethnicity and national origin.”
In December, the CFPB and the Department of Justice ordered Ally, one of the top indirect auto lenders in the U.S., to pay $98 million to settle allegations of discrimination against more than 235,000 minority consumers.
Antonakes said that while the agency’s authority generally reaches only auto lenders and not auto dealers, the CFPB would proceed in addressing potential violations.
Indirect auto lenders—for example, car dealerships that offer financing for automobile purchases—often provide the financing through a third-party lender, which then provides the dealer with an interest rate for a credit applicant.
Lenders generally allow the dealer to charge the consumers an interest rate higher than originally provided to the dealer in what is known as “dealer markup.” The lender then shares part of the profit from the increased rate to the dealer.
According to the CFPB, dealer markups provide dealers discretion in charging consumers different interest rates, regardless of consumer creditworthiness. The agency said such discretion “increase[s] the risk of pricing disparities among consumers” based on ethnicity, origin, race and other characteristics.