The newsLINK Group - Indirect Auto-Finance Mistakes and Fair Lending

Editorial Library Category: Automobile Topics: Automobile Finance Title: Indirect Auto-Finance Mistakes and Fair Lending Author: newsLINK Staff Synopsis: Fair lending matters. It’s one thing to compete with other dealers by negotiating with consumers about specific financing terms. It’s another thing to discriminate against some of those consumers because they don’t have the right ethnicity, gender, or race. Editorial: Indirect Auto-Finance Mistakes and Fair Lending 4064 South Highland Drive, Millcreek, Utah 84124 │ thenewslinkgroup.com │ (v) 801.676.9722 │ (tf) 855.747.4003 │ (f) 801.742.5803 Editorial Library | © The newsLINK Group LLC 1 Fair lending matters. It’s one thing to compete with other dealers by negotiating with consumers about specific financing terms. It’s another thing to discriminate against some of those consumers because they don’t have the right ethnicity, gender, or race. Most people would not argue the merits of competition or nondiscrimination. At the same time, there is another aspect to consider for any dealer who is trying to comply with the rules that specifically govern fair-lending policies for indirect auto finance: how, exactly, does the Consumer Financial Protection Bureau (CFPB) determine whether a fair-lending violation exists? It is much easier to comply with a set of laws if it is clear what compliance does, or does not, mean. Running a business without knowing what those rules are is somewhat like trying to throw darts when you are blindfolded. The CFPB has made it clear that there is a fair-lending concern about dealer participation and the ability to decide markups on a discretionary basis, but getting the necessary information from the CFPB was difficult enough that the federal government, as represented by House Democrats and a bipartisan group of Senators, decided to involve itself by writing letters to CFPB’s director, Richard Cordray. His responses do not clear up every ambiguity, but they do provide valuable information about how CFPB is approaching indirect auto finance. In particular, it is now clear that Mr. Cordray’s concern, and therefore the concern of the CFPB, has to do with the Equal Credit Opportunity Act (ECOA) of 1974. When CFPB reviews an indirect auto lender, therefore, it is specifically interested in credit denials, buy rates (the lender’s interest rate for the dealer), and the buy-rate markup (the interest rate quoted by the dealer to the customer, minus the buy rate). Protect Yourself Against Markup Disparities You can decrease the chance that the CFPB will challenge your dealership about its indirect auto finance policies by applying some specific ideas. This is definitely one area where you can protect your dealership and stop many problems from becoming serious just by not letting markup disparities happen. This is a much better approach to take than continuing to do business the way you always have and hoping no problems will surface. The government’s interest in preventing discrimination is both reasonable and obvious. However, discrimination is not the only possible reason why minorities might end up paying higher markups, especially when the business reality is that margins are small and maximizing profit is not a simple matter. Other reasons include the following: Many businesses have friends-and-family discount programs. Manufacturers sometimes offer subvention programs where the dealer is limited to a one-percent reserve. The customer could only afford a specific dollar amount on a monthly payment. Making the sale depended on staying within budget, and staying within budget meant cutting participation. Interest rates are not high, but they are competitive. Not matching a great rate from a bank or credit union means losing the opportunity to finance the purchase. "The customer came in with a great rate from her credit union. I had to match it or lose the financing on the deal." "The customer said he could only afford a payment of $350 a month. I had to cut the participation in order to keep the payment within his budget." All these reasons can affect the rate markup, and all are legal, legitimate, and nondiscriminatory … if they are documented. If no record is kept as to the reasoning behind the rate markup, then it could as easily be caused by discrimination as by anything else. Protecting yourself is as simple as having a standard markup policy and documenting any exceptions.

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