It is no surprise that U.S. automobile dealers have been in a tizzy the past few months as the Consumer Financial Protection Bureau (CFPB) has been rattling its swords threatening to ban them from marking up interest rates on car loans, a sacred profit center for dealerships. Using methodology that assumes a person’s race can be determined by their last name and their gender by their first name, the CFPB claims that certain protected classes are being discriminated against in terms of being charged higher interest rates and thus the practice must stop.
What is a surprise is that Congress is equally annoyed with the agency’s strategy and lack of transparency, and recently announced new regulations limiting their power. No matter the outcome, there is a real possibility that the unintended consequences of the CFPB’s actions will be higher car loan rates for you.
The three-year old CFPB faces several obstacles to reach their objective. The agency has been unable to produce a single example of a consumer complaint about this issue. They also have no authority over automobile dealerships, where cases of discrimination might exist, so their plan is to punish the banks for the actions of their dealers. Bear in my mind that lenders, be it a captive like Ford Motor Credit or a non-captive like Wells Fargo, never see the client, do not ask questions about race on credit applications, and pointedly do not ask for a copy of the buyer’s driver’s license until after the deal is done. Nonetheless, the agency has been demanding that banks produce data so they may study the customers’ first and last names and the rates they were charged.
Until three weeks ago the CFPB steadfastly refused to answer banks’ and Congress’s queries asking them to produce specifics of their strategy to uncover cases of discrimination. They were then summoned to a Senate hearing, where the CFPB chairman pledged to be more open and accountable. The House Financial Services Committee was not impressed and they imposed new measures on the regulator to insure they behave.
The CFPB then proposed an alternative method of compensating dealers: banks could pay them a flat fee for arranging consumers’ car loans as a substitute for rate participation. The problem with that scenario is that if Bank A approves a customer at 2.9% paying the dealer a $500 flat fee and Bank B approves the same customer at 3.9% with a $750 flat fee, the dealer will offer the latter to buyers. At which point the CFPB can produce another study and be outraged that people with certain first and last names were charged a higher rate.
The CFPB is not alone in their quest. The Department of Justice recently successfully prosecuted the type of case the CFPB is desperately trying to find. They fined a Korean-owned Los Angeles bank and a Korean-owned Mitsubishi dealership for discrimination for their charging Hispanics consumers higher interest rates than non-Hispanics. The CFPB has not acknowledged this case as it is not the type of racial discrimination they are seeking. Let’s face it, a Chrysler Capital or U.S. Bank will be perceived as “white” and if their dealers are charged with discriminating against minorities, they will be shamed by the media and the CFPB will be the hero.
The State of California – always irritated when the Feds find a business practice to regulate before they do – just announced a 2014 ballot initiative to ban interest rate markup by automobile dealers. The proposal includes other new dealer regulations, one of which prohibits dealerships from hiring individuals who have been convicted of identity theft. No dealer in their right mind would knowingly employ such a person but the strategy is to have it on the ballot so voters can think, “Damn car dealers, they must stop hiring convicted felons!” Like the Feds, Sacramento legislators know anything they can do to discredit automobile dealers will be cheered by the press and the populace.
So our question to the Best And The Brightest is this: if you are in the business of profiting by buying a product at wholesale and selling it at retail – and an interest rate is a product – should the government have the power to stop you from doing just that?