By on January 27, 2016

 

That happy couple at the car dealership, back by popular demand...

That happy couple at the car dealership, back by popular demand.

Since we last reported on the Consumer Financial Protection Bureau (CFPB) and its controversial crusade to uncover racial discrimination by car dealers on interest rate markup on automobile loans, the agency has ordered over $100 million in fines and settlements against banks that some have deemed extortion. This has infuriated lenders and car dealers, and has frustrated lawmakers on both sides of the aisle.

The tale continued last week as the House Committee on Financial Services revealed that their work on this case now includes trying to get the CFPB and Department of Justice to agree on that age-old problem on how to get white car buyers to admit that they are actually white.

Let us review this investigation, which recently prompted the House committee to publish a report about the CFPB probe, titled “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending.

The Consumer Financial Protection Bureau is a regulatory agency formed in 2010 under the Dodd-Frank Act. Its operations and $541 million annual budget are not overseen by Congress. In 2012, the agency conjured up a theory: that automobile dealers were discriminating against minority car buyers by marking up the interest rate on their auto loans at a higher rate than they were for white clients. It is believed that there are no examples of any customer complaints to the CFPB or other agencies on the matter.

Dealers work with a variety of indirect finance companies, be it a “captive” bank source like Ford Motor Credit, or a “non-captive” like Wells Fargo. The CFPB had a problem with the indirect loan process. For example, where a bank may approve a customer’s credit application from a dealership for a car loan at 3.5% APR, the dealer has the discretion to mark up the interest rate to as much as 6.0% APR, limited by the bank’s policies and state laws. The typical amount of dealer markup is around 50 to 150 basis points, resulting in a national average of between $300 and $500 per car in profit, or “dealer reserve.”

Other retail financing industries also mark up interest rates, but the CFPB no doubt chose to single out car dealers to ensure getting maximum mileage and headlines out of its crusade. Since the CFPB is barred by law from regulating automobile retailers, where cases of discrimination probably do exist, the agency decided to pursue the banks that provided the loans. Its rationale: by allowing dealer markup, the banks are responsible for discriminatory lending practices. They would thus be violation of the Equal Credit Opportunity Act.

Lenders have no way of knowing the race of a client sitting in front of a dealer’s finance manager. They are forbidden by law to ask for race on credit applications. The CFPB thus turned to a controversial statistical methodology called Bayesian Improved Surname Geocoding, a proxy based analysis which claims that knowing clients’ names and zip codes will result in an accurate determination of their ethnicity. For example, if your last name is Martinez and you live in zip code 78211 (San Antonio), you’re likely to be Hispanic. The CFPB did not consider any other variables that affect payment such as the rate, customer’s FICO score, or deal structure.

We likened this analysis to Seinfeld’s Donna Chang episode, where Jerry is surprised to learn that his blind date with a woman with a Chinese surname turned out to be a blond Caucasian woman.

The agency proceeded to dig into the books of most major auto lending institutions and found thousands of cases of perceived minority customers that paid a higher interest rate than did perceived Caucasian customers.

Between 2013 and 2015, the agency subsequently forced Ally Financial (formerly GMAC), American Honda Finance Corporation, Fifth Third Bank and BB&T Bank to fork over a total of over $100 million in fines and settlements in lieu of prosecution. The average interest rate paid by minority car buyers was around 20 to 29 basis points higher than for Caucasians. The CFPB calculated that the average amount overpaid by 420,000 consumers was $295, or $4.92 per month on a 60-month loan. Each lender refused to admit any wrongdoing.

“Banks and Car Dealers Engage In Racial Discrimination!” screamed the headlines.

Ally agreed to reimburse 235,000 customers a total of $80 million and was fined $18 million. Honda agreed to pay $24 million to consumers and to limit its dealer reserve to 125 basis points on loans up to 60 months and 100 points on longer term loans, which will do nothing to stop dealers from engaging in any discriminatory interest rate markup.

Indirect-Auto-Fair-Lending-CFPB Courtesy trupointpartners.com

The CFPB also wanted the lenders to change the way they compensate dealers, preferably by paying dealers a flat fee for each loan, instead of a rate markup. The agency did not comprehend that this would cause many consumers to pay a higher interest rate: if Bank A approves a dealer’s client a loan at 3.5% APR with a $500 dealer flat fee and Bank B offers 4.0% APR with a $750 fee, the retailer will likely only offer the latter to the customer. (In which case, the CFPB would probably decide that minorities had paid an average higher flat fee amount and launch another investigation.) All but one small lender refused to switch to flat fees.

As the findings unfolded, the CFPB came under attack by the auto industry groups who said the agency was on a witch-hunt to regulate dealers; by members of Congress miffed that the CFPB refused to divulge details on its methodology; and by explosive claims that the agency itself practiced racial discrimination against its own employees. They annoyed the House by going $65 million over a $150 million budget for remodeling their offices, a $590 per square foot project that included sunken gardens and a waterfall.

Which brings us to the hi-jinks of this past week revealed in a report by the House Committee on Financial Services.

Last summer, the CFPB sent a notice to affected car buyers. Customers with at least a 50/50 chance of being a minority received the 15-page letter you can read here. In essence, it says, “You recently financed a vehicle and are entitled to a payment of at least $150 due to alleged discrimination in auto lending. If you do not respond, you will get the money. We think you are a minority but if you are not, you are required to fill out and return the attached form and you will receive no payment.”

The Department of Justice objected to this “opt-out” method, saying it encouraged fraud, as some white clients did not respond and thus will receive payment. They proposed all claimants self-identify under penalty of perjury. The CFPB argued that this method would lead to only 15% to 61% of the customers receiving payment. The House Committee said the DOJ’s method would expose the flaws in the CFPB’s probe.

Said the chairman of the House Committee, Republican Jeb Hensarling, “It defies logic for federal agencies to distribute settlement funds without first verifying the eligibility of prospective recipients, particularly when the bureau’s case is premised upon a flawed statistical analysis.”

A final decision is pending on which opt-in or opt-out or combination of both methodologies will be recognized to verify the race of customers and thus start processing payments.

In November, the House passed a bill rescinding the CFPB’s authority over auto lending. A total of 88 Democratic House members joined Republicans in endorsing the legislation. It is not expected to pass the Senate, plus President Obama is a staunch supporter of the agency. The Republican staff of the House Committee on Financial Services also wrote a scathing report in November entitled, “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending,” blasting the agency’s methodology and concluding:

The Bureau’s assault on the auto finance market is a textbook example of how regulators that don’t understand business and economics can harm the very consumers they intend to protect. According to a recent analysis of the Bureau’s settlements with Honda and BB&T by the Wall Street Journal, the end result of the Bureau’s actions could be higher interest rates for some borrowers that over the life of a four-year $25,000 credit contract would add $586 in interest payments.

To be fair, the CFPB has punished car dealers who genuinely harmed consumers by practicing shady lending practices. Last week, they took action against Herbie’s Auto Sales, a Colorado buy-here pay-here lot, for engaging in a myriad of abusive financing schemes.

herbies_outdoor Courtesy cargocollective.com

In addition, the publicity over the settlements has caused many auto dealers’ finance departments to concentrate more on selling aftermarket products — such as extended warranties and GAP protection — rather than profiting from dealer reserve, though the CFPB is said to be looking at those products as their next target.

If you think this case is much ado about nothing, consider this: suppose the government decides to apply the CFPB’s methodology to determine if there is a disparity in the average price paid on new vehicles by minorities vs. non-minorities. It would be a story of such magnitude that Volkswagen would be knocked right out of the headlines.

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132 Comments on “The Continuing Saga of the Consumer Financial Protection Bureau and Dealer Interest Rate Markup on Car Loans, Part Two...”


  • avatar
    Kyree S. Williams

    “That happy couple at the car dealership, back by popular demand.”

    Thanks for that. haha

    • 0 avatar
      CoreyDL

      Looks like he’s reviewing the week’s spelling words.

    • 0 avatar
      healthy skeptic

      This one’s got all the hallmarks of a classic:

      * Everyone is smiling
      * Papers are being signed
      * A key is being extended toward the new owner(s)
      * The credit card machine on the desk is a nice touch

      Arguably, the signing should be taking place on the hood of a new car, not at the desk, and with the driver side door open. And the couple is optional. It can also be a single woman. The salesman should always be male though. (Actually, it would be the F&I guy, but that’s just a technicality.)

  • avatar

    So, in order to make restitution to percevied victims of racial profiling, the CFPB is racially profilling?

    Awesome.

    • 0 avatar
      dwford

      That’s the funny part. If the banks offered rates based solely on the person’s last name and perceived ethnicity all hell would break loose.

      • 0 avatar
        VoGo

        But that’s the point. The CFPB is reverse engineering the bank’s credit algorithms to identify which banks are discriminating. If you can cut through Steve’s obvious bias, you’ll see real protection for vulnerable consumers here.

        • 0 avatar
          dwford

          The banks algorithm is not much more complex than FICO score and monthly income.

          • 0 avatar
            bunkie

            Ah yes, the FICO score algorithm. A black box, controlled and used by people we can’t vote out of office, that regulates certain important aspects of our lives.

            Even better, it spawned a sub-industry (owned, mostly by the credit agencies themselves) that makes us *pay* to keep an eye on it. Few things show how badly we are beaten down as the utter lack of outrage at this ridiculous system of credit reporting and monitoring.

          • 0 avatar
            shaker

            You get a good, instant FICO score from the dealer (to suck you into the loan), then you get your REAL FICO score later, and you find out then why your interest rate is higher than you thought it would be.
            Kind of sleazy.

            Edit: I might add that for me, the extra $200 over the life of the loan was not a deal-breaker for me; I need to improve my credit score by actually using the stuff.

        • 0 avatar

          No, the CFPB is NOT reversing the bank’s credit algorithms. The banks are NOT discriminating. CFPB is saying the banks are discriminating because they give dealers a rate margin opportunity that enables dealers to discriminate. The banks are alleged to have committed accidental discrimination without malicious intent. Its called “disparate impact.” There is no protection for “vulnerable consumers.” If they want “protected classes” to be treated a particular way they should issue “protected class” membership cars and specify how they want them treated. If they want everyone treated the same they need to mandate the same pricing for everyone or let dealers fix prices.

          They extorted the money from ALLY in the first place and now don’t know how to pay out the restitution money.

          To be clear, the CFPB has done a LOT of good and there is a lot more to be done. But getting mired down in using suspect methodology to prove what doesn’t exist isn’t helpful. At a recent minority car dealer conference, Patrice Ficklin appeared before the group. She is a very bright and engaging person, but she expected a warmer reception than she received. The dealers there excoriated her. Even though I disagree with her I felt sorry for her. But I feel for the plight of the lenders who are damned if they do and damned if they don’t. Ideologues gone rogue with almost unlimited power are dangerous.

  • avatar
    Zackman

    Is there any such thing as an honest way to buy a car, regardless of race or other factors without being taken to the cleaners? Why is this so?

  • avatar
    sirwired

    Just FYI, the customer’s FICO score shouldn’t have any effect on the dealer interest rate markup at all, so it’s not surprising that was not taken into account.

    It does, of course, affect the rate the bank charges the dealer, but should not change the rate the dealer charges the customer.

    • 0 avatar
      Steve Lynch

      Not necessarily. In many cases, customers with low FICO scores and resulting higher dealer buy rates, have their rate marked up to the max allowed, as dealers know they were just happy to get a loan at all and don’t care about the rate.

      • 0 avatar
        fvfvsix

        Great point. For example – I know my FICO score, and when I buy a car, my choices are always a) write a check, or b) let the dealer finance me for a bit of extra negotiating power. There is absolutely no reason for me to accept a rate any higher than “rock bottom”. So, FICO scores can be an easy indicator of a customer’s ability to pay via other means.

      • 0 avatar
        sirwired

        I know it is legal to take advantage of the desperation (and/or financial illiteracy) of a customer, but I’m certainly not happy about the idea.

    • 0 avatar

      So should dealers charge everyone the same margin? Is that what you’re saying? Wouldn’t that be price fixing?

      CFPB has no idea of the FICO score of the so called “harmed parties.”

      For the record, the CFPB’s methodology, called Bayesian Improved Surname Geocoding, with a HUGE margin of error, uncovered a supposed third of a percentage point of interest rate margin “overcharge.” AND it didn’t think to measure the amount of relative negative equity of the so called “classes.” First, it doesn’t and didn’t understand why that is important. Second, it had no way to gather that information.

    • 0 avatar

      If you exclude the fact that the interest rate is negotiated, not charged, and just look at margin on its own, wouldn’t you expect that a deal that requires a lot more time to get approved should have more margin in it than one that doesn’t?

      Dealers often get deals approved that an individual couldn’t get done on their own.

  • avatar
    bikegoesbaa

    People still show up to buy cars without having set up their own financing?

    Hard to feel bad for folks who make a 5-figure purchase without doing basic homework.

    • 0 avatar
      fvfvsix

      Yeah – just go to any dealership and sit down at one of the negotiation cubicles. You’ll overhear some of the saddest stuff you can possibly imagine.

    • 0 avatar
      05lgt

      My dealer beat my pre aranged rate using the same credit union. They really wanted some headspace on the floor plan that evening.

      • 0 avatar
        bikegoesbaa

        By all means let them try to beat your best pre-established rate.

        But just showing up with no financing or point of reference and asking the dealer for whatever they can put together is asking to get taken.

      • 0 avatar

        Because the dealer is worth huge volumes to your credit union, they get a better rate than you get as an individual. The CU still got the deal.

        So how would you like a system where the best negotiators gain no advantage from their expertise? Many consumers think every consumer should win. The dealer has to maintain averages. That’s just a fact of life. Some have to pay too much for some to pay too little. The math on this is easy.

    • 0 avatar
      krhodes1

      I was going to make this same comment – baffles me. If you can’t get your own financing, that is probably a sign you should not be buying a car in the first place.

  • avatar
    VoGo

    Mark,
    This piece is mis-characterized as a mews item, when it is actually an editorial. A very biased editorial by a guy who has spent his career helping dealers maximize their profits at the expense of consumers.

    Consider the following sentence: “In 2012, the agency conjured up a theory: that automobile dealers were discriminating against minority car buyers by marking up the interest rate on their auto loans at a higher rate than they were for white clients.”

    Conjured up a theory? No, the CFPB read several independent studies which have been conducted which showed conclusive evidence of discrimination against minority car buyers. Anyone who was reading TTAC two weeks ago will no doubt remember Jack’s anecdote about his friend Rodney’s mother, which highlights the phenomenon.

    I am fine with industry hacks writing their opinions, but that doesn’t make them fact.

    • 0 avatar
      Steve Lynch

      Show me one of those independent studies about interest rate markup and minorities. I would like to see it.

      • 0 avatar
        tonycd

        Steve, here’s one of those studies, and its contents cite another. This took all of two minutes; Google up some more yourself.

        http://web.law.columbia.edu/sites/default/files/microsites/career-services/Loan%20Discrimination%20At%20The%20Auto%20Dealership.pdf

        • 0 avatar
          Steve Lynch

          Interesting. In the Ford case they used surnames to identify race, so same methodology as the CFPB. In the GMAC case, it is not clear, since it dates back to 1990, maybe race was still asked on credit apps?

        • 0 avatar
          VoGo

          Here are 9 more that took an entire 3 minutes on Google:
          http://www.autonews.com/article/20140205/FINANCE_AND_INSURANCE/140209937/study-that-finds-discrimination-in-car-loans-draws-fire

          https://www.incharge.org/military-money/story/do-auto-lenders-discriminate

          http://www.nbcnews.com/news/us-news/u-s-settles-lawsuit-accusing-honda-car-loan-discrimination-n391981

          http://www.lsej.org/documents/118871The%20Hidden%20Cost%20of%20Discrimination.pdf

          http://www.theatlantic.com/business/archive/2013/06/the-price-is-racist-when-minorities-and-women-are-asked-to-pay-more/277174/

          http://www.nytimes.com/1990/12/13/us/white-men-get-better-deals-on-cars-study-finds.html?pagewanted=all

          http://islandia.law.yale.edu/ayres/Ayres%20Siegelman%20Race%20and%20Gender%20Discrimination%20In%20Bargaining%20%20for%20a%20New%20Car.pdf
          Dealer Price Discrimination in New Car Purchases

          econ.duke.edu/~hf14/…/DealerPriceDiscrimination.ppt

          http://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=2539&context=fss_papers

          A few have a more generalized focus on pricing discrimination overall, rather than just rates.

          • 0 avatar
            Steve Lynch

            Discrimination on pricing on cars is probably a way bigger issue than just 25 higher basis points on a loan. If so, you would think the government would address that issue.

          • 0 avatar
            VoGo

            Funny statement, Steve. You know full well that dealerships are governed locally by the same politicians who accept significant portions of their campaign contributions from those very same dealerships and their lobbyists.

    • 0 avatar

      I see your point, VoGo. However, there’s more straight news in this than opinion. TTAC has a long history of editorializing news to a degree under the News category, and this is no different.

      • 0 avatar
        VoGo

        Appreciate the response.

      • 0 avatar
        Xeranar

        Or in other words: TTAC is backsliding into their right-wing blogosphere style editorials while not admitting the whole piece is basically written from a right-wing point of view.

        You really can’t ignore that much of the attacks on the CFPB originating in the House are strictly along partisan lines and parading them out as honest reporting doesn’t instill value in it. I’m wiling to concede there may be issues but when you slather it in red meat for the conservatives to eat up you’re losing any value to reality.

        By the way, the basic use of geocoding by name & location is valid. The point of even referencing the Seinfeld episode actually proves the point. There are statistically VERY FEW Changs who are not of Asiatic descent. Thus, the margin of error is reasonable within the argument. Never mind we’ve had numerous independent studies proving that banks red-line neighborhoods and zip codes using your basic information because it’s pretty easy to tell an 80% black neighborhood from a 20% one. Just last year they did a study in Baltimore that found blacks in majority white neighborhoods got better rates by virtue of being surrounded by whites.

        This basic demographic information is available to banks and pretending that they’re honest dealers based on what they see on the paper is either naivety to the utmost or flat out lying.

        • 0 avatar

          This is NOT a RW/LW issue. There are MANY Dems who understand how flawed this BISG is. They are also on a bill requesting internal CFPB documents, which the “transparent” CFPB is stone walling. For the record, I proudly voted for our current President TWICE, support Dodd Frank, AND CFPB when they are right. In this case, they aren’t. I supported the bailout of the auto industry, which was really the bailout of the North American industrial base and the economy as a whole. However, I railed loudly at some of the things Team Auto did wrong. I applaud things the did right and observe that given the time pressure involved they did an overall amazing job. Steve Rattner is a personal friend, and we argue about our differences every time we see each other. But I loudly commend him and thank him for his service to our country.

    • 0 avatar

      First, Jack’s piece about the “victimized” Rodney’s mother was so full of holes he should be embarrassed to have even put it out. Second, where is the so called conclusive evidence of “discrimination?” Even CFPBs BS methodology only uncovered a third of a percent overcharge, and now they can’t figure out who to compensate. They’re sending checks out to white folks because they can’t tell who is who and they have to send checks out to someone.

      What do you think the margin of error is for Bayesian Improved Surname Geocoding? What do you think the margin of error is when you send out a letter that implies you will receive a check if you mark a certain box?

    • 0 avatar

      Any business that makes profit does so at the expense of consumers. Is that bad in your world?

  • avatar
    SCE to AUX

    This editorial is based upon the flawed opinion that the CFPB’s analysis was somehow wrong.

    In fact, the CFPB’s BISG technique yielded very accurate results.

    As a result, their ‘perceived’ cases of fraud were overwhelmingly correctly identified.

    The CFPB may have some internal accountability issues, but this statistical technique isn’t one of them.

    • 0 avatar

      Exactly what makes you think BISG as used by CFPB is accurate? They had no way to identify protected class auto loan borrowers. So they used last name and zip code and matched to a list of mortgage borrowers where the protected class status was supposed to be ascertained via self identification on the mortgage credit application. Well, on the mortgage application, the applicant self identifies UNLESS they refuse to. Then the loan officer is required to mark a box or BOXES based on their own perception. A box marker is invited to mark as many of the boxes as they wish with absolutely no objective standard. What is the margin on error for that? Enough to uncover a third of a percent “over charge” Are you kidding me?

      https://www.cfpbmonitor.com/2015/02/19/trade-groups-urge-cfpb-to-respond-to-afsa-vehicle-sales-finance-study/

  • avatar
    tonycd

    Unfortunately, our polarized politics today make it necessary to put some context around this story.

    The CFPB, for those who aren’t familiar with it, was the brainchild of now-Senator Elizabeth Warren, a critic of Wall Street and big-bank excesses that led to the crash of 2009. That cabal has resisted any real reform of the practices that caused our economic meltdown (as an aside, the banks collected vastly more government welfare afterward with vastly fewer strings attached than did the much-reviled General Motors).

    The banks were guilty on a massive scale of deceptive lending practices, deliberate over-lending to people they knew were likely to be bankrupted by their usurious loan terms, and rigged court systems that “robo-signed” inaccurate forms to let them seize people’s houses and personal property, often from people who weren’t even late with their payments. Against this backdrop, Warren successfully pushed for a new government authority to regulate the banks’ consumer lending practices. (As such, she was the obviously logical choice to run it, but Wall Street blackballed her through their mostly Republican footservants in Congress, so she successfully ran for the U.S. Senate on this issue instead.)

    Although I’m white, I know that American corporations have continued to use the tools of the credit industry to practice racism on a huge scale, including the use of credit ratings to deny not just loans, but even jobs to people when it is prohibited to ask what race they are. These are not dark conspiracy theories, but widely published facts.

    Wall Street’s hatred for the CFPB is well known. They have never made the slightest effort to hide it. The use of a Republican House kangaroo court, aided and abetted by a minority of Democrats, is neither surprising nor newsworthy. As Democratic Senate leader Dick Durbin said of Wall Street influence on Capitol Hill, “They own this place.”

    I’m not saying the CFPB is 100% right in this case. I am saying their critics have severe credibility problems of their own.

    • 0 avatar
      Conslaw

      TonyCD, I agree with you 100%.

      I want to add that regulation of car dealers was a contentious point in the establishment of the CFPB. Car dealers had previously been regulated by the Federal Trade Commission, the FTC. The problem was the FTC was doing a really lousy job at it, and the wild west ruled at the dealerships. The CFPB only received limited jurisdiction over auto lenders. (I can’t remember the details.) For those who say the CFPB should regulate all discrimination, there is insufficient political support for that, and the CFPB doesn’t have that authority anyway, not without extensive hearings and rulemaking anyway.

      There are some signs that since the CFPB was established, and the FTC lost a lot of its jurisdiction, it looks like it has been doing a better job at addressing some of the areas that it retains jurisdiction. This would include most unfair and deceptive practices at car dealerships.

      • 0 avatar

        Auto Dealers were specifically removed from CFPB authority. After all, they are regulated by the AGs in the various states, the DOJ, AND the FTC. There is a lot of strife between the CFPB and FTC. CFPB, with its unlimited budget, hired away many people from FTC by offering more money. FTC answers to Congress. CFPB answers to the FED. The FTC certainly has authority over car dealers. I was there last week for a “hearing.” Don’t tell CFPB they don’t have authority to regulate discrimination. They think they do and will make up methodology to prove it when they want to. They work with the DOJ on “disparate impact discrimination.”

        As a practical matter, the complaints of many consumers derives from a lack of understanding of business on the part of the consumer as well as the marketplace created by FTC in the first place.

        Last week’s hearing was quite interesting. A few newer people at FTC seem to want all consumers to pay the same, and they feel that can be accomplished if auto OEMs sell directly. They don’t seem to understand their own role in the system as it exists today. From the beginning they have thought that competition at the retail level is good for consumers. They have promoted the idea of the Sales and Service agreement that protects BOTH parties, the Dealer and the OEM. They haven’t figured out what to do with the billions in facilities dealers built based on that S&S Agreement. OEMs don’t have the money to buy them out. Some of these people at FTC seem to think that dealers would just go away if the OEM is underselling them. Naive consumers think that is what should happen without understanding the contract law that is in place and isn’t going anywhere. The DOJ and any court wouldn’t sit still for an OEM to violate their contracts. Attorneys would love to litigate that.

    • 0 avatar
      motorrad

      You do understand that 95% of those home loans were approved by the Government? My wife worked in the home loan industry during the early 2000s and quit when FHA approved a $800 mortgage payment for a single woman who made $2000 a month.

      As with most things, there is plenty of blame to go around.

      • 0 avatar
        Xeranar

        and my uncle works for GM, he tells me all their greatest secrets!

        Internet people and their anecdotal stories….

        Anyways, most home loans were bundled and backed through Fannie Mae & Freddie Mac, they did not originate them nor did they ‘approve’ them. If we’re discussing the finer points of CRA loans, then I would point out actual CRA loans (that follow the CRA criteria) had a much lower foreclosure rate than the national average. By the way, 2000 a month with an 800 mortgage payment is high but not stratospheric. A single bedroom apartment in most major cities goes for that, if she can survive using public transit or an older car for a few years she would have equity rather than receipts for the same amount of money she put in.

      • 0 avatar

        NO, these loans were NOT approved by the government. An FHA conforming mortgage might be approved and purchased by a GSE like Fannie or Freddie. That is the way things used to be done. Wall Street would arrange the mortgages in a Mortgage Backed Security and sell them for fees. They were rated AAA because they were essentially backed by the full faith and credit of the U.S. government. But Wall Street chafed at just being able to assemble and sell. Once the credit default swap was invented by Blythe Masters at JP Morgan, it was on. Securitizers could approve and buy mortgages and cut Fannie and Freddie out because the CDS enabled them to get the coveted AAA rating from the rating agencies. None of these bright people figured when things went bad it would go bad for everyone. So back to the credit default swaps – RW types blocked the effort by the CFTC to FORCE issuers or CDSs to reserve capital to pay potential claims. Alan Greenspan, Phil Gramm, Arthur Leavitt, and others were behind it. Wall Street preferred to pay big bonuses and dividends to reserving capital. You can talk about the repeal of Glass Steagal through Gramm Leach Biley and what ever else comes into your mind, but the core of the issue came when non regulated CDSs allowed irresponsible people to buy and sell mortgages. Gramm slid a paragraph into the Commodities and Futures Modernization Act that stated CDS would never be regulated as insurance. And before someone pipes up with CRA bullshit – only 16% of mortgages granted during the bubble period were made by depository banks regulated by the CRA. Investment banks (Wall Street)NEVER were. Besides CRA mortgages are relatively small mortgages and have performed better than the mortgage market overall.

    • 0 avatar

      You might take a closer look at CFPB’s critics? For example, I am a HUGE critic of them on the issue of BISG and the fact they are doing an end run around Congress that won’t end well for them. Their over reach in this area will most likely hamper their ability to do real good in other areas. Yes, Liz Warren had a lot to do with CFPB. She is an ideologue that just makes stuff up. For example, she recently made a speech where she said car dealers make $26 billion dollars of rate markup that should have stayed in consumer’s pockets. She took the entire amount of interest charged in a high risk BHPH loan and multiplied it times the number of car loans made in a single year. On top of that, her comment indicated she believes car dealers should originate car loans for free. These are ideologues that will falsify methodology to “prove” the assumption they had in their mind before doing their so called research.

  • avatar
    28-Cars-Later

    MR BURNS: Too bad! You’ve already signed the deal.
    LINDSAY NAEGLE: Actually, he hasn’t.
    MR BURNS: Oh. Well, we highly value your input. [menacing] Until you sign the deal!

  • avatar
    dwford

    The whole concept of dealers charging higher rates to minorities based on their race is ridiculous. The flip side is that the dealers are charging lower rates to white based on race. As a 7 year veteran of the car business, I can say that I’ve never seen any instance where a dealer voluntarily gave up profit as a favor to a customer based not he race of the customer.

    Dealers discriminate against low information customers, not against particular races.

    • 0 avatar
      Astigmatism

      You either misunderstand or misconstrue the situation. Dealers (or banks or finance companies) do not charge lower rates to whites because they like white people and want to do them a favor. Dealers (and banks and finance companies) charge rates to customers of all races according to what they think they can get away with. Historically, this has meant charging black customers more, because they perceive that black customers have fewer financing options and less leverage than white customers with comparable repayment histories – thanks in large part to decades of redlining and other practices that have caused blacks to be concentrated in neighborhoods with fewer banks and other sources of credit. They charge white customers less because if they offered the same terms to white customers they would walk out the door.

      • 0 avatar
        dwford

        It’s not the rates themselves we are arguing about, it is the rate markup the dealer is allowed to charge. They are accusing the dealers of charging a lower rate markup to whites (thus sacrificing profits) than to minorities. The bank determines the base rate based on credit and income, the dealer adds the markup. My point is is that dealers will happily charge the full markup allowed to all customers regardless of race, unless the customer negotiates it. They are not making the financial decision to markup up the rate less to whites vs minorities. NO dealer is going to make a race based decision to throw away money when everyone in the sales process is commission based.

  • avatar
    dwford

    Let’s talk about auto insurance companies and their effective discrimination between races for their use of zip code based claim data to set rates. How does that not end up being racist?

    • 0 avatar
      bball40dtw

      Because it’s based on risk and not race.

      • 0 avatar
        dwford

        I understand that, but the effect is to charge minorities higher rates than whites.

        • 0 avatar
          bball40dtw

          The effect is that areas that have more claims and more expensive claims pay higher premiums. It effects white people too. My wife and I are both over 30, no tickets or accidents in over 5 years, own our home, have good credit, and drive cars that insurance companies don’t rate higher. But where I live jacks my premiums up.

        • 0 avatar
          krhodes1

          Correlation does not imply causation.

          Black people in lower risk zip codes do not pay more, and white people in higher risk zip codes do pay more.

          It happens that the higher risk zip codes tend to be poor and minority – is this really shocking news?

          • 0 avatar

            White farmers and ranchers in rural areas get better deals than whites with masters degrees who live in the city. WHY? Barter and negotiation is baked into rural culture same is with ethnic groups who are accustomed to negotiating everything they buy at market. Fact is, the best negotiators get the best deals regardless of skin color.

          • 0 avatar
            krhodes1

            Ruggles, we were discussing insurance rates, not car prices.

            I do agree with you though, better negotiators get better prices, and anyone who loves fixed pricing for cars likes paying too much. The game isn’t even that hard to play, if you have half a brain.

    • 0 avatar
      Steve Lynch

      Yes. Imagine if insurance companies used the CFPB methodology, using surnames AND zip codes.

      • 0 avatar
        bball40dtw

        Oh they would if they could. Most, if not all, use credit reports.

        • 0 avatar
          CoreyDL

          Credit report
          MVR (motor vehicle report)
          Rx Script Check
          And an exam by a med tech, if you’re getting a large policy.
          Also a blood and urine sample.
          Until recently, if you were a smoker we might make you get a chest x-ray too.

          Current trend in the life industry is toward fluid-free underwriting, and using behavioral economics and things like bill payments instead. It’s going to create some bad blocks of business for a while, until they get their sh-t figured out on how to underwrite effectively with these simplified methods.

          My company is not taking part in any simplified underwriting, as a result.

          • 0 avatar
            bball40dtw

            Well yeah, for life insurance. I had an exam for my life insurance policy I got a few years ago.

          • 0 avatar
            CoreyDL

            There are issues with the exam providers, as they have crap/unreliable/improperly trained employees – because they don’t pay well.

            Did you get a 10/20 year level term? At your age that’s where most people would start.

          • 0 avatar
            bball40dtw

            Yeah. 20 year level term.

          • 0 avatar
            28-Cars-Later

            Sounds like Gattaca.

          • 0 avatar
            CoreyDL

            Watch out for where your eyelashes fall off, citizen.

          • 0 avatar
            CoreyDL

            Also RE: 20 year term

            You might have a conversion privilege to change over to a whole life or universal life within a certain time span (likely within 10 years or the level term period), should you think you want a longer range of insurance.

            I feel like I need to mention these things to people in case they don’t have an agent that’s any good. Lol.

          • 0 avatar
            bball40dtw

            Isn’t whole/universal life a rip-off?

          • 0 avatar
            CoreyDL

            That depends on what you want to use it for. UL has a savings component but is not especially beneficial now because of low interest rates, so you won’t save much. UL sales are currently low. IUL is available and is the new “hot product”, where your results and cash value are indexed to a major markets results like the S&P or NASDAQ for example. This hedges against big losses and big gains, theoretically giving a decent return over time, as the market has done.

            WL products cost much more for the same face, but have flexible premiums, which is an option you don’t get on Term. As well, they never expire, and there are options where you’ll be paid up at a certain point, and then not have further premium. Normally the pay option is for life, but you’re also building cash value.

            Oversimplified example:

            So a 20 year term, you pay $2,000 a year for $1M coverage. Goes away at 20 and you get $0 if you’re not dead or disabled. You can continue paying post-level premium which is normally 12-20x your normal premium. People pay this if they KNOW they’re going to die soon.

            A WL, you pay for life $2,000 a year for $600,000 of coverage. But you’re building cash value (which you can withdraw if need be) and will also collect dividends from the company each time they’re declared, which can be used to pay your premiums for you. Your 600K policy could be worth 1.2M by the time you die.

            If you’re 55 and you have some cash value in your WL, and you’re like “Nope don’t want to spend for my premium this month.” you have the option to let the cash value pay them instead. Cash val in insurance products is accumulated tax free until withdrawal, so there’s that too.

            There are pay to 65 or pay to 80 or pay for 10 policies, where you pay a higher amount for a limited time, then don’t make more premiums, but it’s expensive.

          • 0 avatar
            shaker

            “Isn’t whole/universal life a rip-off?”

            I might be a sap, but when Suze Orman says it’s a rip-off, I agree with her.

            Basically, if they make an effort to sell you a “product”, there’s incentives for the “salesman”.

          • 0 avatar
            CoreyDL

            Yes, agents are compensated – or there wouldn’t be agents and you’d be on your own to figure out what coverage you need. Good luck with that one, because it’s not that simple.

            Look at it this way. Would you rather deal with an agent who has suitability requirements and makes more money if your product has better cash value experience (these are called trail commissions)? OR, deal with the company directly, who has no suitability requirement, and makes their money no matter what your performance is, and has no incentive to get you into the -right- product.

            The insurance market is heavily regulated for a reason, and there’s a reason why the agents still exist.

          • 0 avatar
            shaker

            “The insurance market is heavily regulated for a reason, and there’s a reason why the agents still exist.”

            I’m someone who has insurance, but has never made a claim against it, so the “agent” exists as a middleman that I don’t need.

            But, if I ever need to make a claim, I’d be interested on how helpful such an “agent” would actually be – it’s an intellectual exercise at this point.

      • 0 avatar

        My cousin has a last name of Brennan. CFPB thinks she’s Irish. She’s half Hispanic. Same with her sister. My aunt has a Hispanic last name is is pure English from the beginning. Another aunt is pure English with a Greek last name. My wife has an English last name and is pure Japanese. My daughters have “Caucasian” last names and are quarter Cherokee. The list goes on. Any of them could mark any of the boxes on a mortgage application with no repercussions, except to some unrelated lender at some point.

    • 0 avatar
      tonycd

      It’s absolutely racist, dw.

      • 0 avatar
        dwford

        That’s my point. It may not be intentional racism, but effectively it ends up being discrimination none the less.

      • 0 avatar
        bball40dtw

        It’s not though. If you are white and live in that zip code or area, you’ll pay higher rates too. Insurance companies have to charge Detroit residents more because they file more than double the PIP (medical) claims as neighboring cities despite having basically the same amount of thefts and accidents per person.

        • 0 avatar
          tonycd

          Yeah, bball, but few white people do live in that zip code. The insurer’s knowledge of that fact is the whole point.

          • 0 avatar
            bball40dtw

            But premiums for white people vary in different white people zip codes. I pay more in my current white person zip code then I did in my previous white person zip code. The actuarial formula doesn’t take race into account.

            Insurers can’t charge the same for a car in Detroit as a car in Birmingham. The cost of doing business in Detroit is so much higher. Plus, in Michigan we have super high minimum insurance coverages. Medical for life among other things.

            The only way to fix it is to have the state subsidize insurance premiums in minority areas or raise everyone’s insurance premiums.

          • 0 avatar

            Sounds like redlining in reverse.

      • 0 avatar

        GEICO doesn’t have agents. The use the money to advertise instead. You might pay a little less, but there is less service available to you. And you get to choose.

  • avatar
    28-Cars-Later

    So it would seem Herbie the Love Bug retired and opened a BHPH lot in Colorado. But since the universal nature of BHPH is one an abusive financial scheme, what did everyone’s favorite Beetle do so wrong?

    “Herbies Auto Sales, also known as Y King S Corp., operates as a subprime, buy-here, pay-here dealer, selling cars and originating auto loans.”

    Ok…

    “According to the CFPB’s consent order [PDF], from at least 2012 through May 2014, the company advertised misleading low 9.99% annual percentage rates to consumers via showroom window displays and other marketing, without disclosing other fees, including a $1,650 required warranty, a $100 payment for a required GPS payment reminder device, and other credit costs as finance charges.”

    Ah, bait and switch. While the GPS fee I could see as enforceable, $1650 for a required “warranty” is a tad high.

    “This ruse helped Herbies convince consumers that they would get the 9.99% APR instead of the much higher rate actually charged,” the CFPB alleges.”

    “Additionally, the company must revamp its practices to stop deceiving consumers during financing process, stop posting deceptive automobile prices, and start providing certain financing information in advance.”

    We don’t know what some of the real rates were of course, so I’ll assume double. While bait and switch is indeed wrong, as is requiring an expensive warranty, this is about par for the course in the BHPH world. There’s more to this story than we are led to believe.

    Oh and btw, younger bro just bought a Subaru. Salesman explained they could not quote him a rate until they ran his credit, all he could do was give him generic example rates in certain credit categories. I’m not sure what the aptly named “CFPB” expects regarding “financing information in advance”, but I see the logic in not quoting you a rate until your credit is hit. We also got dinged for what amounts to a “pack” ostensibly from Subaru. Chemical spray on bumpers, door protection plastic or something to this effect. If Herbie did such a thing on its used models, is Herbie guilty of the thought crime of the week and if so why not Subaru of NA?

    http://consumerist.com/2016/01/21/buy-here-pay-here-dealer-to-return-700k-to-consumers-over-deceptive-lending-practices/

    “The agency proceeded to dig into the books of most major auto lending institutions and found thousands of cases of perceived minority customers that paid a higher interest rate than did perceived Caucasian customers.”

    Perceived? Love it. Here’s another serious question, was the purpose of this CFPB brainchild to fight back/against Wall Street or was it to simply be another arm of the Free S*** Army?

    The purpose of using a tool such a FICO score, is to take race or background out of the equation. Now if this information is pulled, but somehow disregarded, I see the problem. However if this sort of information is used as the basis for revolving and smaller installment credit decisions, I fail to see a problem.

    Maybe the real problem is: Quis custodiet ipsos custodes?

    “Lenders use the scores to gauge a potential borrower’s creditworthiness.[9]”

    https://en.wikipedia.org/wiki/FICO

  • avatar
    A09

    My wife and I are labeled “Pacific Islander”, and experienced the attempted markup on a Honda Financial loan when we bought her CR-V last month. Before arriving to the dealer to close the transaction, we obtained a pre-approval from my credit union for the lowest rate.

    Our salesperson said our rate through Honda Financial would be 100 basis points higher than my credit union. That set me off and reminded them that our FICO scores are over 840, and proceeded to show him the rate tables on my credit union’s website.

    He disappeared for about 20 minutes and hashed it out with the sales and finance managers. When he came back to us he “deferred” the conversation to the finance manager. When we sat down with her, I saw the pre-printed Honda Financial forms that aligned with my credit union’s rate.

    • 0 avatar
      ajla

      Car dealers probably aren’t systematically discriminating just because they will decleat *anyone* given the chance.

      That said, I will shed zero tears over a regulatory agency putting some pressure to them.

    • 0 avatar
      28-Cars-Later

      This sounds like what you describe.

      “The Consumer Financial Protection Bureau, along with the Department of Justice, announced today that a two-years-long investigation into American Honda Finance Corporations’ discretionary auto loan pricing and compensation practices found the company allowed dealers to unfairly discriminate against certain consumers.

      According to the CFPB complaint [PDF], as an indirect auto lender, Honda sets a risk-based interest rate – otherwise known as a buy rate – for its auto dealers. The company then allows these dealers to charge a higher interest rate when finalizing a deal – this is generally referred to as a dealer markup.

      This is where the issue comes into play, the CFPB says, because Honda allowed dealers to mark up consumers’ interest rates without regard to creditworthiness as much as 2.25% for contracts with terms of five years or less, and 2% for contracts with lower terms.

      The CFPB and DOJ’s investigation found that Honda’s policies were in violation of the Equal Credit Opportunity Act, and resulted in thousands of minority borrowers from January 2011 through July 14, 2015 paying, on average, $150 to over $250 more for their auto loans.

      “The agencies claim that Honda charged borrowers higher interest rates because of their race or national origin, and not because of the borrowers’ creditworthiness or other objective criteria related to borrower risk,” the DOJ says in a statement.

      In all, investigators found that compared to non-Hispanic white car buyers, average African-American victims were obligated to pay over $250 more during the term of the loan because of discrimination, while the average Hispanic victim was obligated to pay over $200 more during the term of the loan and the average Asian/Pacific Islander victim was obligated to pay over $150 more during the term of the loan.”

      http://consumerist.com/2015/07/14/honda-finance-unit-must-pay-24-million-for-
      charging-higher-interest-to-non-white-borrowers/

      • 0 avatar

        The problem with this is it was based off of BISG, with self identification against no objective standard, which is why they are mailing checks to white borrowers. CFPB doesn’t know who the protected parties are. Their methodology made no effort to determine the average degree of negative equity of the various protected classes compared to the general population because they have no understanding how that can impact rate margin. We’re talking about FRACTIONS of a percent of interest rate margin here with a HUGE margin of error on several levels. Its grasping at straws with huge authority.

    • 0 avatar
      Conslaw

      A09

      Car dealers make a profit off the financing. The lender quotes a base rate and a permitted range above the base-rate that can be charged the customers. The CFPB’s contention is that the very nature of this gap creates the opportunity for discrimination. Similar (but somewhat different) margins used to be the norm in home lending where they were called “yield spread premiums” or YSP. In the bad old days of the subprime mortgage market, mortgage brokers would get extra compensation for writing the loan at a higher rate. In the home mortgage market, where racial statistics are better, it was established that the YSPs were highly discriminatory. YSPs for home lending were banned in the Dodd-Frank legislation.

      • 0 avatar
        A09

        Conslaw: I understand the dealers need to maximize profit, so I was prepared to counter whatever proposal they tried to offer us. I even argued that Honda Financial and my credit union are borrowing from the Fed for nothing or close to it (this was before the rate hike); and I challenged them why they wanted to charge me a full percentage over my credit union.

        At the end of my tirade, I told my salesperson that with my credit union’s loan, a part of the interest paid comes back to me in the form of membership dividends. That is when he disappeared and punted the conversation to the finance manager.

        • 0 avatar
          fvfvsix

          @A09

          Your story is one that happens to me almost _every_ time I ask a sales guy/FI manager what my rate would be without revealing that I’ve already scored the lowest rate from my Credit Union…

          Could be because I’m black. It could also be because they try to make an extra buck off everybody…

          The way I figure… I grew up in the south. I know what real racism looks like. This institutional BS is child’s play.

        • 0 avatar

          The sales person shouldn’t have been talking about interest rates in the first place. To a sales person, it is not only not their place but to them how you pay for the vehicle is none of their business. In some cases, a consumer might ask about interest rates. If there is a subvented program being advertised a sales person can acknowledge it but they absolutely have to make sure the consumer understands that everyone doesn’t get the subvented rate and that it depends on things like credit score, debt to income level, job time, loan to value, etc. etc. There ARE times when a dealership can’t match a CU rate. For example, if a member has had some sketchy credit history but has been fine with the CU, they might not penalize the borrower on interest rate tier. In this case the dealership should inform the consumer that the CU is the best deal, while pointing out that there still might be some advantages to using the dealer’s financing, if there are any.

    • 0 avatar

      No markup from your credit union? Do you think they made any margin on you?

      Why on earth did you finance through the dealer with a pre-approval from your CU even if the rates were the same?

    • 0 avatar

      The lender doesn’t know you’re a Pacific Islander UNLESS they happened to see a mortgage credit application where you marked the Pacific Islander box. If you refused to mark that box, the loan officer is required to GUESS at your ethnicity. You could be white going back generations, and there is NOTHING to stop you from marking EVERY ethnicity box on a mortgage application. What’s the margin of error?

      • 0 avatar
        28-Cars-Later

        “If you refused to mark that box, the loan officer is required to GUESS at your ethnicity.”

        Interesting, I didn’t know this.

        • 0 avatar

          The exact verbiage on a mortgage credit application: “If you do not furnish ethnicity, race, or sex, under Federal regulation, this lender is required to note the information on the basis of visual observation and surname if you have made the application in person.”

  • avatar

    Of course you don’t have to use the dealership for financing at all so hard to claim discrimination IMO. I work in commercial sales, so most of my deals aren’t “spot” sales. When they ask for rate, I suggest they ask their local bank what their rates are and then let me try to beat them. I have no trouble reminding them that I can beat a banks rate, it’s they just have to decide who should get a few bucks, me or the bank, plus, I’m offering to save the customer a little bit of rate in the process. It’s just another product that has profit, just like everything else you buy from everyone else in any commercial industry. Sorta how this whole capitalism thing works….

  • avatar
    Pch101

    “Lenders have no way of knowing the race of a client sitting in front of a dealer’s finance manager.”

    So a lender who sees an applicant by the name of Tanisha Jackson with a Harlem zip code would be absolutely gobsmacked to learn that the borrower is black?

    You may have a legitimate argument on the whole, but points like this turn your credibility to something that resembles Swiss cheese, i.e. white and full of holes.

    • 0 avatar
      VoGo

      You didn’t find the Seinfeld reference convincing?

    • 0 avatar
      SCE to AUX

      Agreed.

      As I mentioned above, the CFPB’s tool was quite accurate, and thus their findings of discrimination were realistic. The few race errors can be addressed by the white owners not accepting the money, or accepting it at their own risk.

      These lenders wouldn’t roll over for million$ in paybacks if the CFPB’s study didn’t hold water.

      • 0 avatar

        This is simply not true. ALLY caved because their IPO was scheduled and the FTC action had to be settled before it could go ahead. The money generated from the IPO was to pay off the taxpayers investment in the company. The CFPB “tool” is bogus from the beginning of self identification. Same with having to ask recipients about their own ethnicity. More margin of error to “prove” a third of a percent alleged over charge.

        The Charles River study lays out clearly the baked in flaws in BISG.

    • 0 avatar

      Not within a reasonable margin of error to allege an over charge of a third of a percent, and drag a major lender through the mud over it.

      What’s the margin of error for self identification when a person thinks a check might come in the mail if they answer a certain way?

      What’s the objective standard? Maybe your Tanisha is only 1/4 African American. 1/16th? 1/32nd?

      https://www.cfpbmonitor.com/2014/11/24/afsa-vehicle-sales-finance-study-finds-significant-flaws-in-cfpb-disparate-impact-methodology-and-approach/

      What about Tanisha Jameson with a Shaker Heights zip code? Or my Japanese wife with an English last name? You don’t have to be god smacked, you just need to have some common sense.

  • avatar
    shaker

    I just hope the couple thoroughly researched “torque ratios” before they signed the paper.

  • avatar
    SunnyvaleCA

    Why do we need the CFPB at all. Why wouldn’t class-action lawsuits work?

    • 0 avatar
      VoGo

      Because the consumers who need protection can’t afford fancy lawyers, and the powers they are fighting against would gladly spend $40MM on the best lawyers and lobbyists to crush them.

    • 0 avatar
      shaker

      IIRC, Most class-action awards are distributed to the lawyers first, and the leftovers are distributed to the individual claimants in the class. IOW, class members get a few bucks if they “win”; no where near enough to cover their actual harm.

    • 0 avatar

      CFPB has done a LOT of good, and accomplished it much more quickly than a class action suit which can drag on for years. But they missed the mark on this one. The ideologues are running this program. “Disparate Impact Discrimination” and BISG are bogus theories from jump.

  • avatar
    HotPotato

    This is a first: the article is a caustic stew of hysterical opinions, whereas the comments are an oasis of facts and levelheaded perspective! Did nobody tell me it’s Opposites Day on the internet, or…

    Anyway, the problem of dealer rate markup practices disproportionately screwing minority buyers is neither new nor fanciful; it was a problem long before there was a CFPB. Occasionally minority buyers formed a class and took action about it, as with the 2003 suit against Nissan, where the buyers were compensated, and Nissan had to give a million bucks to a financial education foundation.

    My $0.02: It’s good that the CFPB has independence from our corrupt Congress and can actually do something about sleazy practices, as they did in addressing predatory payday loans that target military servicemembers. I hope to see more CFPB action with regard to the worst of the BHPH lots (especially those doing “leasing”) and car title loan sharks.

    • 0 avatar

      Even the very suspect CFPB methology, which is indefensible, only found a third of a percent of alleged “over charge.” The also found that Asian males received BETTER rates and margin than did the general population. What’s up with that?

      I commend CFPB for targeting BHPH dealers for targeting service members. But “minority buyers formed a class?” What the hell does that mean?

      What does CFPb think it is going to do with BHPH dealers? If they are run out of business, Tony and Guido at Kneecap Finance are back in business. Just because you take away a service doesn’t mean the demand for that service disappears. Hi risk finance is just that. Its a business where a third of vehicles sold have to be repossessed. Everyone in the risk pool pays for that with higher interest rates. There are thousands of people who have attempted to do the BHPH business and failed. The ones that do well have incredible discipline. Anyone who thinks it is easy is invited to take a flier with THEIR money.

  • avatar
    shaker

    I constantly hear the drumbeat of “Government is TOO BIG” on the Interwebs…

    I would posit that the amount of “Government” is somewhat proportional to the amount of dishonesty in our society.

    If anything, regulations are way behind the number of efforts to circumvent them by dishonest businesses, and they (businesses/lawyers) know that.

    If the People wanted the Government to totally enforce regulations already on the books, they would have to be prepared to pay triple the amount of taxes that they do now.

    • 0 avatar
      BuzzDog

      For better or for worse, you are correct in stating that the amount of regulation usually corresponds to the amount of corruption in a particular industry. Usually.

      If you’ll forgive me for stating something that is hopelessly naïve, I’ve often wondered how much time and money we’d all save if people and businesses would just do the right thing. But I suppose that’s nothing but sheer crazy talk…

      • 0 avatar
        shaker

        “…sheer crazy talk…”

        Ethics seem to be confined to the individual, once they’re part of a big business, “ethics” are dictated by teams of lawyers.

      • 0 avatar

        How to agree on the “right thing?” A savvy consumer who is also a business person might think a 10% return to a car dealer is more than fair, while a more naive consumer might think 10% is highway robbery.

        • 0 avatar
          BuzzDog

          Nowhere in my statement of “I’ve often wondered…” did I even imply that there is anything wrong with a 10%, 100%, or even 1000% profit, and I apologize if you (and only you, it seems) have interpreted it that way.

          And being clearly labeled as a hypothetical statement, any attempt to “agree” on any of its terms is guaranteed to be an exercise in mental masturbation.

          • 0 avatar

            @ BuzzDog – My point was that different people have different definitions of what is the “right thing.” I apologize if you took that as a shot at you. It is merely an observation and the reason the word “reasonable” and/or “fair” is so difficult to nail down. Whose definition do we use?

            Then, if we decide that 10% is “reasonable,” do we then fix prices at that level or still allow consumers to make their best deal? So far, the FTC believes consumers should be able to make their best deal. This means some can pay more while some pay less to achieve the 10% average. And that is exactly what piques many consumers.

          • 0 avatar
            BuzzDog

            Apology accepted, and I’m well aware that there is no bright line that clearly defines a solid ethical boundary of what constitutes a fair profit. While you’ve been beaten up on this site many times over your statements that dealers deserve to make a fair profit (and NOT by me), in my opinion you drug a red herring into my comment by mentioning what consititutes a fair profit.

            Within my own personal, moral framework, an example of a failure to “do the right thing” is not disclosing defects and fees – and to be fair, it’s also imcumbent upon the buyer to read, listen and comprehend when such information is clearly disclosed…and not to whine when they fail to do so. But if one makes money by not disclosing, the gain is no longer a profit, it’s theft through deception.

            Trust me, after more than 35 years in the financial services industry, countless Federal, state and FDIC exams and three very successful CFPB exams behind me, I live daily with the firsthand knowledge that we waste a hell of a lot of time and money on systems that have been put in place because some person or entity didn’t follow the rules. And though I keep acknowledging it’s a naïve statement, were it not for that, we’d have more PROFIT. End of story.

  • avatar
    BuzzDog

    …or investor pressures.

    • 0 avatar

      Of course, to me the entire issue centers around consumers varying perception of what is fair and what isn’t. No one is asking other businesses what their bare costs are. Yet, we have 3rd party businesses like Edmunds, Kelly, AutoTrader, etc. basing their business on disclosing an auto dealer’s costs to consumers. A bit unusual, don’t you think? Think of anything we buy in life. Does anyone expect their costs are the buying public’s business?

      I live in Las Vegas and hear the non stop complaints about resort hotels advertising a cheap price so they rank higher in a consumers “sort,” then slapping you with a $45. or “higher resort fee.” That’s like a dealer advertising his vehicles for bare cost, then adding in a $600. documentary fee plus anything else he can think of. I personally hate that, but in this day and age where consumers typically sort “lowest price first,” its the new reality. The margins on new vehicles in the retail car business are so slender that it is no wonder dealers take as much margin as they can in other elements of their business. Used car margins are compressed as well as the pre-owned shortage elevates wholesale prices while lenders stick to their advance policies. Dealers have run off a lot of possible revenue in the service department with ridiculous labor charges, although there are tiered systems in use that charge a different level depending on the degree of training, expertise, and equipment required to do a particular job. I like that approach. Dealers should be doing maintenance work at competitive rates even though their techs are going to be better trained and equipped than those at independents.

      A classic example of what is going on out there: Many vehicles today have cabin/pollen filters. They first came into being in the mid 1990s. In the case of Ford, many owners were taking their vehicles to Jiffy Lube, Firestone, or where ever for routine maintenance. The workers there didn’t know about the cabin filters. After all, how do you train near minimum wage workers on every vehicle out there? After a while, the pollen filters clogged and burned out the blower motor. Guess where the consumer would go looking for a free fix for the blower motor?

      The larger question regarding OEM Direct sales: Are consumers better off buying from a local dealer who has a vested interest in their satisfaction or a national OEM who looks at warranty as an expense rather than as a profit center? My point is, consumers, at some point, MAY GET WHAT THEY WANT. If the FTC allows auto OEMS to sell direct, undercutting their dealers and running them out of business, consumers will be able to experience legal price fixing ala APPLE. Camaro would compete against Mustang and Challenger without Challenger having to compete against numerous Challenger dealers. Direct OEM sales may be the only way to restore margin into auto retail. It is likely that OEMs would minimize their sales locations since each one is an expense based on how OEM bean counters look at things. Many are enthralled with the Toyota model, where there are fewer sales points selling more vehicles per point. If you want to know why the wonderful Toyota Tundra sells such low numbers, you have your answer. How many Ford, Dodge, and Chevy dealers will a rural consumer drive by to buy their first Toyota product?

      Consumers should be careful what they wish for. Does anyone know the cost of their APPLE product? Does anyone know they margin they are paying? Since everyone thinks they are paying the same, and no one else is getting a better deal, no one is clamoring to change their business model. Transfer that to large ticket items with trade ins and complex financing issues and lets see how it works.

  • avatar

    KUDOS to Steve Lynch for his EXCELLENT treatment of this issue.

  • avatar

    RE: “Anyway, the problem of dealer rate markup practices disproportionately screwing minority buyers is neither new nor fanciful”

    CFPB didn’t say the margin itself constituting a “screwing.” They say the third of a percent of margin,” based on their suspect methodology, constituted unintentional, non willful, “disparate impact” discrimination on the part of the lender because the lender enabled the dealers by compensating them for their loan origination services with a system that allowed for that unintentional discrimination. If everyone paid 3% margin, CFPB would be happy with it. But that goes against what the FTC stands for. They won’t allow “price fixing.” They want to the consumer to be able to shop. You have two government agencies at odds with the DOJ supportive of “discriminate impact.” Dealers are caught in the middle. Lenders don’t know what to do. CFPB says going to flat fees doesn’t work for them. Honda agreed to shorten their margin availability to 1.25%. But that still keeps the door open for unintended discrimination if a protected class isn’t as good at negotiating as the consumer populace at large. They won’t allow “protected class” membership cards to be issued and make dealers and lenders guess at who is and isn’t a member. Even if there were membership cards issued, there are no directions on how CFPB wants them treated. Its damned if you do and damned if you don’t. Frankly, the industry is mostly killing time until the next administration. At some point, disparate impact will hit a bump in the road in the courts OR CFPB will have to furnish the internal documentation they’ve been sitting on OR a court will come down hard on BISG. Any of the Republicans will kill it. So will Hillary. Bernie? Not so much. If he’s elected the issue will have to go to the courts. I’d hate for CFPB to be derailed overall by this singular over reach.

    I’ve even been an affirmative action guy for decades. But this kind of stuff makes me rethink even that. Just tell us how to identify protected classes without having to guess and tell us what to do with them. And while you’re at it, get your solution to pass muster with the FTC and DOJ.


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