Is the Consumer Financial Protection Bureau’s (CFPB) dealer reserve issue really about discrimination? Or is dealer profit on indirect auto financing the pink elephant in the room?
Circumstantial evidence suggests the CFPB may have drank the potion whipped up by consumer advocate groups, and now believe dealers make too much money on consumer financing. Publicly, CFPB personnel have emphatically denied their intent is to reduce dealer compensation. Actions, however, speak louder than words. CFPB actions leave one conclusion: The agency seeks to limit dealer compensation in the finance transaction.
Proof may be found in recent settlements with American Honda Finance and Fifth Third Bank. The Honda and Fifth Third consent decrees have identical provisions going forward for dealer compensation. Markup is limited to 1.25% for contracts 60 months or less, and 1% on contracts more than 60 months.
The limitations on markup are significant when looking at the alleged disparities. For Fifth Third, the CFPB alleged African-Americans were charged 35 basis points more in dealer markup, while Hispanics were charged 36 basis points more. The CFPB deems such a disparity significant and actionable.
So one has to ask: If the idea is to rid the industry of what is perceived to be significant discrimination at the dealership, then what difference does limiting dealer discretion make to the equation?
Honda limited discretion to 225 basis points prior to entering into the settlement, and “significant deviations” determined by the CFPB were 36 basis points for African-Americans and 28 basis points for Hispanics—deviations of less than 1%. Given a markup cap of 1.25%, deviations of 22 to 36 basis points between customers of a dealership, regardless of their ethnicity, are not only possible, but probable.
So what has changed? The change is forcing two companies to decrease dealer compensation by approximately half, from 2.5% to 2.0% to 1.25% to 1%. Yet deviations of less than 500 basis points can still occur.
Not convinced? A September 17 expose by American Banker is a must-read. The article reported the following quote from a memo from officials in preparation for a briefing with CFPB Director Richard Cordray and 19 senior officials on May 20, 2013:
“The purpose of this meeting is to continue our discussion around a market-tipping settlement that would resolve the discriminatory disparities caused by dealer markup by eliminating markup at many major auto lenders.”
The government’s agenda is clear. Limit dealer income to what the CFPB deems fair compensation. What is fair compensation in the CFPB’s eyes? Based on Honda and Fifth Third, it is 1.25% to 1%. In other words, pricing established by consent decree, rather than the marketplace.
Want the marketplace to dictate price? Then get your dealership on a fair lending program today. Document deviations in markup on each deal in accord with established Department of Justice guidelines, and help your finance sources fight your fight. Without the help of dealers, the companies funding your deals are eventually going to allow the government to dictate dealer compensation.
The next question is: Will that quest stop at rate?
David R. Missimer, [email protected]m, is general counsel for Automotive Compliance Consultants Inc. (www.compliantnow.com). He spent 28 years in private practice as a seasoned litigator and trial lawyer representing lenders, auto dealers, and numerous other entities and individuals.