U.S. wants to regulate large non-bank auto lending

David Shepardson
The Detroit News

Washington — The Obama administration on Wednesday proposed federal oversight of larger auto finance companies for the first time, after it uncovered discrimination against minority buyers who have taken out loans for cars at major banks.

The new rules would mean oversight for 38 large non-bank auto lenders, including captive finance arms of companies like Ford Motor Co., Toyota Motor Corp., Honda Motor Co., Volkswagen AG and Nissan Motor Co. They would cover any non-bank that made 10,000 auto loans or leases in a year. The Consumer Financial Protection Bureau declined to provide a list of the 38, but said there are as many as 530 non-bank auto lenders.

Currently, only auto finance companies that are banks or bank holding companies — like Detroit-based Ally Financial Inc. — are subject to federal oversight. They are already overseen by CFPB, the Federal Reserve Board and other regulators.

The finance companies originate around 90 percent of non-bank auto loans and leases, and in 2013 provided financing to about 6.8 million buyers, the bureau said.

CFPB Director Richard Cordray said, “We took action after we uncovered auto-lending discrimination at banks we supervise. Today’s proposal would extend our oversight, allowing us to root out discrimination and ensure consumers are being treated fairly across this market.”

The CFPB — created by Congress as part of the 2010 financial overhaul law known as Dodd-Frank in the wake of the 2008 financial collapse — is barred from directly regulating auto dealers, but has been investigating banks and auto lending practices for loans arranged by dealers and others.

Dealers routinely arrange financing for customers. They are often allowed by lenders to mark up the interest rate charged to consumers, allowing them to keep the difference. The CFPB wants to make sure dealers aren’t charging minority buyers a higher rate than white buyers. In March 2013, the CFPB issued guidance urging banks to avoid discriminatory practices.

The CFPB’s recent supervisory actions against banks will result in about $56 million returned to up to 190,000 consumers harmed by discriminatory practices, it said. The agency declined to name the banks.

In December, Ally agreed to pay $98 million to settle claims that the Detroit-based lender discriminated against more than 235,000 minority auto buyers, marking the federal government’s largest auto loan discrimination settlement in history. The Justice Department said since April 2011, about 100,000 African-American car buyers, 125,000 Hispanic borrowers and 10,000 Asian/Pacific Islander borrowers paid Ally higher interest rates than white borrowers “because of their race or national origin and not based on their credit worthiness or other objective criteria related to borrower risk.”

The National Automobile Dealers Association questioned CFPB’s findings on auto lending and says it hasn’t disclosed how it determines minority lenders are being harmed. “There are legitimate, market-based reasons for disparities in interest rates — from monthly budget constraints, to the presence of more competitive offers, to inventory reduction considerations — all of which are nondiscriminatory and all of which can be documented in the transaction. A better solution would be for lenders to adopt a robust retail compliance program that documents the basis of the pricing decision to effectively reduce the risk of discrimination in the purchasing process,” NADA said.

In August, the Justice Department subpoenaed the lending unit of General Motors Co. as part of a review to determine if banks were misled into buying some auto loans. General Motors Financial Co. Inc. said in a securities filing it was served with a subpoena July 28 asking for documents related to the company’s and affiliates’ subprime auto loan originations and securitizations since 2007.

Auto lenders — including GM Financial — package loans by creditworthiness and sell them to banks and other investors in a process called “securitization.” The practice is used to assure that auto lenders that are lending billions of dollars have access to enough capital to lend large amounts of money at a relatively low price.