How the CFPB Protects Consumers of Auto Loans
Written by: Kristy Welsh
Last Updated: August 29, 2017
It’s challenging enough getting a good deal on a car under the best of circumstances. But throw into the mix deceptive or discriminatory lending and borrowers don’t have a chance. That’s why the work of the Consumer Financial Protection Bureau (CFPB) is so essential — providing much-needed industry oversight and consumer education.
CFPB Regulates Auto Lenders
While the agency has no jurisdiction over auto dealers, the CFPB does have the authority to regulate auto lenders (with the exception of non-bank lenders, though proposed regulation is pending). This is an important distinction, as oversight of auto lending enables the agency to guard against discriminatory and/or deceptive auto lending practices.
For instance, in March 2013, the CFPB released a bulletin urging auto lenders to mind their Ps and Qs when it comes to the dealer markup policies associated with indirect auto lending, as it often leads to discriminatory practices. Here’s how it works.
Auto dealers often finance loans indirectly through third-party lenders. While the indirect lender may quote the dealer one interest rate to finance the loan – known as the buy rate – the dealer may be permitted to markup the interest rate it offers to the borrower. Then both the dealer and the lender make a profit off the marked up interest.
As stated in the bulletin, here’s the problem with that arrangement:
“Because of the incentives these policies create, and the discretion they permit, there is a significant risk that they will result in pricing disparities on the basis of race, national origin, and potentially other prohibited bases.”
And that is a violation of the Equal Credit Opportunity Act (ECOA).
To guard against discriminatory lending practices, the CFPB bulletin urges indirect auto lenders to do one of two things:
- Impose controls on dealer markup and compensation policies, or otherwise revise dealer markup and compensation policies, and monitor and address the effects of those policies, or
- Eliminate dealer discretion to mark up buy rates and instead fairly compensate dealers using another mechanism, such as a flat fee per transaction
CFPB Takes Enforcement Action
In June 2013, the CFPB ordered U.S. Bank and Dealers’ Financial Services to pay servicemembers $6.5 million for deceptive marketing and lending practices.
U.S. Bank finances subprime auto loans to servicemembers. This is known as the MILES program, or Military Installment Loans and Educational Services. Dealers’ Financial Services is the company that handles the customer service arm of the operation, from marketing to loan processing.
The problem is that the two companies failed to disclose necessary information to borrowers regarding the military allotment system. While servicemembers understood payments would be deducted from their paychecks, they were not made aware of allotment fees or the correct payment schedule.
In response, the CFPB ordered U.S. Bank to pay $3.2 million and Dealers’ Financial Services to pay $3.3 million to more than 50,000 affected servicemembers.
In December 2013, the CFPB took its first enforcement action against an indirect auto lender for discriminatory lending practices.
Ally is one of the largest indirect auto lenders in the country, financing loans through more than 12,000 auto dealers across the country. Unfortunately, a CFPB investigation found that Ally’s dealer markup policies unfairly discriminated against minorities.
In response, the CFPB ordered Ally to pay a $98 million fine -- $80 in restitution, as well as an $18 million civil penalty. Ally was also ordered to take steps aimed at preventing discriminatory lending in the future, such as stricter controls on dealer markup policies, or the elimination of them entirely.
CFPB Educates Consumers on Auto Loans
Do you have a question about auto loans?
Check out the Ask CFPB section at ConsumerFinance.gov, a comprehensive database that includes a section on auto loans.
You’ll find answers to questions like:
- What is a buy rate?
- What is risk-based pricing?
- What is mandatory binding arbitration?
- What is forced-play insurance?
- What is a loan-to-value ratio?
You can scroll through the most commonly asked questions or conduct your own unique search, sorting by most relevant, most helpful, most viewed, or most recently updated.
CFPB Accepts Auto Loan Complaints
Do you have a complaint about an auto lender’s marketing tactics? Did you have a problem with the application process? Do you believe you were discriminated against? If you already have a loan, have you had an issue with the processing of payments? What about a violation of your rights in the event you were unable to pay?
Whatever the issue relative to your auto loan, the CFPB wants to hear about it.
When you submit a complaint to the CFPB:
- Your complaint and supporting documentation is forwarded to the company for their review.
- The company has 15 days to respond to the CFPB and to you.
- The CFPB provides you with email updates on your complaint status.
Note, the CFPB also shares complaints with state and federal law enforcement agencies, and sends a complaint report to Congress twice a year. Your complaint may also be posted to the Consumer Complaint Database (minus any personally-identifying information).