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Dealer markups continue to be a hot topic for auto lenders

Dec 04, 2013 Philip Burgess

For the better part of 2013, financial regulators have been scrutinizing the practice of auto dealer markups. According to law firm Dorsey & Whitney, this strategy involves dealers charging higher than average interest rates on auto loans, only to be compensated by indirect auto lenders for the higher premiums.

The source reported that the Consumer Financial Protection Bureau (CFPB) released a guidance bulletin in March warning that the practice could be scrutinized by the organization in the future. However, the jurisdiction of the CFPB action has come into question. The reason is because the CFPB has limited control of auto lenders, as outlined in the Dodd-Frank Act that established the CFPB a few years ago.

However, officials with the organization argue that indirect auto lending outlets can be regulated by CFPB policies.

Debate rages on
That assessment has created a battle involving the CFPB, dealers, lenders and elected officials. Auto lending groups believe that they should not be punished for actions taken by dealers, while dealerships themselves assert that the practice is legal.

Dorsey & Whitney also noted that in October, three members of Congress sent a letter to the CFPB arguing that the actions taken could be unnecessary and that the practice requires Congressional oversight and analysis. Just a day letter, a separate letter from a bipartisan group of 22 Senators was sent to CFPB officials, suggesting that the regulations limit a dealer's ability to negotiate rates with consumers.

The CFPB responded to the letters with a statement that indicated practices similar to dealer markups can often result in discriminatory lending that force certain groups to pay higher rates. The source stated that the CFPB has provided little evidence of this claim, noting that the necessary data to prove their case is not normally collected by lenders.

Even so, the CFPB continues to pursue potential steps to eliminate dealer markups, which could mean that many auto lenders will need to adjust their practices in the future. At very least, car creditors should pay attention to how the debate progresses, as it will likely have a profound impact on their industry.

Despite a possible regulatory change, the auto loan industry has had a lucrative year. Consumers have ramped up new vehicle purchases and delinquency rates have been declining, according to Fortune. As a result, many lenders have been able to offer loans to subprime borrowers, a sign that risk associated with auto lending is dropping.