Garnet Capital Advisors Blog

The Consumer Financial Protection Bureau has immense oversight powers over a number of many financial industries, including residential financing and payday lending. However, one area where CFPB purview has lagged behind has been in auto lending.

That could soon change, though, as the CFPB is continuing to grow its oversight authority over this specific market.

Why the holdup?
While the CFPB has a high profile in other lending areas, it is much less so in the automotive industry. Why exactly is that the case?

According to American Banker, there are three reasons for this:

1. Political influence of auto dealers
2. Varied and diverse auto lending market
3. Lack of oversight for nonbank lenders, which includes auto manufacturers' financing departments

An example of the auto industry's political influence is the exemption it earned from CFPB oversight, first acquired back in 2010, American Banker reported. Until recently, the CFPB also had no rule over nonbank lenders, which further complicated matters relating to the auto industry. 

"I don't think the CFPB has been successful in changing the way the [auto] market functions regarding dealer markups," Leonard Chanin, a former assistant director of the CFPB's Office of Regulations, told American Banker.

Even so, that could soon be changing.

CFPB takes strides in auto lending regulation
While there haven't been many wins for the CFPB so far, it has taken some big steps in the regulation direction. One, as outlined by American Banker, is the supervision now granted over nonbank lenders. Since many top auto lenders are nonbanks, this gives the CFPB increased leverage.

The second is continued lobbying over reforms to the auto industry. The CFPB has been far from reticent when it comes to regulations, constantly pushing for more change in favor of consumers' rights. Some CFPB options include enforcement against banks that work with auto dealers with questionable pricing policies, in addition to a flat fee for auto dealers, no matter the size of the loan sold. Currently, more expensive loans can net some dealers more money.

"The CFPB has put a lot of pressure on financing sources to change their financing model," Paul Metrey, chief regulatory counsel at the National Automotive Dealers Association, told American Banker. "And that's really not something that the finance-source community has embraced."

Tides could shift in CFPB's favor
Some of that pressure could soon pay off, according to a separate report from American Banker. The CFPB could soon cite three major auto dealers - Toyota Motor Credit Corp., American Honda Finance Corp. and Nissan Motor Acceptance Corp. - for discretionary pricing practices.

These practices are when individual dealerships charge higher rates for loans to minorities. If the CFPB does take action, it could force the dealers in question to pay remuneration to all affected consumers, American Banker reported. It is also a possibility that the CFPB will not pursue civil penalties if the dealers agree to prevent this practice from happening in the future. Ideally, the major manufacturers would stop dealer partners from adjusting the cost of an auto loan.

If this does come to pass, it would be the biggest win for the CFPB in the auto lending industry, and it could help shape the landscape in the future. Right now, however, the CFPB is still working to gain more oversight power over auto lenders.