Last month the Consumer Financial Protection Bureau announced that it will start holding banks accountable for the discriminatory actions of indirect auto lenders. The issue arises when a consumer goes to purchase a car and applies for financing right at the dealership. That dealer then takes the loan application and submits it to a bank which either declines the loan or offers to make the loan at a fixed rate. Pursuant to the dealer’s arrangement with the bank, it can then markup the loan in what is known in the industry as “dealer reserve.” Its not that different from a yield spread premium in the mortgage industry.
For years there has been litigation about whether banks can be held accountable for a dealer’s discriminatory markups. Some courts say yes. Some say no. The CFPB has now weighed in and as a result we can expect many more of these types of cases. The CFPB has found that giving discretion to dealers to markup loans creates a significant risk of price disparity based on race, national origin and potentially other prohibited bases.