COLORADO SPRINGS, Colo.-With the CFPB zeroing in on buy-rate financing, the agency's next target may be auto dealer insurance add-ons-and that could significantly hike the indirect loan price consumers see, cautions one CU exec.
Bill Vogeney, EVP/CLO at the $3.8 billion Ent FCU, told Credit Union Journal that analysts are saying the CFPB may have questioned some big banks about dealer-sold insurance practices. "The CFPB cannot regulate the auto dealers, but to address this matter it can regulate banks and make rules that impact credit unions. There have been rumblings, too, over the last couple years, that the CFPB is looking at including credit life and debt cancellation into the loan APR."
Vogeney believes the CFPB may require lenders to add the price of some of the dealer-sold insurance products into the APR, speculating the big offender, in the eyes of the CFPB, are nonrefundable warranties.
"Say you buy a car and have buyer's remorse on a warranty and don't think you need it. In the past you have been able to go to the dealer, and with a little arm twisting, get that refunded. Now the dealer builds these kinds of items into the front-end price of the car and they are no longer a refundable product."
Vogeney thinks the CFPB may make its move by modifying Reg Z. "Financial institutions are not responsible for this behavior, the dealers are. But credit unions, and all other financial institutions involved with dealers selling these products, will be made to look like the bad guys. The dealers will feel the impact when it comes to car purchases, but potentially we will have to deliver the bad news to consumers."
That news could be a big jump in APR, from the current 3% to 4% range to double digits, suggested the CUNA Lending Council chair, depending on the price of the add-ons. "This (jump in APR) will be very difficult for consumers to make sense of and will be a big educational ramp for all financial institutions to climb."
With the CFPB's attention on buy-rate financing (Credit Union Journal, March 25) there are a lot of "moving parts" in the auto lending market now, emphasized Vogeney. With buy rate, dealers are generally allowed to increase the amount of the FI's rate from two to 2.5 percentage points, keeping much of the revenue from the mark-up. It's a practice sources claim often takes advantage of car buyers with poor financial balance sheets as well as minorities.
"We may be on the cusp of some serious changes that impact auto lending, and credit unions have to be ready for how the market will respond," said Vogeney. "We have to be on our toes now."