With three of the largest automakers' captive finance companies squarely in the Consumer Financial Protection Bureau's sights, should credit unions be worried or gleeful about how that could impact their own auto lending efforts?
In proposed consent orders obtained last month by CU Journal affiliate American Banker, the CFPB said it was planning to cite American Honda Finance Corp., Toyota Motor Credit Corp. and Nissan Motor Acceptance Corp. for unintentional discrimination against minorities who took out auto loans.
Since then, Honda's auto financing unit has agreed to pay $24 million to minority borrowers as part of a settlement with the Department of Justice. The business unit allegedly charged minorities higher interest rates than white customers. The company also agreed to lower the amount that dealers can mark up interest rates from 2.25% to 1.25% for loans of five years or less.
If the CFPB gets its way, Toyota and Nissan likewise would have to agree to limit discretionary pricing for dealers. Although the CFPB does not directly supervise auto dealers, it has been scrutinizing indirect auto lenders' policy of allowing price discretion to partners, arguing it often results in minorities paying more.
For credit unions, that raises the basic question: is this a good thing or a bad thing for credit unions? Does this give credit unions an opportunity to dust off their "white hats" — a way of differentiating themselves from "finance companies behaving badly?" Or should credit unions be concerned that CFPB eventually will be taking a closer look at credit unions' lending policies?
Jeremy Pinard, VP of consumer lending for Chicago-based Alliant CU, said the answer clearly is "yes" to all of those questions. The CFPB's recent action sends a "clear message" to the market, he said: simple, transparent, consumer-friendly pricing models are the way forward with indirect auto lending.
"Alliant, and most other credit unions, already operate this way," Pinard asserted. "So, we believe the CFPB's actions further level the playing field for us and create more opportunity for credit unions in indirect auto lending."
With that said, Pinard argued the benefit will not come through promoting themselves as "white hats." Instead, he said the CFPB's move forces other lenders to take off their "black hats" and reduces the incentives for auto dealers to use "black hat" lenders.
Alliant sees future potential in the indirect auto lending market, and it is building its origination volume in that space, Pinard noted. "We are competing on simplicity of product, consumer-friendly rates and fees, consistent and reliable partnerships with dealer partners, and generous but fair compensation to originating dealers," he said. "Instead of allowing dealers the discretion to mark up rates, Alliant uses a simple tiered flats model. Programs such as ours will become less and less disadvantaged as premium participation models continue to face CFPB pressure."
Still, Pinard cautioned against dismissing concerns about CFPB eventually taking a closer look at what credit unions are doing. While "worry" might be "too strong a word" at this stage, Pinard said credit unions of every size should be conscious of the CFPB's rules and priorities and should align their indirect auto lending programs with their spirit, if not their letter.
The "good news," Pinard continued, is most credit unions are already living on "right side" of the CFPB's views.
"In the end, these recent developments will challenge all financial institutions, but banks and finance companies, especially, to win dealer business on the basis of product or service or operational efficiency, instead of simply buying the business through rich dealer participation and markup premiums," said Pinard.
CUS EXPECTED TO BENEFIT
Richard Epley, CEO of Auto Financial Group in Houston, also believes CUs will benefit overall from CFPB going after discretionary pricing. "The captives are moving away from allowing the dealer to participate in the rate, which is going to help level the playing field for credit unions," Epley told CU Journal. "Some credit unions that do indirect lending are allowing rate participation, but most are moving to a flat fee due to the CFPB's actions. Even though most credit unions might not be on the radar of the CFPB, most are operating as if they were."
Brian Hamilton is chief credit officer for Blue Yield, an auto lending exchange based in Aliso Viejo, Calif. He said credit unions should look at the CFPB's action as an "opportunity," for two reasons.
"One, it continues to build the 'halo' over the credit union space that started with Occupy Wall Street," Hamilton explained. Two, he said, it is not necessarily a "competitive advantage" because the captives pay dealers a higher flat.
"The fact captives can no longer mark up rates is not a financial advantage unless credit unions take swift action to gain market share," Hamilton advised. "If we continue to do business the way we do today — and assume more market share will come — it will not. If we stand pat, the captives will pay super flats — paying 2% to 3% and buying market share."
Hamilton believes the CFPB, as it grows and becomes more successful, will look at more and more institutions. "As long as credit unions keep their shops in order they should be okay. But the problem is sometimes the intent is not there but there can be an effect — as seen in the disparate impact case."
CUs can — and should — leverage the "halo effect" they are enjoying, Hamilton added. However, he warned if they do not pay attention to what the rest of the market is doing, the benefit will not be as significant as it could be if properly maximized.
Greg Gandolpho, EVP of Credit Union Leasing of America (CULA), based in San Diego, said he believes the CU industry can be a "white hat" as long as all credit unions pay close attention to what the CFPB and NCUA are saying about what constitutes disparate actions. "Whichever federal agency we are talking about, credit unions must follow what actions are getting lenders in trouble and stay away," said Gandolpho. "NCUA is following what CFPB is doing and adopting many of the same ideas."
Rachel Witkowski contributed to this story.