When will dealers implement compliance policies to protect their business model and give finance sources the ability to respond to the CFPB?
It’s the start of a new year, and like clockwork, the Consumer Financial Protection Bureau (CFPB), ever vigilant in self-promotion and use of press releases, announced in early February a settlement with Toyota Motor Credit Corporation (TMCC) for “alleged” violations of the Equal Credit Opportunity Act (ECOA).
We use the word alleged as the consent decree provides:
- “Toyota allegedly engaged in a pattern or practice of conduct in violation of the Equal Credit Opportunity Act . . . by permitting dealers to charge higher interest rates to consumer auto loan borrowers on the basis of race and national origin.”
- “There has been no factual finding or adjudication with respect to any matter alleged by the United States.”
- “Toyota enters this settlement solely for the purpose of avoiding contested litigation with the Department of Justice, and instead to devote its resources to providing fair and industry-leading services to its customers.”
In addition to the CFPB release, Toyota issued its own press release stating, “During their review the agencies [CFPB and DOJ] did not contend that TMCC intentionally discriminated against its customers.” Accordingly, TMCC denies any wrongdoing and notes that this voluntary agreement does not include an assessment of civil money penalties.
So what exactly caught the ire of the DOJ and CFPB?
The agencies reviewed loans from January 2011 through February 2, 2016, and alleged “significant disparities” were found, with African-American borrowers charged approximately 27 basis points (.27%) more in dealer markup than similarly situated non-Hispanic whites. Meanwhile, Asian and/or Pacific Islander borrowers were charged nearly 18 basis points (.18%) more.
To address these disparities, the CFPB turned to what is becoming a standard approach to limit and reduce dealer compensation.
Under the terms of the decree, Toyota must implement a dealer compensation policy conforming to one of three options:
- Option 1: Limit dealer discretion to 125 basis points for terms of 60 months or less, and 100 basis points with terms greater than 60 months. Toyota is not precluded from including in its compensation policies and an additional nondiscretionary component of dealer compensation consistent with applicable laws and subject to the non-objection of the CFPB. Under this option, Toyota may provide entirely nondiscretionary dealer compensation to some dealers while it provides discretionary compensation consistent with Option 1 to others, so long as all loans purchased from a particular dealer are compensated using only one of the two compensation systems.
- Option 2: Provides for the establishment of a standard dealer participation rate (within the substantially lower rate spread limits of 1.25 and 1.0) with downward deviations under authorized exceptions. As with Option 1, Toyota may provide entirely nondiscretionary dealer compensation to some dealers while it provides discretionary compensation consistent with Option 2 to others, so long as all loans purchased from a particular dealer are compensated using only one of the two compensation systems.
- Option 3: Allows for no dealer discretion and would be flat-rate compensation.
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Dealer Marketing Magazine