CFPB Regulations Could Raise Vehicle Prices

Consumer auto prices may be negatively impacted as the CFPB continues its crusade against automotive financing. The Consumer Financial Protection Bureau (CFBP) has increased its interest and desire to levy penalties against automotive lending organizations. Over $200 million in settlement fines have been collected by the federal governmental organization since 2013. The CFPB has stated their efforts to regulate automotive finance are due to interest rate inequality among certain racial groups.

However, as we’ve reported, the methodology the CFPB employed to determine that certain racial groups were discriminated against is questionable. It’s a methodology that has been essentially debunked in a study by Charles River Associates, which found that the CFPB’s proxy methodology could only identify a certain race correctly just 25 percent of the time.

The CFPB has reached settlements with a few large automotive lending organizations in their pursuit of lending equality, including Ally Bank and the American Honda Finance Corporation. For Honda, the CFPB ordered them to pay $24 million back to borrowers of certain racial groups that were found to have paid a higher interest rate on their loan than non-Hispanic white borrowers.  In reaction to this order from the CFPB to pay back consumers, the lending arm of Honda has made a few changes. Speaking to the WSJ, an American Honda Finance Corp. representative said the company has made, “adjustments and modifiers in a way that continues to support our dealers’ business compensation as well as our customers’ financing choices.” Those choices consumers have might be more costly thanks to CFPB regulation. An example of a potential cost increase for the consumer was highlighted by the Wall Street Journal.

In the WSJ report, the regulations over the lending arm of Honda were explained. As part of its CFPB settlement, Honda has lowered its potential dealership interest rate flexibility from 2.25 percent to 1.25 percent while raising the wholesale rate. Honda has also decided to pay dealers 1 percent of the loan value out of its own pocket. For consumers with a credit score of 760 and above, the wholesale rate for a new vehicle starts at 3.4 percent verses 2.3 percent before the regulation. The example given is that assuming a dealership markup of 0.5 percent, a consumer with that excellent credit would end up with a 3.9 percent rate on their auto loan, compared with 2.8 percent before the regulation. For a 48-month loan of $25,000 that would be $586 in interest payments. While not all consumer and credit groups will be impacted the same as this example, it appears some consumers will pay more because of Honda’s reaction to the CFPB regulations.

The information provided in the example came from a pricing sheet that was sent out to Honda dealers in Texas. Jared Allen, spokesman for NADA, weighed in on this subject to the WSJ. Speaking of the CFPB regulation, Allen felt that it, “will invariably lead to many consumers paying more for auto financing.” What, if any, impacts have you felt at your store as a result of government regulations? Do you think the CFPB regulations will eventually help the consumer or cause more problems for dealers, automakers and consumers?