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Tougher Oversight Could Make Car Loans Fairer, Cut Costs

Oct. 6, 2014
Banking, Banking News
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If you’ve ever felt like you were taken for a ride when the bill finally arrives for that nice new car you financed through the dealer, you’re not alone. And the Consumer Financial Protection Bureau aims to do something about it.

The agency wants to oversee nonbank auto finance companies, becoming the regulatory supervisor of 38 lenders that make, acquire or refinance 10,000 or more loans or leases in a year. This would put the finance arms of companies such as Toyota, Honda and Ford under the bureau’s watchful eye

You may be less likely to overpay for your next car if the agency succeeds in broadening its authority to include these finance companies. And if you fall behind on payments, you may escape the abusive practices some borrowers have been subjected to, according to the bureau. For nonwhite buyers, the added oversight aims to prevent discriminatory practices that can push up your costs.

Millions of loans

The 38 companies the agency wants to oversee originate close to 90% of all nonbank auto loans and leases and provide financing to about 6.8 million consumers each year, according to agency Director Richard Cordray. The bureau already supervises large banks, including their car-lending operations.

“It should not matter whether you get a loan or lease from a company that has a banking charter versus one that does not – every auto lender should be following the law and be subject to the same level of oversight,” Cordray said at a Sept. 18 hearing on the subject in Indianapolis.

Concerns over nonbank finance company lending practices include the use of deceptive marketing tactics, incorrect reporting of consumer information to credit bureaus, and unfair debt collection methods, according to the agency.

Subprime lender fined

In August, the bureau ordered First Investors Financial Services Group, a Texas-based subprime auto lender, to pay a $2.75 million fine for allegedly distorting borrower credit reports. The company made loans to people whose credit scores fell below what most banks deem unacceptable.

“For years, the company knew it was sending incorrect information about tens of thousands of its own customers to the credit bureaus,” Cordray said about First Investors in a statement.

Other nonbank finance company complaints have been received from consumers who say their cars have been repossessed even though they are current on the loan or have a payment plan, according to the agency.

Lender discrimination

Discriminatory car-lending practices remain another concern of the agency.

Last year, Ally Financial reached a $98 million settlement with federal authorities over a lawsuit alleging the company let dealers mark up interest rates on auto loans to nonwhite borrowers, including African-Americans, Asians and Hispanics. About $80 million of that was distributed to some 235,000 borrowers. Actions against several other lenders will result in an additional $56 million in compensation for up to 190,000 consumers harmed by discriminatory practices, according to the bureau.

“In these cases, minority borrowers were paying more for their loans than similarly situated non-Hispanic white borrowers,” Cordray said at the Indianapolis hearing.

Americans owe more on their cars – $900 billion at the start of this year – than any other common household debt except mortgages and student loans.

Rulemaking takes months

The proposed rule is open for comment 60 days after publication in the Federal Register. The details can be found here. The final regulations would take effect 60 days following their appearance in the register.

No one wants to be fooled into buying a car they can’t afford or suffer discrimination, and with greater federal oversight, the illegal practices of auto lenders and their agents could become a thing of the past.

Loan image via Shutterstock.