Feds Step Up Retail Automotive Financing Inquiries

February 27, 2015

Most dealers are aware that the federal Justice Department is paying extra-close attention to the ways and means of automotive financing.

justicedeptThis week brings more news of the department’s interest in potential racial disparities in retail loans among captive and non-captive lenders, with J.P. Morgan Chase acknowledging it’s also been asked to provide regulators details on its lending practices and standards.

In addition, a Justice Department official says the agency is also concerned about the growing trend of auto loan securitization. A Bloomberg news report says this investigation follows Justice Department concerns that the rapid rise of auto loan-backed securities could lead to deceptive, discriminatory and fraudulent practices that marked the build-up and bursting of the mortgage-backed securities market a few years ago.

I was particularly struck by the official’s characterization of the inquiry’s decidedly proactive nature. “We can and should use our experience investigating mortgage-backed securities to be on the lookout for, and head off, any potential threat, rather than waiting until after losses have been suffered,” the official says.

I know a few dealers who feel insulted by the distrust that’s inherent in the Justice Department’s auto securitization inquiry. “We dot every ‘i’ and cross every ‘t’ in our F&I offices,” says the head of a dealer group in the Northwest. “We’d be out of business if we tried to pull the kinds of stuff mortgage brokers got away with. It’s off-putting, to say the least, that dealers don’t seem to be getting any benefit of the doubt.”

It’ll be interesting to see if anything substantial comes from the Justice Department’s query. In the meantime, it’d be wise for dealers, particularly those who’ve come to over-rely on F&I income to drive dealership profitability, to mind another quote the Justice Department official offered, “We shouldn’t wait until there is a crisis to pay attention.”