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Don’t Underestimate the CFPB

The editor reports on a new study that slams the CFPB’s examination of dealer participation, but he wonders if it will do much to slow the bureau down.

December 17, 2014

Since 2010, the Consumer Financial Protection Bureau (CFPB) has been mentioned in 47 articles published in F&I and Showroom. I’m not responsible for all of them. But for the ones I wrote, I heard a common theme from the people I interviewed: If dealer participation is to be saved, the CFPB needs to hear from finance sources. Well, they spoke loud and clear on Nov. 19.

See, last year, the American Financial Services Association (AFSA) promised to address the CFPB’s concerns regarding dealer participation with an independent study. As you know, the bureau believes negotiated interest rates between dealers and their customers create a significant risk of unintentional “disparate impact” discrimination.

So the AFSA commissioned Boston-based Charles River Associates to examine the CFPB’s use of the Bayesian Improved Surname Geocoding (BISG) proxy method to measure disparities in dealer reserve. And, well, here’s what the firm found:

“Our research concludes there is very little evidence that dealers systematically charge different dealer reserve on a prohibited basis. ... In addition, the use of race and ethnicity proxies creates significant measurement errors, overestimates minority population counts, and results in overstated disparities.”

The CRA study first tested the accuracy of the BISG against mortgage data, for which race and ethnicity data is known. With an 80% probability that an individual belonged to an African-American group, the proxy method correctly identified race less than 25% of the time. And when used to identify disparities in interest paid, the methodology inflated what African-Americans paid by 87%.

The authors also tested the methodology on more than 8.2 million new- and used-vehicle finance contracts issued between 2012 and 2013. The average amount financed of those contracts was $25,525 for new vehicles and $18,753 for used, with dealer reserve averaging 110 and 132 basis points, respectively.

For one of the tests performed, the firm removed all contracts with zero reserve, adjusted for proxy bias and included observable economic factors the industry believes the CFPB ignores when reviewing lender portfolios. The firm also proxied for unobservable factors, such as discounting to beat a competitive rate. Doing that put disparities between 50 and 60 cents per month for minority borrowers.

Here’s the bureau’s response: “The CFPB is always interested in relevant data regarding important issues like discrimination in auto lending.”

The release of the study comes at a time when the House of Representatives is considering legislation that would rescind the CFPB’s March 2013 guidance, which stated that finance sources would be held liable for discriminatory markups on the part of dealers. But don’t think for a second that the bureau is on the ropes.

In fact, the same day the AFSA released the CRA report, the bureau announced it fined DriveTime Automotive Group — the largest buy-here, pay-here operation in the nation — $8 million for its debt-collection practices.

I just hope you appreciate the current regulatory environment, because, like Tom Hudson wrote in September 2012, the CFPB isn’t the only regulator vying for the title of “toughest cop on the Washington beat.”

In fact, just as I was digging into the CRA study, one of my insiders tipped me off to a rumor that the Federal Trade Commission issued subpoenas to a number of dealers regarding their spot-delivery practices. The agency wouldn’t confirm the investigation. However, I got my hands on an agenda from a state dealer association meeting last month that just about confirmed what I heard.

Folks, we need to get our houses in order. Industry trade groups like the National Automobile Dealers Association are fighting hard on our behalf, so let’s not let them down. So does your dealership have a compliance officer? Has it scheduled the Red Flags-required review of its identity theft-prevention program? Hey, just because the Red Flags and Safeguards rules aren’t making headlines anymore doesn’t mean you don’t have to comply with their mandates.

What about your F&I products? Can you explain how you price them to a regulator? A former CFPB official told attendees at our annual conference this past September that the bureau is very interested in how we price our products. And don’t think the dealer exemption is going to stop it from finding out.

By the way, the CFPB spokesman I exchanged emails with said he’d get back to me with a statement once the bureau reviews the study. I doubt I’ll be waiting long.

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