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The editor thinks the industry has done well to defend itself against regulatory attacks, but regulators have gotten in a few nice shots as well.

July 6, 2015

I was so disappointed to hear about the payment-packing cases in New York, especially after one of my Washington, D.C., insiders told me he believes the Consumer Financial Protection Bureau (CFPB) is about to turn up the heat on F&I product sales.

The news was also disappointing because the industry was making major gains in its campaign against regulatory overreach. Take the March hearing in which CFPB Director Richard Cordray was grilled by a House committee over a study conducted by Charles River Associates on behalf of the American Financial Services Association (AFSA).

Released last November, the study found that the Bayesian Improved Surname Geocoding (BISG) proxy methodology, which the bureau uses to determine disparate impact among legally protected groups, suffered from significant bias and high error rates — conclusions Cordray refuted during the hearing.

The study also concluded that BISG made it impossible to identify victims of alleged discrimination, a finding that was at the center of an April 3 op-ed piece in The Wall Street Journal. The newspaper questioned why the CFPB and the Justice Department had yet to distribute a single nickel from the $80 million escrow account established after Ally agreed to settle charges that its dealer markup policy resulted in minorities paying more for auto loans than nonminorities.

“Is it possible that victims aren’t getting paid because there are no victims?” the author wondered.

In a second op-ed published on April 6, the newspaper called the bureau’s claims that dealers are charging minorities higher interest rates more of a guess: “The feds look at data from thousands of loans and, based on last names and addresses of the borrowers, guess who’s black, who’s white, and so on.”

The study was also behind the introduction of two bipartisan House bills, one of which aims to repeal the bureau’s March 2013 guidance on dealer participation. The House also unanimously passed last month an amendment to the Fiscal Year 2016 Commerce, Justice and Science Appropriations Act. If approved by the Senate, it would bar the Justice Department from using funds for litigation that relies on the disparate impact theory.

Then there was The Washington Post’s May 5 blog post, which called into question a stat used by the CFPB’s biggest advocates, including bureau architect Sen. Elizabeth Warren, to attack dealer participation: “Auto dealer markups cost consumers $26 billion a year.”
The source of that stat is the Center for Responsible Lending (CRL)’s 2011 study, “Under the Hood: Auto Loan Interest Rate Hikes Inflate Consumer Costs and Loan Losses.” I attacked the study on this page back in May 2011, so I was happy to see the Post come to the same conclusions I did.  

See, the newspaper discovered the $26 billion figure was derived from the National Automotive Finance Association’s 2010 Nonprime Automotive Financing Survey. The survey, which polled 25 finance sources that year, provided a great snapshot of the below-prime segment, but its findings weren’t intended to be applied to the entire auto finance market.

A CRL executive acknowledged the study “is not a perfect data set,” but the organization changed its tune three days later, noting on its website that the newspaper “did not understand the data and, in at least one instance, simply chose to ignore our explanations.”

Yeah, I hate it when that happens.

But you have to hand it to the bureau. In the face of mounting criticism, it expanded its jurisdiction to nonbank auto finance companies, sued an auto lender for aggressive debt-collection tactics against military servicemembers and pressured BB&T Bank into switching to a flat-fee compensation model.

I also believe the bureau was behind U.S. Bank’s announcement in late May that it will monitor F&I product pricing, although bank officials denied that being the case. Fueling my belief is what my insider told me. He said the bureau is concerned with the pricing discretion dealers have and that consumers are getting little value for the amount they pay for our products.

That takes us to New York, where State Attorney General Eric Schneiderman’s year-long investigation into payment packing resulted in an F&I product provider being forced to dissolve and four dealerships agreeing to settle charges that they not only sold a product the regulator said was worthless and violated state and federal law, but also packed payments to do it.

Folks, we have a tie ball game on our hands and regulators are coming to bat. I’m just not sure arguments like “profit isn’t a dirty word” are going to shut down this latest challenge. 

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