If you didn’t already realize the significance of the dealer exemption the National Automobile Dealers Association (NADA) won prior to the passage of the Dodd-Frank Act, go to the House Financial Services Committee’s website and look up the 33 internal Consumer Financial Protection Bureau (CFPB) documents Republican committee members posted on Nov. 24.
There you’ll find an April 2013 briefing memo showing that the bureau had considered writing an unfair, deceptive or abusive acts or practices rule banning dealer participation. You’ll also discover the bureau considered a rule that would clarify the liability of finance sources operating in the indirect financing channel under the Equal Credit Opportunity Act (ECOA). It also considered using the Truth in Lending Act to force dealers to disclose markups to consumers.
But the dealer exemption stood in its way. All the bureau could do was issue guidance explaining that the provision in the ECOA’s Regulation B that lets creditors off the hook for another creditor’s violation doesn’t apply to dealer participation. But the discussion continued, internally, as recently as this past August.
The confidential documents also make clear that there was a lot more going on behind the scenes than any of us really knew. For instance, did you know that Ally wasn’t the bureau’s first target? In 2012, a year before settling with that company, the bureau informed another, unnamed finance source that — based on its disparate impact statistics — it had violated the ECOA.
That finance source hired a statistics expert, Dr. Bernard Siskin, to help argue its case by poking holes in the CFPB’s methodology. Unfortunately for the bureau, Siskin knew the bureau wasn’t accounting for race-neutral factors such as a dealership’s location and the vehicle’s age, because he had done consulting work for the CFPB as well. That finance source had disparate impact statistics similar to seven other finance sources, including Ally, but was allowed to quietly enter into a Memorandum of Understanding.
Speaking of Ally, one of the documents the House committee and other media outlets pounced on was an October 2013 draft of a memo seeking authorization to reach settlement with the former captive. In it, the bureau acknowledged its proxy methodology and reliance on the disparate impact doctrine could be challenged in court. The document also reveals why the bureau ultimately decided to proceed.
“Ally may have a powerful incentive to settle the entire matter quickly without engaging in protracted litigation,” read the memo, in part. That incentive was Ally’s pending application before the Federal Reserve to change its status to a financial holding company. The bureau knew, based on conversations with the Federal Reserve, that maintaining that status, which was set to expire in December 2013, would be difficult if the bureau found that Ally violated the ECOA. And if the agency didn’t approve its application, Ally would have been forced to divest its insurance and used-car remarketing operations.
But Ally didn’t just roll over. It argued the bureau’s methodology overestimated disparities or produced findings that may not have been evidence of discrimination because several variables weren’t considered. The CFPB, however, claimed Ally couldn’t produce evidence to back its claims.
Knowing they couldn’t eliminate dealer participation through rulemaking, the bureau’s directors hoped a “market-tipping settlement” would move the industry away from dealer markups. Ally was a soft target, but it refused to eliminate dealer participation, even with the enticement of more favorable settlement terms. As one Ally exec told the bureau, eliminating dealer participation would be “corporate suicide.”
Not only did the bureau know other finance sources would make similar claims, it had anecdotal evidence that eliminating markups would lead to loss of market share. So in December 2014, the CFPB and the DOJ made an offer to a large group of finance sources: If they collectively imposed stricter markup caps or eliminated markups altogether, the bureau would not impose fines against them. That strategy also failed.
There isn’t enough space to delve into what else I found. Just know the release of those documents came shortly after a CFPB reform bill, H.R. 1737, passed the House of Representatives. It would repeal the CFPB’s March 2013 guidance and add a few more steps to its guidance-writing activities. Whether the release of those internal documents and the committee’s report bashing the bureau’s activities are enough to get the U.S. Senate and President Barack Obama to approve the legislation is anyone’s guess. Personally, I’d like to see the disparate impact theory have its day in court. Hey, if it doesn’t happen with this regulator, there will be another to take up the torch.