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Sizing Up the CFPB’s Threat

The F&I Conference’s compliance panel offered up more questions than answers, but participants made clear the industry’s newest regulator has plenty of tools at its disposal.

November 2013, F&I and Showroom - Feature

by Gregory Arroyo - Also by this author

They came looking for answers. Instead, attendees of the 2013 F&I Conference and Expo found an industry digging in for a long fight to prevent the Consumer Financial Protection Bureau (CFPB) from altering how dealers participate in the indirect financing channel.

F&I and Showroom’s annual conference was held at the Paris Las Vegas in mid-September. David Westcott, the National Automobile Dealers Association (NADA)’s 2013 chairman, opened the proceedings. He made clear his frustration with what he described as a one-sided discussion between the industry and the CFPB. “Creditors don’t even see the standard the CFPB will judge them on,” he said. “This is simply unacceptable. We started a dialogue in Washington and now it’s time to take it everywhere else.”

Terry O’Loughlin, who spent 16 years in the Florida attorney general’s office before joining Reynolds and Reynolds Co. as its director of compliance, said there’s a reason for the CFPB’s lack of transparency. “If you’re not sure how to react or behave, then you might overcompensate,” he said. “For agencies, that’s a great result because it makes you that much more careful.”

The standing room-only crowd also learned that the bureau is no longer bent on eliminating dealer compensation. But it does want to bring structure to how they’re compensated. The good news is a key tool in the bureau’s drive for transparency — the disparate impact theory — is being threatened by a potential Supreme Court ruling.

“If they rule [there’s no disparate impact theory], there’s going to be a complete sea change in everything we’re talking about today,” said Andy Koblenz, executive vice president and general counsel for the NADA. “Their primary tool will no longer be available to them and they’ll be back to the drawing board.”

In Need of Guidance
The two-day conference featured 15 sessions. Two of the sessions centered on the CFPB — one of which was Westcott’s keynote address. The other was “Dodd-Frank and F&I’s Gray Zone,” a panel discussion that included Koblenz and O’Loughlin as well as Nikki Munro, a partner with Hudson Cook LLP, David Robertson, executive director of the Association of Finance & Insurance Professionals (AFIP), and Damon Wiener, senior vice president and general counsel of Safe-Guard Products International.

The NADA’s David Westcott says a move to a flat-fee system would hurt consumers, not just dealers.
The NADA’s David Westcott says a move to a flat-fee system would hurt consumers, not just dealers.

Compliance consultant Robert Harkins served as moderator. His first question garnered a colorful description of the CFPB from Munro. “I like to say it’s been as busy as a two-year-old on a sugar high. In the last two years, it has initiated investigations, settled enforcement actions, released reports, defined larger participants in consumer reporting and debt-collection industries, and initiated a number of regulations and compliance bulletins.”

Munro also noted the CFPB has yet to initiate regulations impacting the auto industry. It has issued its first public enforcement action against an auto finance source, as well as a guidance bulletin detailing its approach to dealer compensation policies.

The bulletin, issued this past March, explained the bureau’s understanding of rate participation, claiming that “such policies could result in pricing disparities on the basis of race, national origin and other prohibited bases.” The bulletin stated that if such disparities exist within a finance source’s portfolio, it would be held liable under the legal doctrines of both disparate treatment and disparate impact.

Koblenz explained that, to prove discrimination — intentional or otherwise — the CFPB would have to create a statistical methodology to divide the world up into minorities and nonminorities. He believes the bureau is using census tracks to do so. “That’s great,” he said, “but you have a huge part of the United States that’s not predominantly minority and nonminority.”

The CFPB also must identify every possible variable that might explain a pricing disparity, an assignment Koblenz doubted it could fulfill. Once it did, the CFPB would then need to determine the metric it uses to draw its conclusions. “Until you establish the correct metric — and we think the agency has the wrong metric — you can’t do the analysis,” he said, speculating that the bureau’s metric is based on basis points vs. the dollar value of the service provided, which the NADA prefers.

“You need to break the world up properly into minorities and nonminorities, you have to progress out all the variables that should be held constant so you get similarly situated minorities and nonminorities, and then you have to measure them using the right metric,” he added. “So how much of that has the agency disclosed? They’ve said, ‘We are using geography and surnames’ — they don’t say which method. And they have categorically refused to identify the progression analysis they’re using.”

Fueling the assumption that the bureau uses basis points as its metric stems from notices finance sources have issued to dealers this year regarding their rate markup policies. Harkins read one such notice aloud. It requested the dealer explain a 39-basis point difference in what some car buyers were charged.

“Thirty-nine basis points is the differential. That sounds like it might be within the statistical noise prospect given all those uncertainties,” Koblenz commented. “These letters raise a tremendous number of questions and we need to push back to the banks. In fairness to the banks, all they’re doing is reacting to the strong-arming of the agency … but we think there is an opportunity to ask these data questions to reveal the problem being asserted doesn’t exist.”

Those questions could be moot as the Supreme Court and its conservative majority prepares to hear the Mount Holly, N.J., housing discrimination case. Twenty low-income, African-American and Hispanic households sued their township in 2008 over plans to demolish and redevelop a rundown neighborhood. They claim those plans unfairly price minorities out of the market. Barring a settlement, the high court would focus on whether minority residents can sue under the Fair Housing Act when a policy has a disparate impact on them.


  1. 1. Mick [ November 20, 2013 @ 02:03PM ]

    Ugh, knowing the laws is a moving target.


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