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Showdown in D.C.

Industry representatives and consumer advocacy groups squared off in Washington, D.C., last month for the CFPB’s first public forum on auto lending. The event revealed the tightrope the bureau is walking between preserving a rebounding market and strengthening consumer protections.

December 2013, F&I and Showroom - Cover Story

by - Also by this author

November was a busy month for the Consumer Financial Protection Bureau. On Nov. 14, a day after CFPB Director Richard Cordray testified at a Senate Banking Committee hearing, the bureau hosted its very first public forum on auto lending. The meeting was organized amid cries for transparency in how the agency is testing for evidence of discrimination against minority car buyers.

The forum came a little late in the game for Sen. Jerry Moran (R-Kan.), who confronted Cordray during the November hearing. Moran was one of 22 senators who asked the bureau to divulge its methodology for determining discrimination back in October. Cordray responded to the senators’ letter on Nov. 4.

During the hearing, Cordray told senators he agreed with “some of the criticism” regarding the bureau’s lack of transparency in the auto lending sphere, but said he and his peers were grappling with jurisdictional issues. The bureau does not have supervisory powers over dealers, thanks to an exemption won by the National Automobile Dealers Association (NADA) in the months leading up to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“We’re trying very hard to observe the line Congress drew, but it’s not a natural line,” Cordray told Moran.

Cordray’s letter to senators gave an overview of the proxy methodology the CFPB and its sister agencies are using to determine the presence of discrimination, but did not divulge any of the bureau’s findings. At least one finance source, Ally Financial, was under investigation at the time of the hearing.

“I want to be careful about talking about what we have found, because this is an ongoing investigatory effort where we’re working with the Justice Department,” Cordray said during the hearing. “So the order of the day on those things is confidentiality, unless you get to the point of taking some sort of public action.”

Also discussed was the CFPB’s removal of enforcement attorneys from its fair lending examinations, a move the bureau made on Oct. 10 to bring about a freer exchange of information between finance sources and their examiners. Sen. Mike Crapo (R-Idaho) said he believed the decision would ultimately result in better supervision.

“You don’t get to buy a refrigerator at Walmart at their wholesale rate. You don’t get a car at the dealer wholesale rate
unless the dealer needs to do that for a legitimate business purpose.”
— Randy Henrick, Dealertrack Technologies
“You don’t get to buy a refrigerator at Walmart at their wholesale rate. You don’t get a car at the dealer wholesale rateunless the dealer needs to do that for a legitimate business purpose.”— Randy Henrick, Dealertrack Technologies

Also at the meeting was Sen. Elizabeth Warren (D-Mass.), considered the architect of the CFPB. She applauded the bureau’s efforts in the auto lending arena, but joined others in citing a study conducted by the Bipartisan Policy Center that calls for Congress to close the dealer loophole.

“It makes no sense to me that there should be any exception here for consumers who are being tricked out of billions of dollars every year on car loans,” Warren said. That number would be hotly contested the following day at the CFPB’s auto lending forum.

Reporting for Duty
The CFPB hosted its public forum at its Washington, D.C., headquarters. The event consisted of three panels: The first covered how regulators are addressing fair lending, while the second offered on-the-ground perspectives about what’s happening to consumers in the auto finance arena. The last panel addressed fair lending risks pertaining to indirect auto lending. Cordray offered the opening remarks.

“…If anyone is uncertain about our resolve, let me do my best to dispel that uncertainty this morning,” Cordray told the audience. “We will make every effort to do the job that Congress has set out for us, which is to identify and root out unlawful, discriminatory lending practices, including practices that, in the words of the Supreme Court, are ‘fair in form but discriminatory in operation.’”

In a much-discussed fair lending bulletin issued this past March, the CFPB said it would hold finance sources liable for policies that result in discriminatory pricing — whether intentional or not — using a legal theory called “disparate impact.” The Supreme Court was set to hear a case in December that called the theory into question, but on the eve of the forum, a town council in Mount Holly, N.J., voted unanimously to settle the discrimination suit. It was the second case involving disparate impact that was settled before reaching the high court.

“[The] AFSA is disappointed that the Mount Holly case will not make it to the Supreme Court, as the disparate impact theory it would have examined is being used broadly and aggressively by federal regulators,” Bill Himpler, the association’s executive vice president, told F&I and Showroom. Himpler also served on the indirect auto lending panel at the CFPB’s forum.

Himpler’s co-panelist, Richard Riese, senior vice president of the Center for Regulatory Compliance at the American Bankers Association (ABA), made note of the settlement when he spoke at the forum. “We all found out this morning that we’re not going to have a quick answer in Mount Holly,” he told the audience. He also noted that he believes dealer discretion is not an appropriate area to apply disparate impact, based on Regulation B of the Equal Credit Opportunity Act.

“The discretion that’s being applied for compensation that we all agree here is due dealers, is not a creditor’s determination of creditworthiness. That’s enclosed in the buy rate,” he said. “The others have to do with compensation and other factors, but it is not the creditor’s determination of credit worthiness, so I’d say Regulation B restrains the bureau and [other agencies] from applying [disparate impact] to dealer premiums.”

“We’re trying very hard to observe
the line Congress drew, but it’s
not a natural line.”
— Richard Cordray, CFPB
“We’re trying very hard to observethe line Congress drew, but it’snot a natural line.”— Richard Cordray, CFPB
Paying More
The CFPB’s forum opened with a panel of regulators moderated by the bureau’s Steven Antonakes. Panelists hailed from the Federal Deposit Insurance Corporation (FDIC), the Federal Trade Commission (FTC), the Office of the Comptroller of the Currency, the U.S. Department of Justice (DOJ), the Credit Union Administration and the Federal Reserve.

First at the microphone was Patrice Ficklin, the CFPB’s assistant director of fair lending and equal opportunity. She told attendees that, to date, the bureau has found “substantial and statistically significant disparities between the interest rates paid by African American, Hispanic and Asian car buyers and rates paid by white car buyers with similar credit scores and other factors.

“Our work is even more expansive in scope today than it was in March, and it still indicates significant fair lending risk for lenders who maintain such policies,” Ficklin noted. Some institutions, she said, had disparities of more than 20 or even 30 basis points.

Other statistics were mulled over during the on-the-ground perspectives panel, which only had one dealer representative among several consumer advocacy groups, including the National Consumer Law Center, Consumers for Auto Reliability and Safety (CARS) and the National Association for the Advancement of Colored People (NAACP).

The NAACP’s Hilary Shelton told audience members that a study from the Center for Responsible Lending found that dealer markups increased the odds of a loan default or repossession by 12.4 and 33 percent, respectively, for subprime borrowers. CARS President Rosemary Shahan was also critical of dealer markups, noting that AutoNation, the nation’s largest auto group, has reported it makes an average of $441 in rate markups on each deal.

“It’s money that can be better spent in other ways,” Shahan said.
In California, which Shahan called “ground zero on this issue,” CARS recently submitted a new ballot initiative that aims to eliminate dealer markups in the state. It is currently in the early stages of the state’s qualification process for ballot initiatives.

“I would note that the provision in the initiative that we just filed … polled at 82 percent support,” Shahan noted. “And there isn’t a lot these days that polls so resoundingly well.”

Suspect Methodology
Other federal agencies that participated in the forum confirmed they are also using proxy methodologies to determine whether discrimination exists in lender portfolios. During the Senate Banking Committee hearing, Cordray said the proxies have been refined to some degree — meaning that the bureau has included Census tract data for more precise testing.


  1. 1. Mick [ January 02, 2014 @ 05:45AM ]

    "20 or even 30 basis points" seems intentionally phrased to make that sound like a lot. That is a statistically insignificant difference.


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