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Defending the CFPB

The editor goes one-on-one with the man who helped chart the CFPB’s course into the auto finance industry. Find out what the former regulator has to say about dealer participation and F&I product sales.

April 2014, F&I and Showroom - Cover Story

by Gregory Arroyo - Also by this author

Rick Hackett is back. Last year, the Consumer Financial Protection Bureau’s former point man to the auto finance industry left the agency behind. In March, he joined industry law firm Hudson Cook as a partner in its Portland, Maine, office. But as Hackett made clear in a phone interview with F&I and Showroom, his stint in public service might be over, but the regulator within him remains.

Hackett spent 31 years practicing law before the CFPB selected him in 2011 to lead its Office of Installment and Liquidity Lending Markets — which resides in the agency’s research, markets and regulations division — as assistant director. Until his departure from the CFPB last August, Hackett helped chart the bureau’s course into the auto finance industry. He also helped lead the team tasked with guiding strategy for examining and investigating dealer participation programs.

Although he declined to comment on the bureau’s consent order against Ally Financial, he spoke freely about his feelings toward rate participation. He also answered the most important question of all: Is the CFPB gunning for auto dealers?

F&I: I think the only statement I’ve received from the bureau was a confirmation that you were leaving. Why is the CFPB not speaking to the media?

Hackett: There’s a concern that there be a consistent and thoughtful public message because, frankly, some people are gunning for the bureau. A lot of it is coming from people who oppose the agency’s very existence and who still haven’t given up on making changes that would be significant — not least of which would be making the funding subject to their discretion, which never works for a bank regulatory agency.

F&I: In January, Patrice Ficklin, the CFPB’s assistant director of the Office of Fair Lending and Equal Opportunity, was asked at a conference I attended if she was your replacement. She said no one could replace you. Her answer left me confused as to how the CFPB is structured. Can you offer some insight?  

Hackett: I was in the markets division. I ran one office out of four. My responsibilities were auto, student, payday loans, vehicle title loans, and basically anything else in the super-subprime space that’s not housing or [bank and credit] cards. The markets offices sit in the division that has the rulemaking lawyers and research economists. The point of this is to have interaction among people who develop and execute bureau policy that comes from market leads and their teams. These teams have a whole lot of experience with the industries in their portfolio.

Echoing Patrice Ficklin’s comments at the 2014 Vehicle Finance Conference, Rick Hackett said the bureau’s use of U.S. Census data and the BISG proxy method is sufficiently predictive to distinguish disparate outcomes in loan portfolios.
Echoing Patrice Ficklin’s comments at the 2014 Vehicle Finance Conference, Rick Hackett said the bureau’s use of U.S. Census data and the BISG proxy method is sufficiently predictive to distinguish disparate outcomes in loan portfolios.

I spent more than 30 years representing student lenders, auto lenders and all kinds of lenders. If it was a consumer-finance loan, rent-to-own or whatever product, I worked on it. So when it comes to how that function integrates with the rest of the bureau, I not only talked a lot with research economists — the people who crunch the numbers — I also used my connections and experience in the industry to get numbers for them to crunch. So my job was to work with someone like Patrice and partner with her to develop both perspective and strategy for how to approach the markets for which I was responsible.

I also worked in the bureau’s deliberative process. All the assistant directors and above — about 40 people — get together once a week for two hours. They each have substantial input into major policy issues. These meetings are scheduled out well in advance to give the various working divisions that have issues coming up the opportunity to escalate them for review. It’s like an advisory committee. The director makes the final decision, but he gets the input from a broad range of perspectives, including those with industry perspective.

F&I: Jeff Langer was named your replacement in March. What can you tell me about him?

Hackett: I helped the bureau recruit him. He’s is a terrific guy, and, like me, he has 30 years of experience in the credit space. He has worked both in private law firms and as in-house counsel. He has a great deal of depth in collections, which is something I didn’t have. And I think he may be helping out in that area as well as auto and student.

F&I: Did you offer him any advice?

Hackett: I told Jeff when I recruited him that the fun part about this job is you get to bring your industry perspective to a dialogue across all parts of the agency. And that perspective is respected and, frankly, relied upon in deciding what bureau strategies ought to be and whether an issue is an issue or not an issue.

F&I: Why did you leave the CFPB?

Hackett: When you make a conscious effort as a government agency to gain access to industry information from sources other than lobbyists — in other words, bring the industry in-house so they can be 100% candid — that’s a benefit to the industry and the agency. But people who can do that are not going to spend the rest of their lives there, or many of them won’t.

Rick Hackett helped the bureau recruit his replacement, Jeff Langer. He was named to the post in March.
Rick Hackett helped the bureau recruit his replacement, Jeff Langer. He was named to the post in March.
Frankly, one of the determining factors in my decision was, for what they pay in Washington, even though they pay us very well on a government scale, I couldn’t afford to move my family to Washington. On my own nickel, I spent $50,000 a year to fly and house myself in D.C. every week. That’s not an exaggeration. You figure out what an apartment in D.C. costs, plus 26 roundtrip tickets. Then add taxes on top of that, because it’s not deductible.

F&I: You were hired on a three-year contract, correct?

Hackett: That’s right. Part of it was conscious preference; part of it was hiring rules embedded in the Dodd-Frank Act. I was made permanent before I left, but I said to my boss, “Before you go through the trouble, it’s probably not going to make a difference.” He said, “That’s OK. We want to send a signal that we like what you’re doing.”

F&I: The CFPB Monitor, a blog managed by a law firm, ran this headline shortly before your departure: “CFPB brain drain continues.”

Hackett: I think some of the brain-drain stuff is overblown. Look, when you’re trying to bring in people to create a whole new business from the ground up, if you will, you want to bring in bright people who are not interested in long-term security, who are going to push real hard. And there’s a natural tension between the desire to have industry knowledge, the desire to have entrepreneurial people, and the personal financial ability to stay in an agency like that on a long-term basis.

I think, over time, the turnover will decline as the growing pains decline, as the challenges change, and as the expectations of what you’re getting into are pretty well set. When I got there, we were literally flying the plane while still putting the wings on. That’s exciting and wonderful, working 16 hours a day at the age of 62. At the same time, it’s not sustainable.

F&I: When you addressed the American Financial Services Association at its February 2013 conference, did you know the bureau’s fair-lending guidance was coming? I was in the audience, and, based on what I heard, I didn’t think we’d see anything from the bureau until the end of last year. I said as much in a March 2013 editorial and it came back to bite me the same month when the bureau released its guidance.

Hackett: I did, but I didn’t know exactly when. When I addressed the American Bar Association’s Consumer Financial Services Committee in January 2013, I laid out the legal groundwork for the issue of auto-finance discrimination. But for me to talk about [the guidance] in a forum like that — based on what was ultimately approved — would have been misconstrued. I was definitely saying you weren’t going to see lawsuits tomorrow, and, in fact, you didn’t see one until that December.

What I couldn’t say at either event was this was an issue that was being developed in a supervisory process, which is completely confidential. The public knows that now from the Ally settlement. So if I gave the impression that we hadn’t formed a view of what the ramifications would be if we found certain facts, I apologize. But, yes, I knew, and I was trying to signal that some kind of broad communication that would allow people to start shifting their activity was going to happen.

F&I: Did the response shock you?

Hackett: Lenders care most about what their dealers think. And dealers, for whatever reason, think that only by getting paid for participation will they be able to maximize their revenues. I personally am not convinced of that. There are many ways to structure compensation. The problem is that no lender can be the first to innovate without significant business risk. Dealers will all go, “I don’t know who I want to deal with tomorrow, so I’m not going to select innovative Lender Y because I know I can get the most money today with markup on this deal with Lender Z.”

Comment

  1. 1. Craig Tilleman [ May 02, 2014 @ 07:51AM ]

    How intrusive is this government? Justification for this inquisition is that the bureau can't look under the hood?

  2. 2. William V. Fowler [ May 03, 2014 @ 08:40AM ]

    I have tried to point out in my postings on LinkedIn that auto loan origination has changed and the loan origination process that is presently used (in my personal opinion) is setting up dealers and financing sources for UDAAP violations.

    However there are ways to solve this problem and move on.

  3. 3. howell clark [ May 05, 2014 @ 09:59AM ]

    liberals see race everywhere, me thinks its simply the excuse for raising the hood so to speak. ok they raised it , yup its a motor, but its not as shiny as the one under that hood, Houston we have a problem !

  4. 4. Chris Pyle [ June 25, 2014 @ 02:41PM ]

    Could someone please help me clear a few things up?
    Negotiating is more common in some cultures than others. For example, If I don't haggle with the cab driver in some parts of the world, I'm treated as uneducated. If I pull that same exact stunt in NYC I'll probably have to find another cab.
    The million dollar question for me when desking a deal was this. What is the highest starting point I can justify in every area of the deal structure, without completely alienating that customer. Scraping them off the ceiling is one thing and to be expected, chasing tail lights in the parking lot is much different. If you can say" because" or "based on" after each part of the offer with some solid validation to back it up your normally ok.
    Here's my point. The guy they mentioned here to validate their claims of race being a factor may have been a bit "rude" with his statements, but if he's walked more Asians due to holding too much rate than any other race, why shouldn't he be more careful now? In fact, if I know what area of any deal a particular customer is most concerned with, I have a pretty good idea where I wont be making the most money. The desks job is to control and MAXAMIZE the gross. If you knew they didn't care what they paid for the car as long as they got $3,000 for their trade, is that an opportunity or a crime based on this new way of thinking? Reverse it and say they didn't care if they only got $1 for their trade, they must get $2,999 off the sale price. Chargebacks and rate spilts aside, aren't all dollars green? That's the only color most guys I've ever worked with care about.
    Every experienced Manager has his own ideas how to do the job (right or wrong) based on what they've encountered over the years. It's an impossible leap to say that means every F&I manager drops rate for one race, or jacks it up for another.
    Sorry for the long rant, I love reading everyone's comments and wanted to finally participate!

 

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