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CFPB Investigating Ally Financial

March 12, 2013

WASHINGTON — Ally Financial, in its March 1 filing with the Securities and Exchange Commission (SEC), revealed that it was one of the finance sources warned by the Consumer Financial Protection Bureau that it could face lawsuits under the Equal Credit Opportunity Act (ECOA).

“The CFPB has recently advised us that they are investigating certain [parts] of our retail financing practices,” read the filing. “It is possible that this could result in actions against us.”

The filing didn’t offer any further details regarding the CFPB’s actions, and company officials declined to comment on the matter.

In February, Bloomberg, citing unnamed sources, reported that the CFPB alerted  “at least four” banking institutions that they could face lawsuits related to their policies that allow auto dealers to mark up the interest rates on retail installment sales transactions in exchange for services rendered. The bureau, through speeches, alleged these policies have caused a disparate impact and caused members of minority groups to pay higher interest rates. 

Bill Himpler, executive vice president of the American Financial Services Association, told F&I and Showroom magazine late last month that the association had yet to see the letters, but said he believed Bloomberg’s report was “close to accurate.”

 “We feel fairly confident that letters have gone out,” he said.

The CFPB has not returned calls seeking comment, and has yet to publicly confirm the warnings.

Ally’s filing with the SEC is the first confirmation of the CFPB’s actions, which legal insiders say signals an imminent crackdown on the auto industry. It’s a move experts have been predicting since the CFPB was formed in 2011 as a result of the Dodd–Frank Wall Street Reform and Consumer Protection Act.

Financial institutions are also reacting. Through a bulletin faxed to dealers in late February, Chase announced a new dealer rate participation monitoring program. Under the program, Chase will periodically monitor dealer pricing on retail installment contracts it purchases from dealerships.

“Our dealer monitoring program reaffirms our commitment to fair lending and supports our indirect auto lending activities,” a Chase spokesperson told F&I and Showroom magazine.

According to the bulletin, if a dealer is found to have different pricing for protected classes, Chase will require them to provide an explanation, and “will consider taking further action” if it is not satisfactory.

Thomas B. Hudson, a partner in the law firm of Hudson Cook LLP, said the CFPB’s approach is inherently flawed, if reports are true. But if the bureau's legal strategy is successful, he speculated that “finance companies and banks will end up imposing a lot more supervision and control over dealers.”

However, this outcome is far from inevitable, Hudson said. Alleging that banking and finance company policies have allowed dealers to create a disparate impact — which holds that practices that have a disproportionate adverse impact on members of a minority group are discriminatory and illegal — could be a hard sell.

“There are people on the legal side of the credit business who don’t think it’s appropriate to graft that concept on to the Equal Credit and Opportunity Act,” he explained.

The ECOA takes its definition of disparate impact discrimination from Supreme Court cases concerning employment, including the 1971 case of Griggs vs. Duke Power Co. and the 1975 case of Albemarle Paper Co. vs. Moody. Prior to the Griggs decision, which found that Duke Power’s employment requirements did not pertain to applicants’ ability to perform the job, employers did not have to separate intentional wrongs from unintentional wrongs if they appeared to treat all applicants equally.

Using the disparate impact theory, the CFPB has taken the position that violations of the ECOA can be pursued based solely on statistics that suggest an otherwise neutral policy disparately affects minorities. Consequently, the government does not have to prove intent to discriminate to launch claims related to the ECOA.

“The concern is the banks are never face to face with a customer. The banks don’t know the customer’s race or ethnicity or age or sex,” Hudson said. “The dealer is sitting there across the desk from these folks, so if there’s discrimination in the bank’s portfolio, you would think that it was there because dealers were marking up in a discretionary manner, to a greater degree, for protected classes than for others. And if that’s the case, then the bureau is going to sit there and scratch its head and say, ‘Okay, how do we fix this?’”

No federal court of appeals has yet determined whether the ECOA permits disparate impact claims, although two have questioned its appropriateness.

Last month, the CFPB Director Richard Cordray spoke to at a National Association of Attorneys General (NAAG)’s meeting. While he did not confirm the CFPB's reported actions, he did make clear the bureau's interest on how interest rates are set for minority buyers.

“When consumers and lenders sit down to discuss loans, consumers are often unaware what options may or should be available to them,” he said. “If a rate or a price is quoted, they do not know whether that quote accurately depicts their actual position in the loan market.

“Interest rates can and do vary based on the characteristics of the borrower,” he continued. “Lender policies that provide incentives for brokers or loan officers to negotiate higher rates have often been shown to result in African-American and Hispanic borrowers paying more for mortgages and auto loans.”

Cordray said the NAAG has been working closely with the CFPB since its inception. “The NAAG working groups on such topics as student loans and auto-loan financing have fostered important conversations and allowed for closer and more effective coordination,” Cordray stated.

Legal insiders believe that the CFPB’s analysis of retail pricing for portfolios of retail installment sale contracts has the potential to yield false positives for a disparate impact. For example, if two dealerships both apply their pricing policies consistently, but one charges a higher rate, there is still a potential for disparate impact if their customer demographics differ.

As Hudson pointed out, the Supreme Court has yet to determine the validity of disparate impact theory as it relates to the ECOA, but “until it does, the bureau is going to pretend like it’s live ammunition.”

“They are going to use it,” he said. “They are going to continue to assume that it’s one of their tools, and they’re going to proceed as if it’s a valid theory.”

If Cordray’s speech to members of the NAAG is any indication, it appears that’s what the CFPB intends to do.

“We made it clear last year that — like the other banking regulators and the Justice Department — we will pursue discrimination in consumer financial markets based on disparate impact as well as on intentional violations,” he said. “From the perspective of a consumer disadvantaged by policies that have a discriminatory effect, it makes no practical difference whether or not a lender consciously intended to discriminate.”

—    Brittany-Marie Swanson

Comments

  1. 1. EF [ March 12, 2013 @ 01:02PM ]

    bullshit let's regulate the regulators. Why aren't all corporate profits regulated by class. We should fix all corporate pricing so that all classes should get the same price??? If there is going to be a precedent set then why stop at just financial institutions. Rates are based on risk and there are maximums that are permitted by the states. Some states have usury rate maximum's of 36% . What happened to Buyer Beware and negotiating rates, prices commodities etc

  2. 2. timp [ March 13, 2013 @ 06:49AM ]

    Personally i find this to be just ONE more way for our corrupt government to get their GREEDY hands into our pockets. To call this discrimination is just plain ignorance on Big Brothers part. I use rate markup on anyone and everyone that i can and i sure as hell do not do it because of ANYTHING other than profit for the dealership that i work for.

  3. 3. Trevor [ March 13, 2013 @ 08:39AM ]

    Using this logic we should launch an investigation on our police force, and proceed to arrest every officer who arrests a disproportionate number of minorities, regardless of whether or not they intend to discriminate... It makes no sense to say that because one subset of the population results in a greater proportion of profit for a company, that that is in and of itself discrimination.

  4. 4. kristian [ March 14, 2013 @ 07:25AM ]

    Auto dealers and lenders should be proactively mitigating risk to avoid the enforcement of consumer financial laws and focus on low cost, high value approaches that are a win-win for them and consumers. This investigation should be a wake up call to assess their current operations and focus on areas like consumer credit education and transparency to avoid practices considered ‘unfair, deceptive, or abusive’. Regulation is a balancing act, the CFPB realizes auto dealers and lenders need to sell cars, but they must investigate and enforce practices that are fair to consumers.
    @creditjeeves

  5. 5. Patricia [ March 14, 2013 @ 11:39AM ]

    Auto dealers are offered a different rate than even a prime customer can get. They have been attempting to take away our reserve mark up for the past 8 years. I knew it would only be a matter of time, and unfortunate as it is using the MINORITY race card will get it done! Ef is correct rate is based on risk, and dealers are in business to make money. However I can say there are good and bad dealers out there. Good and bad F&I out there, I have walked away and been terminated because I refused to do something that was non compliant. Maybe some of these investigations should be turned to our GOVERNMENT OFFICE, they keep setting up programs that are to protect the consumer and then do nothing!

  6. 6. William V. Fowler [ November 12, 2013 @ 12:21PM ]

    Let me point out that this is only the tip of the iceberg that is coming at all financing sources, yet I see very little action from Banks, Credit Unions and other Financing Sources to solve this problem that is facing this industry. First everyone stood back and said don’t worry, Cordray will not get nominated, or the CFPB will get shot down. Now everyone is waiting to hear about the Mount Holly Case. Folks that case is in the final steps of closing and the CFPB are now focusing on multiple other Banks, Credit Unions and other Financing Sources.

    It’s my belief that CFPB Examiners will use the following Procedures in examinations of Motor Vehicle Dealers (MVD), including their sales and F&I personnel. In this article we will refer to the Sales and F&I personnel as Auto Loan Originators (ALO). https://www.enetfs.net/en/sales/1.Enet%20Offers%20Compliant%20Lendeing%20Solutions.pdf

    My company has built a SaaS web base software system that will help lender and or dealers process a loan in a compliant manner. If you want more info, my e-mail address is: bfowler@enetfs.net

 

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