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.
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.
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.”
The reaction from dealer associations, especially the National Automobile Dealers Association, certainly got the bureau’s attention. We spent a fair amount of time listening to them, even though the bureau does not regulate their members. I will give them this, the NADA has come out with a fair-lending compliance program that has the potential to make significant inroads on the problem.
F&I: So you think it’s a good step forward for the industry?
Hackett: In the wrong hands, it could be a totally useless pretext for what you want to do. In the right hands, I think it would significantly control the problem. And since the bureau has said that compliance programs may be an alternative to going to a flat, I think we should try this one out.
F&I: So you feel there’s a problem?
Hackett: I met many dealers during the initial stages of this. One of them actually said to me, “Look, you’ve got to understand, we’ve got a very short period of time to figure out the best way to put together all the moving parts of a complex transaction for the consumer, and how we’re going to be able to negotiate to have a deal the consumer can accept and is adequate for the dealership. And so we have to make quick judgments when we sort out the process. So when you pick that initial rate for negotiating a finance rate, we all know Asians are better negotiators.” That’s the God’s honest truth.
F&I: I’ll take that as a “Yes.”
Hackett: There are three kinds of discrimination: There’s overt discrimination, which is, “I hate this race and I’ll admit it.” Then there’s disparate treatment, where you either consciously or subconsciously say, “I’m going to treat people differently based on their race.” That’s what the dealer described. Then there’s disparate impact, which, frankly, is a subject of great debate unless what you’re talking about is the statistical evidence that is extracted from a large number of transactions where people were treated disparately.
If all the disparate impact is evidence of disparate treatment in a context where people say that’s what they’re doing, then you have a problem. It’s not a problem of people being bad; it’s a problem of when I negotiate with you or anybody else, I use all kinds of subconscious mechanisms called “heuristics” to quickly determine where I think I can go to get you to a deal. It’s based on my experience with people, it’s based on my biases of what I think, who has the information and who doesn’t, and a lot of other stuff. And because that’s the nature of the F&I transaction today, which is bargaining to get the best you can for the dealership, it just invites that kind of problem.
Let’s say I’ve been an F&I manager for a long time. I know enough to be very careful about what I say, think, or do around third-rail issues like race, ethnicity and so forth. But even then, you have to constantly make sure you’re using all the objective evidence about performance and not any kind of subconscious biases. And in an F&I manager’s office, you don’t have a whole pile of objective evidence about where you can go. You have your gut instinct.
So the NADA program, to me, is the kind of approach that’s been successful in other areas by requiring objective reasons to move from the target price. But again, you can game the heck out of that system if you want.
F&I: Yes, nothing is guaranteed.
Hackett: Well, the way you guarantee it is the dealership sets up controls, and if they find someone who’s really gaming the system, they warn him once and then fire him. Then the lender looks at the controls the dealer uses. Right now we have a situation where the only public model for the industry is Ally. But my sense is Ally is not alone in the next steps it has to take. You have to test your dealers every quarter, and if you find disparate results, you have to train and educate them. If the NADA program provides an effective next step, that’s great.
F&I: The March 2013 guidance listed flats as an alternative to rate participation. But isn’t a flat-fee system susceptible to issues the bureau eliminated in the mortgage arena?
Hackett: In mortgage finance, the bureau had a specific statutory tool that allowed them to enact anti-steering rules. And the basic question with flats is, would the market develop in such a way that higher priced lenders were paying higher flats and minority consumers were steered to higher-priced loans in disproportionate numbers? The mitigator of that is what dealers say to us, which is there’s intense competition around rates at the retail level. If that’s true, then steering is not an issue.
F&I: Let’s talk about the method the CFPB is using to determine discrimination in lender portfolios. We know it’s using U.S. Census data and the Bayesian Improved Surname Geocoding (BISG) proxy method. Is this method predictive?
Hackett: My belief, and I’m not an economist, is the BISG is sufficiently predictive to distinguish disparate outcomes in loan portfolios and individual originations. I think as time goes by, more and more evidence of that will become public.
Some in the industry are really not arguing about whether the fundamentals of BISG are predictive, they’re arguing about whether it should be modified by taking into account certain types of controls on the results, like the credit worthiness of the borrower, whether it’s a new or used vehicle, and so forth. I will tell you that every lender that deals with the bureau has an opportunity to make those arguments. And depending upon the circumstances, sometimes they’re appropriate.
F&I: Do you believe the bureau has jurisdiction over F&I products?
Hackett: I think the CFPB has jurisdiction over products that are directly tied into the financing, like GAP and credit insurance. Credit insurance less so, but it’s paying off the contract, so there’s regulations about disclosing it and so forth. We’ll call them either direct-finance products or products that are tied into the consumer financial protection laws through the Truth in Lending Act.
My view, and I do not know whether my successor shares it or not, is there is no “Equal Mud Flap Opportunity Act” like there’s an Equal Credit Opportunity Act. If somehow dealers are managing to sell mud flaps to minorities in a greater proportion and at higher prices than nonminorities, I think that’s a Federal Trade Commission issue. And I say that even though there are strong allegations from recent consumer surveys that F&I products, in fact, have a higher penetration rate with minorities than they do with others.
F&I: Are you referring to the study released by the Center for Responsible Lending?
Hackett: That’s right. The data they published shows 50% greater penetration rates for two or more F&I products with minorities than with nonminorities. If that data is correct, and that’s a big “if,” there’s a sort of global issue.
F&I: That is a big “if,” especially if it’s true the CRL based its findings on questions that asked respondents to recall what happened six years ago. How much influence do groups like the CRL have with the CFPB?
Hackett: The CRL has access to the bureau, but we know they have an agenda, just like any industry has an agenda. The first thing I’d do with something like the CRL report is hand it to a research economist and say, “What are the strengths and weaknesses of this analysis?”
I was recently asked what the point is of equalizing the treatment of finance rates when dealers can make up the difference by selling additional product. We call that the “squeezing the balloon” problem. We thought about it a long time, and we concluded that we’ll squeeze it and let other people squeeze parts that are under their jurisdiction. Just because you may be partially squeezing a balloon is not a reason to give up.
F&I: So how does the bureau view F&I product sales?
Hackett: I think the F&I office does suffer from nontransparency of product value and price. When I go to buy a car, I know what the value of that product is. I’ve got information coming out my ears about what other dealers will give me for a price, what the invoice price is, etc. Then I go to the F&I office and you offer me a service contract. Where do I go to look for competitive pricing for a service contract? How do I compare the coverage of service contract A and B? There’s no place to do that.
Then there’s pricing, which is set by the dealership. There is a variable markup in many aftermarket products, and the delta over the wholesale price is very significant. Why is that? So you have a scenario where consumers are lacking information on value and price. That’s what we call an inherently high-risk scenario. Oh, and by the way, the person selling you gets paid more the more he charges you. So what do you do? You’ve got an inherently high-risk situation outside of your jurisdiction that is all wrapped up in a nice pink ribbon and has landed on the doorstep of someone that is in your jurisdiction. I don’t know what the bureau is going to do. But where I think it may show up is in buy here, pay here, but that’s just wild conjecture.
F&I: Is the CFPB gunning for dealers because of the exemption the NADA won?
Hackett: The bureau respects the Congressional delineation of jurisdiction. The bureau also respects the political power that caused that delineation of jurisdiction. The bureau probably thinks it isn’t right, but it is what it is. Is there some truth to the belief that the bureau is more suspicious of dealers because it can’t look under the hood? Probably, but isn’t that human nature? [Dealers] spent tons of money and time to make sure the bureau didn’t have the same kind of regulatory authority that it has over financial services providers. It should be no surprise that reasonable minds might wonder why that is.
Rick Hackett will deliver a keynote address at Industry Summit 2014 on Tuesday, Sept. 9, at 9 a.m. For more, visit www.industrysummit.com.