WASHINGTON, D.C. — Appearing before the House Financial Services Committee to deliver the Consumer Financial Protection Bureau’s semi-annual report to Congress, Director Richard Cordray was grilled for three hours about the bureau’s activities in the auto finance, mortgage, credit card and payday lending industries. But it wasn’t just Republican committee members asking the tough questions.
Rep. David Scott (D-Ga.) made clear Democrats also have serious concerns about the bureau’s use of the disparate impact doctrine to uncover alleged discrimination in vehicle financing, noting that the bureau’s approach may be hurting the very people it’s trying to protect.
“When you discriminate [against dealers who adjust interest rates to meet a payment a customer asks for], that is discrimination against African-Americans,” Scott said. “When your rule and your actions deny them access to that car, how are they going to get a job? These are the unintended consequences.
“The unintended consequence is that you’re strangling the poor dealer and denying the very customers that you’re supposedly trying … to help,” he added.
This was the first time Cordray appeared before the committee since Republican members issued two staff reports critical of the bureau’s activities in the auto finance arena.
The first report, released on Nov. 24, revealed that the CFPB pursued its potentially “market-tipping” enforcement action against Ally Financial and Ally Bank even through bureau officials knew the statistical method used in its case was “prone to significant error.” It also charged that the bureau was able to secure its December 2013 settlement with Ally because of “undue leverage” — Ally needed Washington regulators’ approval for a broader restructuring of its business.
To that latter charge, which Rep. Jeb Hensarling questioned Cordray on during the hearing, the CFPB director said, “We had pursued this investigation against Ally for more than a year before they brought it to our attention.”
In the second report, released on Jan. 26, Republican committee members again hammered the bureau over its handling of the Ally settlement. Based on internal CFPB documents, the report charged that some settlement checks were sent to white borrowers. It also charged that the bureau declined to employ a distribution method proposed by the U.S. Department of Justice (DOJ) because it would limit the number of recipients to between 36,000 and 143,000. The bureau had alleged that 235,000 consumers were harmed by Ally’s dealer markup policy.
Citing the report, Rep. Sean Duffy (R-Wisc.) questioned Cordray about the accuracy of the bureau’s method for identifying victims. Cordray said he didn’t think anyone could ever be 100% accurate, noting that there was nothing unique in how the bureau handled disbursement of the settlement checks.
Duffy again cited the reports when he questioned Cordray about the accuracy of the bureau’s method for identifying disparate impact discrimination in its case against Ally. Cordray responded by saying the bureau’s methodology had “a high degree of accuracy.”
“I can’t give you specific percentages, but if you want my staff to work with your staff on specifics there, we could do that,” Cordray offered. “I don’t know if anybody is ever 100% accurate, but we get as close as we can.”
Unsatisfied with Cordray’s response, Duffy asked why the bureau had yet to comply with the committee’s three-month-old request for documents related to the bureau’s case against Ally, noting the information contained in the requested documents could reveal exactly how much more African-Americans paid in interest rate markups than white borrowers. Cordray again offered to have his staff work with Duffy’s staff, noting that what he saw “was systematically, African-Americans and/or Hispanic borrowers in certain matters were paying more.”
Still not satisfied, Duffy pointed to a slide projected behind him during his line of questioning. It showed findings from the bureau’s three-year investigation of Toyota Motor Credit. To Duffy, the data didn’t show much of a disparity between what white borrowers paid in interest rates and what African-Americans paid.
The slide showed the bureau examined 116,500 African-American borrowers who took out non-subvented auto loans between Jan. 1, 2011, and December 31, 2013. Of that total, 66,000 paid more than what white borrowers paid in interest rates, which, based on Duffy’s calculations, meant that 56% of African-American borrowers paid more than white borrowers and 44% paid less.
Duffy also pointed to data associated with the 7,559 African-Americans who took out subvented loans during that period. Of that total, 2,668 of them paid more than the average paid by white borrowers, which based on Duffy’s calculations, meant 35% of African-American borrowers paid more than white borrowers and 65% paid less.
“What I can say is that subvented auto loans can behave differently from normal auto loans,” Cordray responded. “And that is something normal in auto loans and that is something we take account of in our analysis.”
The bureau’s use of the disparate impact theory, which says a policy or practice may be deemed discriminatory if it has an adverse impact on a protected group, consumed a large portion of last Wednesday’s three-hour hearing. Mixed in were questions about the bureau’s activities in the mortgage, credit card and payday lending industries.
Toward the end of the hearing, Rep. Ed Perlmutter (D-Colo.), the co-author of the CFPB reform bill that would repeal the bureau’s guidance on dealer markups if approved by the Senate, called for more communication between the agency and dealers. Cordray admitted that wasn’t the case early on, as the bureau wanted “to be respectful of our judicial lines.” He noted, however, that the two sides now have an open line of communication.
“Being a regulator, you’re never anybody’s best friend, and that’s not your job and that’s not what you’re supposed to be,” Perlmutter acknowledged. “But you’re supposed to be looking out for the best interests of the people within your jurisdiction of your agency and I thank you for doing that in so many different ways.”