WASHINGTON — The Consumer Financial Protection Bureau’s Richard Cordray responded Monday to demands from 22 U.S. Senators for more information in its review of the auto finance market. In his response, the director admitted the bureau has not analyzed how a move to flat fees would affect car buyers.
Cordray’s response comes a day before Ally Financial revealed that the bureau believes the finance source “failed to fulfill” an obligation to prevent its auto dealer partners from violating the anti-discrimination provisions of the Equal Credit Opportunity Act.
On Oct. 30, 11 Democrats and 11 Republicans asked that the CFPB to provide “complete details” regarding the methodology it is using to determine whether members of minority groups pay higher rates for auto loans. The bureau alleges that bank policies allowing auto dealers to mark up the interest rates on retail installment sale transactions in exchange for services rendered often result in discrimination.
“Historically, the failure to properly or consistently monitor such policies and practices for compliance with anti-discrimination laws has been a contributing factor in discrimination, both in auto lending and in other product markets, like mortgages,” Cordray wrote. In March, the bureau issued a bulletin offering guidance to indirect auto lenders on how to comply with the fair lending requirements of ECOA.
According to Cordray’s letter, the bureau is using proxies to determine the presence of discrimination; for instance, to proxy for gender, the CFPB relies on a first-name database from the Social Security Administration. To proxy for race and national origin, the bureau uses the surname database published by the Census Bureau in addition to “geocoding” — a practice in which race or national origin are determined by the demographics of the census geography in which an individual’s residence is located.
“For the purpose of conducting our supervisor work, we have chosen to use proxy methods that rely solely on public data so that lenders can replicate our methods without the need to recreate or purchase proprietary databases as part of their own fair lending compliance management systems,” Cordray stated in his response.
The bureau also makes a case-by-case assessment of whether to pursue supervisory or enforcement actions against finance sources whose portfolios contain statistically significant disparities.
Today, in a filing with the Securities Exchange Commission (SEC), Ally Financial confirmed that the bureau believes it has failed in its obligation to prevent discriminatory actions by its dealer partners. Ally also noted that other auto finance companies have received similar notices, but did not identify them.
“We are currently in discussions with the CFPB with respect to these matters. It is possible that this could result in material adverse consequences including, without limitation, settlements, fines, penalties, adverse regulatory actions, changes in our business practices, or other actions,” the filing stated. “However, we are unable to estimate any potential financial or other impact at this time that could result from these investigations, should any occur.”
In its March bulletin, the CFPB advised finance companies that enforcing a flat fee model would eliminate the potential for discrimination. However, lawmakers, as well as the National Automobile Dealers Association, have questioned whether this would harm the ability of customers to secure competitive rates.
Cordray said a move to flat fees was “merely … one example of a non-discretionary compensation mechanism,” but he admitted that the bureau has not fully explored the effect such a move would have on competition in the automotive finance marketplace.
“The Bureau has not undertaken a study of how market-wide adoption of a single non-discretionary compensation program would affect the availability of credit, nor has it attempted to analyze the impact of all the potential actions lender may take to eliminate discrimination from their indirect auto lending programs,” Cordray stated. “As a general matter, however, the bureau believes that fair lending and the legitimate business needs of creditors are compatible.”