Experts weigh in on recent reports that the CFPB issued warnings to banks over practices related to auto retail installment sales transactions. If reports are correct, experts believe the CFPB may be stretching the definition of the Equal Credit Opportunity Act too far.
WASHINGTON — Earlier this month, Bloomberg, citing unnamed sources, reported that the U.S. Consumer Financial Protection Bureau (CFPB) alerted several banking institutions that they could face lawsuits under the Equal Credit Opportunity Act (ECOA). Although the CFPB has yet to confirm its issued warnings, banks and legal insiders are already reacting.
At issue, legal insiders said, are bank and finance company policies which allow auto dealers to mark up the interest rates on retail installment sale transactions in exchange for services rendered. The bureau, through speeches, alleges these policies have caused a disparate impact and caused members of minority groups to pay higher rates.
If reports are true, the CFPB’s move could signal an imminent crackdown on the auto industry by the bureau, which 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.
Through a bulletin faxed to dealers on Monday, 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.
On Tuesday, 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.”
