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
“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
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
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.
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.
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.
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
“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.”
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.
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
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.
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
— Brittany-Marie Swanson