Editor's Note: Story has been updated to include a statement from the Consumer Financial Protection Bureau.)
WASHINGTON (UPDATED: 2:07 p.m. PST, 9/22/15) — According to internal documents obtained by American Banker, officials with the Consumer Financial Protection Bureau (CFPB) have acknowledged that the method the agency uses for detecting discrimination by indirect auto lenders can overestimate potential bias, resulting in higher penalties for finance sources cited by the regulator.
This revelation marks the second time this year that the media outlet has obtained internal CFPB memos. In July, American Banker reported that it had obtained proposed consent orders that indicated the bureau was preparing to take action against three captive finance companies for allegedly allowing their dealer partners to charge higher interest rates on loans to minority buyers.
This time, a series of internal documents the media outlet obtained show CFPB officials repeatedly acknowledging that the bureau’s methodology miscalculates the potential discrimination by firms. In an April 2013 memo, according to American Banker, Patricia Ficklin, assistant director of the CFPB’s Office of Fair Lending, writes in response to objections raised by a finance source the bureau was investigating at the time that although there may be some risk of overestimating disparities, “the alternative presents an equal (and perhaps greater) risk of underestimating disparities and thus consumer harm.”
Samual Gfilford, a spokesperson for the CFPB, issued the following statement to F&I and Showroom: "Nothing in the American Banker story disputes the existence of discrimination in auto lending, or that minority borrowers have been charged higher interest rates on their loans as a result. We use all information at our disposal, and the best available methodologies, to fairly and consistently enforce the Equal Credit Opportunity Act and ensure borrowers harmed by discrimination receive the relief they deserve."
The American Banker article was the lead story in the National Automobile Dealers Association (NADA)’s Sept. 18 enewsletter. In an editor’s note at the bottom of three-paragraph brief, the NADA noted that the article “highlights the need for the transparency that ‘public notices and comment’ would provide if H.R. 1737 were enacted.”
Introduced in April by Reps. Frank Guinta (R-N.H.) and Ed Perimutter (D-Colo.), H.R 1737 would repeal the CFPB’s March 2013 guidance on dealer participation and add a few more steps to its guidance-writing activities. On July 30, the House Financial Services Committee approved the bill by a 47-10 vote. The legislation now awaits consideration by the entire House of Representatives.
Andrew Koblenz, the NADA’s executive vice president of legal and regulatory affairs and general counsel, called the committee’s passage of the bill “a major success for consumers” when he spoke to F&I and Showroom magazine last month, noting that 13 out of the 23 Democrats on the committee voted for it.
“H.R. 1737 is a good-government bill that says to the CFPB, stay in your lane, make sure you understand the market, listen to the public, listen to the stakeholders — all of them — understand the implications of what you’re doing, understand what your actions do to consumers, and understand what they do to minority-owned businesses, women-owned businesses, and, in fact, all small businesses,” he said. “And be transparent. Tell us what you’re basing your analysis on, your conclusions on, and, to the extent you can, what your data shows.”
Koblenz said the NADA’s concerns emanate from the fact that the CFPB’s attempt to address the fair credit concerns it has identified “has utilized an approach that we think doesn’t really address those fair credit concerns, and that has adverse effects on consumers.”
By adverse effects, Koblenz meant the potential loss of rate discounts for consumer if the pressure the CFPB is putting on finance sources results in an across-the-board move to a flat-fee dealer compensation model.
“So, in our view, adoption of the CFPB’s approach would fail to advance the ball from a fair credit perspective, and at the same time would move the ball back from a consumer perspective by reducing the amount of discounts that are available to consumers,” Koblenz said.
According to American Banker, its Sept. 17 article is the first in a series about the CFPB’s use of disparate impact, a legal theory that says finance sources can be penalized if they have a neutral policy that creates an adverse impact against a protected class of borrowers, regardless of intent.