SAN DIEGO–The CFPB’s Disparate Impact Initiative has led to a number of big-dollar settlements with several auto lenders, but congressional pushback could rein such settlements in in the future, according to one attorney.
Disparate Impact is the theory that certain groups of auto loan borrowers are paying more for dealer participation in loans than others.
Paul Metrey, VP-regulatory affairs with the National Association of Auto Dealers, told CU Direct’s DRIVE 16 meeting here that disparities and uncertainties surrounding the data that is behind the CFPB’s actions related to so-called Disparate Impact has now met with near bipartisan pressure from Congress.
First, some background. One year ago, the CFPB had issued just one consent order related to Disparate Impact, to Ally. In the last year it has issued three more.
“The CFPB’s goal in this area is a focus on dealer compensation: what do CUs pay dealers who originate their captive finance contracts,” explained Metrey. “Their goal, quite simply, is to eliminate dealer participation, which is the portion of the finance charge or APR that dealers retain for originating the finance contract. Keep in mind that amount is capped by contract just about everywhere at 2% to 2.5%.”
Metrey said that rather than addressing its concerns in the “prudent way,” through statue or regulation, it is instead doing it through a through a public guidance document telling (lenders) to either eliminate dealer participation or greatly constrain it. The second way is through the tip of the spear, through enforcement actions. What you will see is despite the CFPB’s best efforts, in indirect auto finance nobody has more than 5% marketshare, and most sources earn less than 1%. You get two or three or four or five to flip, where are you? That is not getting them to their goal.”
How is discrimination in this area proven? Metrey told the CU Direct Meeting that the CFPB is not alleging intentional discrimination, so that means it’s not an issue resolved by training to be consistent with the law. “That’s important, but not what this is about. This is about unintentional discrimination, or disparate impact. And you get to that by looking at past actions and whether one group paid more in dealer participation than other groups. They aren’t looking at APR or retail buy rate.”
To find that disparate impact, the CFPB has not used a statistical impact, since data such as race isn’t captured on car loans. Instead, it is using the BSIG method, which is based on an analysis of the last name of the consumer and where they reside.
“It is fraught with peril. People across the political spectrum have criticized the CFPB for this,” said Metrey. “The CFPB’s own data demonstrate its limitations. CFPB used its mortgage database, which captures this background data. They ran it against the mortgage database, but found it had significantly flawed results.”
Despite the flaws, four lenders have agreed to consent orders. Only one lender has been fined: Ally, which fought the CFPB and ultimately paid $90 million. The other companies agreeing to consent orders have been American Honda Finance, Fifth Third, and Toyota Motor Credit.
While Congress does not have oversight of the CFPB, including no control over appropriations, several bills have been proposed that would rein in the CFPB on Disparate Impact. Those include HR 1727 and S 2663, which would nullify CFPB Bulletin 2013-02, and requires that prior to issuing future guidance on ANY topic related to indirect auto financing and provide public notice and comment, CFPB would make publicly available all studies, data, methodologies, analyses and other information relied upon by CFPB in preparing such guidance, and more. HR 1727 Passed the House by a huge majority.
Metrey also noted:
- The House Financial Services Committee Majority Staff Report found that senior CFPB officials knew that Disparate Impact theory of liability may not be actionable; BISG is “less accurate than other available methods and prone to significant error, and that factors other than race were causing observed disparities, but the CFPB refused to control for them.”
- The HFSC Majority Staff Report on the Ally settlement found that the CFPB went to extraordinary lengths to ensure that it could exhaust the $80 million in remuneration funds that Ally had agreed to pay to more than 235,000 minority consumers. (CFPB got to 235,000 by adding up fractions of people.)
So where does that leave lenders? According to Metrey, “We currently have a situation which is at an impasse. The CFPB can’t move the market, and the industry has a cloud of uncertainty over it over what it can do. With that in mind, bipartisan calls in Congress to get a non-legislative, non-consent order fix to this.”