CFPB Guidance Lacks Transparency and Research

David Westcott — May 2013

COMMENTARY
   David Westcott
Westcott
2013 NADA Chairman

The Consumer Financial Protection Bureau (CFPB) issued fair lending guidance this spring that seeks to change the way dealers are compensated for arranging financing without demonstrating that problems exist with the current compensation method or without analyzing the effect that such change would have on the marketplace.
 
When a federal agency seeks to upend an enormously efficient $783 billion market, it should only do so in a manner that is transparent, thoroughly researched, and that benefits from interagency coordination and public feedback.
 
The foundation for the CFPB’s guidance wholly rests on a theory of liability called “disparate impact.” Under this theory, if an auto finance policy results in certain groups of consumers paying more for credit than similarly-situated consumers in other groups, then unintentional discrimination is taking place.
 
The bureau claims that this theory exists under the Equal Credit Opportunity Act and Regulation B and is using it to target the compensation arrangements used by indirect auto lenders with dealers. The bureau favors arrangements in which indirect lenders compensate dealers through the use of flat fees instead of arrangements that allow dealers to discount the credit rates that they offer to consumers in order to earn their business.
 
The first problem with this guidance is the way the CFPB measures whether disparate impact financing is present in the indirect auto financing market. Disparate impact does not involve intentional discrimination and instead is proven through a statistical analysis of past transactions. We have no idea what methodology the bureau is using to measure disparate impact or what data it is relying upon to conclude that it exists in today’s auto financing market. For an agency that promotes transparency and expects the same from the businesses it regulates, it is extraordinary that the bureau has not revealed this basic information.
 
The second problem is the CFPB’s lack of foresight. Before disrupting a robust and efficient market that performed extraordinarily well during the credit crisis, it is critical that the bureau closely examine the effect flat fees would have on the cost of credit to consumers. By effectively eliminating dealers’ current ability to discount the credit rates they offer to consumers, the bureau would be removing a huge competitive force that has been enormously effective in significantly reducing the cost of credit paid by millions of consumers. This is important for all consumers, especially those who would be prevented from obtaining conventional financing for their transportation needs because of an increase in the cost of credit.
 
Finally, the CFPB has not coordinated its enforcement actions with the Federal Trade Commission and the Federal Reserve Board, which are the agencies Congress entrusted to directly regulate dealers: As a response, NADA has opened a dialogue with CFPB officials over the past month to advocate our position and gain clarity on theirs.
 
U.S. Representative John Campbell, in an opinion piece in The Wall Street Journal, recently described the CFPB’s proposal as a “noxious attempt to solve a problem that doesn’t exist.”
 
Congressman Campbell, a member of the House Financial Services Committee, has called on the CFPB to “withdraw this outrageous and abusive guidance immediately.”
 
We share the Congressman’s concerns.  

Dave Westcott
NADA Chairman