David Westcott — July 2013
2013 NADA Chairman
Ever since the Consumer Financial Protection Bureau (CFPB) released its fair lending guidance to indirect auto lenders on March 21, dealers and lenders have questioned the basis for the guidance—and now Washington lawmakers are as well.
The foundation for the CFPB’s guidance wholly rests on a disputed theory of liability called “disparate impact.” Under this theory, if the auto finance system results in minorities paying more for credit than non-minorities in the same credit tier, then unintentional discrimination is taking place. In an effort to ensure lenders are complying with the Equal Credit Opportunity Act (ECOA) and Regulation B, the CFPB targeted the compensation arrangements used by indirect auto lenders with dealers.
Late last month, House Republicans—including 27 members of the Financial Services Committee—sent a letter to the CFPB questioning the intent and methodology behind its guidance. Just as NADA has asked CFPB officials to provide grounds for its assertion that disparate impact exits in auto lending today, Republican lawmakers also called on the CFPB to provide the rationale behind its new fair lending guidelines.
The House letter which was dated on June 20, asked the CFPB to explain how it determined two important data points in its study regarding disparate impact in the auto industry: the background of certain borrowers and the pricing discrepancies. A total of 35 House members signed the letter which, in part, read: “It is troubling that the agency has initiated this process without a public hearing, without public comment, and without releasing the data, methodology, or analysis it relied upon to support such an important change in policy.”
The lawmakers have asked the Bureau to respond within 30 days.
This isn’t the first time Congress has stepped in to question the unfounded guidance. A letter dated May 28, was circulated by Congresswoman Terri Sewell to colleagues on the House Financial Services Committee. A total of 12 Democrats signed the letter and it was sent directly to CFPB director Richard Cordray. Their letter also asks for the analysis and methodology behind the guidance.
Despite these requests, the CFPB has not revealed any of this information, including the data it used to run its statistical analysis. This poses a major problem since dealers resoundingly agree that a federal agency has an obligation to provide transparency, reliable data analysis, interagency coordination and public feedback when it attempts to change the financing method of a $783 billion auto loan market.
Although the CFPB is not accusing dealers of intentional discrimination, the series of actions it has taken could drastically change how auto finance sources compensate dealers for arranging auto loans. Dealers across the nation understand that changing the system could stifle competition and end up costing consumers more—ultimately hurting the people the CFPB is trying to protect in the first place.
To date, the CFPB has issued subpoenas to several large auto lenders seeking information on sales practices, pricing and disclosure. The Bureau is seemingly pressuring lenders to change the way they compensate dealers so they ultimately move toward a flat fee model.
Over the past few months, NADA opened a dialogue with CFPB officials—and met several times—to advocate our position and gain clarity on theirs. We have contested the assertion that there is a potential for disparate impact on protected classes of consumers in today’s auto lending. We will continue to let officials—and the public—know that dealers positively and fairly help secure financing for their customers.