Nov. 14 --Consumer Financial Protection Bureau (CFPB) Director Richard Cordray defended the agency's methods for determining potential discriminatory lending in the indirect auto finance market and said lender relationships with car dealers will continue to face close scrutiny.
Cordray said the CFPB continues to have serious concerns that blacks, Hispanics, Asians, and other borrowers are being treated unfairly under arrangements that compensate dealers for originating loans on behalf of banks and other auto lenders.
“Our initial analysis thus far raises serious concerns about discrimination in the field of indirect auto lending, which is causing millions of dollars in harm to consumers,” Cordray said.
The CFPB hosted a forum on auto financing that included other federal regulators, consumer advocates, and trade groups representing auto dealers and major lenders.
The bureau issued a bulletin in March that said lenders may be liable under the fair lending provisions of the Equal Credit Opportunity Act (ECOA) for any discriminatory lending, whether intentional or not, that may happen through auto dealerships that originate loans on behalf of the lenders. The bureau does not have authority to regulate car dealers (25 BBLR 431, 3/28/13).
A number of lawmakers and auto finance industry stakeholders have said that the CFPB lacks hard data and has not explained the basis for its assertions that so-called disparate impact may be occurring among minority borrowers.
Cordray said the CFPB only uses “proven statistical methods” to determine whether discriminatory lending is occurring in the indirect auto lending market.
“The approach we take to assessing fair lending risk is not new and is already familiar to most lenders who use the same approaches themselves. Our approach is largely similar to those used by the Department of Justice and other regulators,” he said.
Under arrangements with lenders, there is often discretion for the car dealer to sell the borrower a higher interest rate than if the bank or finance company had made the loan directly to the borrower. The rate markups are used to compensate dealers for their work originating the loans.
Cordray said that lenders could take steps to comply with the law by adopting other pricing mechanisms to compensate dealers, such as a flat-fee structure or a fixed percentage of the amount financed.
Cordray said adoption of alternative pricing mechanisms would provide greater transparency to consumers about the costs of auto lending. At the same time, lenders would avoid “close and constant monitoring” by the CFPB over potential harm to minority borrowers from discretionary markup practices, he told the forum.
The CFPB has ECOA enforcement authority for large banks with more than $10 billion in assets, while smaller institutions are examined by their primary safety and soundness regulator. Cordray said the March bulletin was a reminder to lenders offering auto loans through dealerships that they remain accountable under the law and its implementing regulations.
“Again, none of this should have come as news to auto lenders, for whom these laws had already been in place for many years and many of whom had already been through litigation on some of these very same points,” Cordray said.
Under ECOA, auto lenders and other nonmortgage lenders are generally not allowed to collect data about the borrower's age, gender, race, or other types of similar information.
The CFPB uses proxies and other methods used by other federal regulators, such as the Office of the Comptroller of the Currency (OCC), to assess the probability that a borrower belongs to a particular racial group or is of a particular national origin, Cordray said.
Those methods only use publicly available data to determine probabilities, “so that anyone can replicate our processes,” he added.
During a panel discussion, officials from the Department of Justice, the OCC, the Federal Trade Commission, and the Federal Deposit Insurance Corporation said there are a number of proven methods to proxy for race and national origin.
One method commonly used to check the probability that an applicant is Hispanic or Asian is to use the last name database published by the Census Bureau, which reports by race and national origin the percentage of individuals with a given surname.
Another method to proxy for race and national origin is to use census tract information in which an individual's residence is located, and assign probabilities about the borrower's race or national origin based on the demographics of that area, as reported by the Census Bureau.
Donna Murphy, director of the OCC's consumer law section, said the agency continually refines its ECOA assessment methods to take into account changes in technology, the marketplace, and legal developments. There are also methods specific to each type of credit product being offered.
“For auto lending, we are looking at how we gather information on factors such as the use of third parties and how a bank or thrift's decision-making is structured, both in terms of the credit decision and the components of its pricing,” she said.
Patrice Ficklin, director of fair lending at the CFPB, said the agency has seen pricing disparities of at least 10 basis points when comparing car loans to black, Hispanic, or Asian consumers versus whites, taking into account borrower credit profiles. In some cases, the disparities have been more than 30 basis points, she said.
The CFPB and other banking regulators refer their fair lending reviews to the Department of Justice. Steven Rosenbaum, chief of the DOJ's housing and civil enforcement section, said that ECOA neither requires nor prohibits discretionary markups in indirect auto pricing.
However, Rosenbaum said that lenders should identify and set limits on allowable increases, or consider using some of the alternative pricing mechanisms advocated by Cordray and others at the forum.
“If you have discretion in pricing, you have a fair lending risk and you need to manage around it,” he said.
The Dodd-Frank Wall Street Reform and Consumer Protection Act prohibits the CFPB and other banking agencies from directly regulating auto dealers, but some lawmakers including Sen. Elizabeth Warren (D-Mass.) have called for changes to the law.
“I think the CFPB has done great work, and great work in this area as best it can,” Warren said at a Nov. 12 hearing of the Senate Banking Committee. “But it makes no sense to me that there should be any exception here for consumers who are being tricked out of billions of dollars every year on car loans.”
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Cordray's prepared remarks to the forum are available at: http://www.consumerfinance.gov/newsroom/director-cordray-remarks-at-the-cfpb-auto-finance-forum/.
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