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Friday, November 15, 2019

U.S. House committee report slams CFPB for campaign against vehicle finance companies

By Jessica Karmasek | Dec 3, 2015


WASHINGTON (Legal Newsline) - A U.S. House committee is taking aim at the Consumer Financial Protection Bureau for its alleged “pressure campaign” against vehicle finance companies.

Last week, the House Financial Services Committee released a staff report, including various internal CFPB documents obtained by the panel, that show the bureau’s “disparate impact” claims against vehicle financing businesses are weak and that the statistical method it is using to allege racial discrimination in auto lending is “prone to significant error.”

“Notwithstanding the weakness of its case, the Bureau pursued its radical enforcement strategy using ‘unfair, abusive and deceptive’ tactics of its own, including by making an example of a company over which it had significant political leverage and concealing other aspects of its efforts from public scrutiny,” according to the report, “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending.”

Internal memoranda, according to the staff report, reveal that senior bureau officials warned CFPB Director Richard Cordray -- a former Ohio attorney general -- of the “weakness” of the controversial legal theory upon which it has built numerous discrimination cases against auto lenders.

The bureau is using the disparate impact theory to go after those companies that help arrange auto financing for car buyers.

Disparate impact occurs when a lender’s practices or policies are facially neutral but have discriminatory effects. Sometimes these practices meet a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact. But sometimes they do not.

“The CFPB is a dangerously out-of-control agency,” Committee Chairman Jeb Hensarling, R-Texas, said last week. “It is irresponsibly branding companies with the stigma of racial discrimination based on nothing more than junk science that even CFPB senior officials acknowledge is gravely flawed.

“Why? To cudgel those companies into enormous monetary settlements without ever having to go to court. If it sounds like a shake down, that’s because it is.”

The House report was released on the heels of a Nov. 18 House vote to nullify CFPB Bulletin 2013-02, related to indirect auto lending.

In a 332-96 vote, the House passed the Reforming CFPB Indirect Auto Financing Guidance Act, or H.R. 1737.

If the bill passes the Senate and is signed by the president in its current state, the legislation will amend the Consumer Financial Protection Act of 2010 by directing the bureau, when proposing and issuing guidance primarily related to indirect auto financing, to:

- Provide for a public notice and comment period before issuing the guidance in final form;

- Make publicly available all information relied on by the CFPB;

- Redact any information exempt from disclosure under the Freedom of Information Act;

- Consult with the Board of Governors of the Federal Reserve System, the Federal Trade Commission, and the Department of Justice; and

- Study the costs and impacts of the guidance to consumers and women-owned, minority-owned, and small businesses.

The act also would nullify Bulletin 2013-02, otherwise known as the Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act, which was published in 2013.

The bulletin essentially provides guidance to the auto lending industry related to compliance with the Equal Credit Opportunity Act.

But some view the bulletin as the bureau’s way of indirectly attempting to supervise the auto industry, which is expressly prohibited by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The CFPB was created by Dodd-Frank, which was passed in 2010 in response to the financial crisis of 2007-08 and the subsequent recession.

The House committee, in its report, noted that though the bulletin is technically nonbinding and only serves as guidance, it effectively functions as a rule because industry participants run the risk of an enforcement action or other adverse action if they fail to comply with its mandates.

“Racial discrimination is morally repugnant and against the law. Our government must continue to combat discrimination and punish those responsible. But inventing discrimination through a disparate impact theory is not a helpful tool in fighting actual discrimination,” Hensarling said last week.

“And increasing the cost of auto loans for consumers -- especially those with low and moderate incomes -- through meritless discrimination cases and government-imposed pricing schemes is the exact opposite of what a consumer protection bureau is supposed to do.”

Sam Gilford, a CFPB spokesman, declined to comment on the House report. However, he reiterated that the bureau’s goal has been, and continues to be, the elimination of illegal discrimination.

“Discrimination in auto lending has resulted in minority borrowers being unfairly charged higher interest rates on their loans,” he said in an emailed statement to Legal Newsline. “We will continue to fairly and consistently enforce the Equal Credit Opportunity Act to ensure borrowers harmed by discrimination receive the relief they deserve.”

Kate Larson, regulatory counsel for the Consumer Bankers Association -- a trade organization that represents financial institutions offering retail lending products and services such as automobile financing, credit and debit cards, home equity lending, residential mortgages, small business loans and student loans -- said the House committee report and accompanying memoranda provide “rare insight” behind the CFPB’s closed doors.

“In particular, the internal memos demonstrate that the bureau is strategically debating their approach to the indirect auto issue and employing enforcement as a policy-making tool,” she said in an emailed statement.

Meanwhile, auto dealers have rallied behind H.R. 1737.

Both the National Automobile Dealers Association and the American International Auto Dealers Association have called it “reasonable” and a “common sense solution.”

“International brand automobile dealers vehemently oppose discrimination in any form and fully support the efforts of the CFPB to eliminate it from the marketplace,” said Cody Lusk, president of AIADA, following the House vote last month.

“However, the CFPB has failed time and again to fully disclose its methodology for measuring the presence of disparate impact or provide transparency in issuing guidance to auto lenders. H.R. 1737 is a common sense solution to a problem the CFPB has itself created by working to end dealer discounts on financing without considering the negative impact on consumers.

“The House today chose to support small businesses by pushing back against CFPB policies that reduced competition among lenders and, as a result, raised rates on consumers.”

The report comes as the CFPB continues to face scrutiny over its announcement in October that it is considering proposing a rule that bans the arbitration clauses that prevent class action lawsuits.

From Legal Newsline: Reach Jessica Karmasek by email at

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Consumer Financial Protection BureauHouse Financial Services Committee