CFPB Continues Crackdown on Auto Lending Industry

WASHINGTON — Several auto lenders under investigation by the Consumer Financial Protection Bureau for potential fair lending violations are being referred to the Department of Justice, according to sources familiar with the matter.

At least three lenders have recently been given notices by the CFPB about the referral, sources said. Although the firms have not been publicly identified, the agency has been probing large banks for more than a year, while it has asked several big non-banks to begin submitting data to the CFPB.

Agency officials have argued that financial institutions are responsible for mark-ups made by dealers, including whether they disproportionately raise interest rates on minority and other protected consumers. But banks, backed by some lawmakers, have insisted they should not be on the hook for actions taken by a dealer without their knowledge.

"The current round of discrimination investigations focused on auto lenders is ill-founded," said Andrew Sandler, chairman and executive partner at financial services law firm BuckleySandler.

Since auto loans legally can't show the race or gender, regulators have to use assumptions known as "proxies" of a lenders' portfolio that is partly built from business at dealerships.

Regulators "don't have reliable information from which to draw conclusions and lenders only get a sliver of any dealer's transactions," Sandler said. "And so, no meaningful conclusions can be drawn from lender pricing data as to whether either the lender or the dealer has engaged in discriminatory conduct."

The CFPB issued a bulletin to the indirect auto lending industry in March, warning that it would cite lenders for fair lending violations if their partners discriminate against any protected class, regardless of whether the discrimination was intentional. This legal theory, known as disparate impact, has sparked concerns with lenders, dealers and policymakers who question whether the CFPB can hold indirect auto lenders responsible for actions taken by dealers.

They also accuse regulators of misinterpreting proxy data by relying on publicly available Social Security Administration and Census Bureau information to draw conclusions about whether a borrower is in a protected class. Doing so, lenders said, is unreliable, sometimes allowing regulators to classify a borrower based on their name or whether a given ZIP code is in a predominantly minority area.

"The proxies the CFPB is using are completely arbitrary" in the manner it's being used to take legal action, said Bailey Wood, the senior director of legislative affairs and communications at the National Automobile Dealers Association. "If you look at the list of names for women that the Fed uses to determine whether the loan was made to a female or male, my name is on there as 'Bailey' being a female. And I'm most certainly not a woman."

Dozens of House lawmakers have sent letters to the CFPB questioning how the agency used data from proxies to come up with its March notice, and why it issued a bulletin rather than proceeding through the rulemaking process that is subject to public comment.

Last week, a bi-partisan group of 22 senators also joined in the debate, saying the agency has not yet provided sufficient information to Congress, particularly in its use of disparate impact theory, when a lender unintentionally discriminates against a protected class.

"Although the CFPB has alleged that 'disparate impact' discrimination is present in the indirect auto financing market, the bureau has yet to explain its basis for this assertion," the senators said in their letter issued Oct. 30. "Nor has the bureau released the complete statistical methodology it employs for determining whether disparate impact is present in an auto lender's portfolio and the extent to which it has considered how the practical effect of its guidance will affect competition in the auto loan marketplace."

That same week, three Democrats in the house — Reps. Colleen Hanabusa of Hawaii, Frederica Wilson of Florida and David Cicilline of Rhode Island — also sent a similar letter to the CFPB that was obtained by American Banker.

"The importance of this issue necessitates proper Congressional oversight, yet without complete information, we cannot know if the CFPB is faithfully executing the Equal Credit Opportunity Act's protections against discriminatory lending, or if the bureau's lending guidelines are unnecessary and counter-productive," the Oct. 29 letter said.

The CFPB declined to comment for this article, but sent a letter in response to the senators Monday in an attempt to address Congress' concerns. The CFPB said it uses an "integrated" methodology of surnames and geography based solely on public data that has long been used by other regulators.

"For the purpose of conducting our supervisory work, we have chosen to use proxy methods that rely solely on public data so that lenders can replicate our methods without the need to recreate or purchase proprietary databases as part of their own fair lending compliance management systems," the agency said.

However, the CFPB did not clearly define the "controls" it uses for determining disparate impact of a lender in partnerships with dealers, arguing it will be cited on a case-by-case basis.

"When lenders share with us the nature and results of their own analysis, we are open to hearing specific explanations for the decisions they have made to include particular analytical controls that reflect legitimate business needs," the letter said. "Because of this case-by-case determination we cannot identify each control that we apply in the analysis to ensure that borrowers are similarly situated."

The CFPB further contended that it pursued a bulletin over a rulemaking process because it believed current fair lending laws addressed the topic and the bulletin was to "remind lenders" of such laws. Because the bulletin did not add or change a rule, the CFPB argued that it was "not appropriate" to do a cost-benefit analysis on how the bulletin would impact the industry.

Despite complaints the CFPB is overstepping its authority, lenders have been acting on the agency's March bulletin, with many issuing letters to their partners warning about potential fair lending violations, particularly tied to interest rate pricing.

Ally Financial reported earlier this year in a regulatory filing that it was being investigated by the CFPB with regard to fair lending laws. Toyota Motor Credit Corp. and American Honda Finance Corp. have also reportedly surrendered information to the CFPB and Justice Department in response to similar inquiries. It remains unclear whether the Justice Department will pursue cases from the companies cited so far.

But the CFPB's actions have already caused lenders to curtail dealerships, which have often noted that they are exempt from the Dodd-Frank Act.

"Notwithstanding the legal arguments about coverage of dealers, at the end of the day, the CFPB has the ability to enforce fair lending standards against the finance parties so they have to take this seriously," said Donald Lampe, a partner in the financial services group at Morrison & Foerster. "It is affecting the auto finance industry and the conduct of the auto dealership industry."