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Inside this issue
Is the CFPB Overestimating Racial Bias in Auto Loans?
Video Opinion: Shaking Down Auto Lenders
Stagnant Wages are a Drag on New-Car Sales
High Salesperson Turnover Getting Worse, Study Finds
DOD to Prohibit the Use of Certain Military Allotments
Trust in Takata to Solve Crisis is Dissolving
Toyota's Products, Factory Retooling Set Stage for Market Share Gains
Carmakers Hit the Gas as China Slows Down
Burt Reynolds Selling 'Smokey and the Bandit' Trans Am
Click here for more auto industry news at NADAFrontPage.com. .
Top Stories
Is the CFPB Overestimating Racial Bias in Auto Loans?

The CFPB's methodology is "flawed in its application and subject to significant measurements that lead to overestimation of racial disparities and calculations of alleged harm," said Chris Stinebert, president of the American Financial Services Association.

The financial services industry believes it has finally discovered proof that the Consumer Financial Protection Bureau uses flawed methods to detect possible discrimination in auto loans. A recently released industry-commissioned review of 8.2 million auto loans found that the CFPB's method was overestimating African-Americans and other minority populations, potentially leading to inflated enforcement actions. If the agency doesn't know a borrower's race accurately, it casts doubt on whether it can detect racial bias, the study argued. Though the CFPB and consumer groups dispute some of the study's findings, the industry is using it as they press their case on Capitol Hill and elsewhere that the agency is going too far in its crackdown on auto lending.

The CFPB's methodology is "flawed in its application and subject to significant measurements that lead to overestimation of racial disparities and calculations of alleged harm," said Chris Stinebert, president and chief executive of the American Financial Services Association, which commissioned the report conducted by Charles River Associates. The study "was even more aggressive in its findings than we had expected."

The industry has been battling the CFPB over its methods since March 2013, when the agency first warned lenders that they could be cited for so-called disparate impact when their partnering dealerships charge a different rate to minorities based on a portfolio-wide analysis. At issue is how the CFPB identifies minorities and other legally protected classes. For home loans, a borrower's race is included in the application. But it's not the same in auto lending, where that information isn't available. As a result, regulators like the CFPB use a proxy method to estimate the race of a borrower by instead looking at trends in surnames and geography. They often use a system called the BISG (Bayesian Improved Surname Geocoding), which has become the most common and arguably best option regulators use to estimate a borrower's race. But even regulators acknowledge the system is imperfect, identifying some borrowers as minorities when they are not.

The CFPB recently released a white paper meant to answer concerns raised by the industry and some policymakers on its proxy methodology. In the report, the agency did a sampling study and noted that the BISG system was overestimating African American and, to a lesser degree, Hispanic populations based on certain probability thresholds. But the Charles River study released Nov. 19 said the problems are worse than the CFPB acknowledged. The study found that the BISG system was overestimating African Americans by more than 40% based on a sample size of the actual population. The CFPB did a similar case study in its white paper and found the BISG system overestimated by about 20% of the actual African American population.

That has raised concerns even among some former CFPB officials familiar with the agency's program. "One, the paper reports that there's a significant error rate in the BISG results, such as a significant rate of false positives. And two, that there are some controls that the CFPB could implement that might reduce the error rate," the former official said on condition of anonymity. "The bureau should analyze this paper carefully."

But the industry argues that in addition to overestimating the population of a race, the agency is also overestimating the pricing disparities for minorities who get auto loans. Lenders fear that when a firm is cited for disparate impact and required to send checks to harmed consumers, they could be sending money to the wrong people if the BISG system is overestimating the affected population. "The study reveals that a real challenge to the CFPB's testing methodology is how it determines who gets a check or a rate adjustment. Because of the high error rate, it is likely that checks or rate adjustments will be provided to people not assumed to be harmed," said Paul Metrey, chief regulatory counsel at the National Automobile Dealers Association. "This is among the inherent flaws in the bureau's methodology."

The Charles River study further contends that the loan pricing disparities identified in the BISG system are inflated by 87% for African Americans and 57% for Hispanics relative to the raw pricing disparities identified using the actual race. The CFPB has "got to come to grips with flaws in its method, some of which are revealed in its own white paper," Metrey said. The "CFPB needs to explain how it corrects for those flaws and it needs to build in controls to ensure the consumers it is comparing are similarly situated."

Since the CFPB took its first significant stance on the topic by citing Ally Financial for disparate impact last December in conjunction with the Justice Department, the industry seems to have largely accepted that the agency would not back down from using a portfolio-wide analysis to find statistical disparities. "We're very hopeful that the study and data can be used in our continuing discussions with the CFPB," Stinebert said. "We all have the same goal: to reduce any overt discrimination or disparate impact that might occur in the auto finance industry."

However, the industry is pressuring the CFPB to consider other controls in its methodology, largely business and competitive factors that can influence the price of a loan and which differ greatly among dealers. For example, one dealer might have more inventory than another dealer so they cut the price of the loan to move more cars off the lot. That would likely not show in a portfolio-wide analysis at the indirect auto lender without some clearly marked explanation from the dealer. The NADA launched a fair lending compliance program earlier this year where dealers would voluntarily document their reasons for deviating from the wholesale rate offered by the lender.

"As demonstrated in the AFSA study, there are clear limitations in using the BISG proxy methodology to assess disparate impact in auto financing," said Gina Proia, chief communications officer at Ally Financial. "Ally believes that the most prudent course is for finance providers, dealers and other participants to come together to determine an industry-wide solution that addresses the issue of disparate impact without triggering significant unintended consequences."
Source: American Banker (Subscription required.)
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Video Opinion: Shaking Down Auto Lenders
By Holman Jenkins Jr., The Wall Street Journal

Business World Columnist Holman Jenkins Jr. on the Consumer Financial Protection Bureau's latest attempt to accuse employers of unintentional discrimination. Click here to view the commentary.
Source: The Wall Street Journal
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Stagnant Wages are a Drag on New-Car Sales

Some consumers hold off on buying or take longer loans

One reason U.S. auto sales still aren't quite back to the 17 million-a-year pace seen during the boom years before the recession: Many consumers, including most UAW members and many other blue-collar workers, haven't gotten much of a raise since then. Stagnant wages have made buying a new vehicle more difficult as the price tags keep rising, forcing some people with tight budgets to hold off longer, browse the used-car lot instead or take out a longer loan to reduce their monthly payment. Economists and dealers say shoppers don't fear losing their jobs as much anymore but often can't afford much more than what they already were paying on their trade-in. "If wages were growing, we'd be in a market over 17 million already," said Steven Szakaly, chief economist for the National Automobile Dealers Association. "I think these wage and income challenges are with us for the next several years." Szakaly expects light-vehicle sales to come in around 16.9 million next year and somewhere between 16.5 million and 17 million in 2016.
Source: Automotive News
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High Salesperson Turnover Getting Worse, Study Finds

Showrooms across the nation have a hard time keeping salespeople. In 2013, the average dealership had a 66 percent turnover rate among sales consultants, up 4 percentage points from the previous year and well above the national average for the private sector of 42 percent, the National Automobile Dealers Association's 2014 Dealership Workforce Study found. "Poor employee retention is a big money-wasting opportunity when you consider the retention and training costs and lost productivity issues, and the link to poor customer satisfaction and customer retention," said Ted Kraybill, president of ESI Trends. The Largo, Fla., firm compiled the third annual study for NADA, after reviewing 240,000 payroll records from 2,016 dealerships.
Source: Automotive News
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DOD to Prohibit the Use of Certain Military Allotments

The Department of Defense has announced that, effective January 1, 2015, service members will be prohibited from using new military allotments to purchase, lease, or rent personal property, including vehicles. This change to DOD regulations does not affect existing allotments and applies only to service members and not military retirees or DOD civilians. Additional information is available here.
Source: NADA Regulatory Affairs
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Trust in Takata to Solve Crisis is Dissolving

Automakers, regulators take action as airbag maker resists recalls

Takata Corp., the world's No. 2 supplier of airbag inflators and a company once considered too big to fail, is rapidly losing control of the recall crisis. Last week was a turning point. Regulators and automakers announced plans to conduct independent engineering tests of Takata's inflators. They also took steps to expand the recalls -- even though Takata said it isn't necessary. Their actions made clear that they object to Takata's adversarial approach with U.S. regulators. And Takata has done itself no favors by failing to find the cause of the defects -- and by doling out information slowly to the media. In Japan, Takata's top executives have avoided public appearances, adding to the growing perception of an out-of-touch company losing control of events. On Tuesday, Dec. 2, Takata bluntly informed the National Highway Traffic Safety Administration that it would resist the agency's demands for a nationwide recall of its driver-side airbags. And that's when the roof caved in.
Source: Automotive News

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Toyota's Products, Factory Retooling Set Stage for Market Share Gains

In public, Toyota executives are famously reserved in talking about the company's outlook and ambitions. Behind closed doors, it can be a different story. At a large Toyota dealer meeting held in August in Las Vegas, for instance, the company presented a video to attendees. It showed Bob Carter, senior vice president of Toyota Motor Corp.'s U.S. sales unit, driving a new Camry through the desert when, suddenly, three bugs went splat against his windshield. Stepping out for a closer look, he discovered they were not bugs but rather the mangled logos of Ford, Honda and Nissan. Then, as he turned back to get into the car, he squished something else with his foot. Stuck to the bottom of his shoe was a Hyundai "H." In an interview, Carter said the video was intended "to have a little fun" with the dealer audience. But the underlying message to dealers and competitors was dead serious: Toyota is on the march.
Source: Automotive News
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Carmakers Hit the Gas as China Slows Down

Luxury demand, weak domestic rivals provide hope in face of economic slump

Chinese bureaucrats are jittery, maybe even a bit panicky, about the country's slumping economy. But global carmakers sound as optimistic as ever as they place big bets on the world's biggest auto market. Last month, China's central bank unexpectedly lowered interest rates to reverse a slowdown in economic growth that also has sapped auto demand. Yet international carmakers remain largely unfazed and are standing firm behind the wisdom of their massive capacity buildups. Some even say sales are hurting because they haven't invested enough.
Source: Automotive News
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Burt Reynolds Selling 'Smokey and the Bandit' Trans Am

In some famous movies, the cars became as popular as the stars — and now one of those cars has come up for auction. Burt Reynolds is selling the 1977 Pontiac Trans Am that was a promotional vehicle for his comedy "Smokey and the Bandit". Reynolds received it as a gift for his car collection, according to Julien's Auctions, which is handling the sale. The movie, which also starred Sally Field and Jerry Reed, was about smuggling beer. Yes, beer. The black-and-gold car has a 400-cubic-inch V-8 engine and automatic transmission. The opening bid is $30,000, but it is expected to go for $60,000 to $80,000. The car is part of an extensive auction of Reynolds' belongings, from a high-school football trophy to Star Wars memorabilia.
Source: USA Today
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Quotable

"If you force everyone to follow the same mold, you will eliminate competition and prices will go up."

   
-- Holman Jenkins Jr., business columnist for The Wall Street Journal, discussing the impact of the CFPB's attempt to regulate auto lenders, Dec. 5

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