52 House Dems Buck Obama On Auto Loan Bias Suits
After extracting $180 million from Honda, Ally Financial and other auto lenders to settle racial discrimination charges, the Obama administration has set its sights on reordering the auto finance industry. But even many Democrats think that it's attacking a phantom foe and will end up hurting car buyers. More than 50 Democratic lawmakers — including Democratic National Committee chief Rep. Debbie Wasserman-Schultz and some Congressional Black Caucus members — have signed onto a
GOP bill that restricts the administration's use of a low-proof legal theory as a basis for filing race bias claims vs. auto lenders. HR 1737 now has 119 co-sponsors and has been taken up by the House Committee on Financial Services.
Critics say that the administration is trying to upend the auto-lending process based on flimsy allegations of racism, a radioactive charge that can permanently damage corporate brands and trigger boycotts. "Absolutely none of this has to do with discrimination," National Automobile Dealers Association (NADA) spokesman Jared Allen asserted in an IBD interview. In several bipartisan letters to the CFPB which is leading the administration's auto-finance attack, lawmakers have
complained that investigators have little evidence of lending bias.
The bias allegations rest on the statistics-based legal doctrine known as disparate impact, which holds that any policy or practice that results in adverse outcomes for minority groups must be racist, even if opportunities are the same, the policies are neutral and applied evenly to all customers, and there is no intent to discriminate. CFPB claims that its statistics show blacks and other minorities paying, on average, more in finance charges for car loans, so car dealers must be ripping
them off in favor of whites. As little as a 10-basis-point difference in charges can trigger investigations.
Car loan applications don't actually ask about borrowers' race, so the CFPB assigns race to borrowers based on their addresses and last names. But its methods aren't foolproof. For instance, African-Americans and whites often have the same surnames. Studies show that the agency correctly IDs black borrowers only 24% of the time. Even CFPB recently acknowledged that its "proxy" method badly misidentifies African-Americans. "CFPB must manufacture the central variable in its
analyses — race and ethnicity," O'Melveny & Myers financial services lawyer Christopher Craig said.
Auto lenders set interest rates based on factors including credit risks, but dealers can discount the rates at a cost to their own compensation. CFPB investigators have failed to account for a host of business factors unrelated to race that explain pricing differences at the dealer level. They include seven factors that the Department of Justice has recognized as legitimate reasons for dealer discounts. "When you do not factor in those factors, you are not comparing similarly situated
customers," NADA chief regulatory affairs counsel Paul Metrey told IBD.
For example, the DOJ has said that lenders can let dealers cut retail rates to close sales with customers who have shopped around for better deals or have taken advantage of special promotions or end-of-year clearances. Such discounts are critical in the highly competitive auto market, and they save customers millions of dollars a year. Could some dealers give white customers discounts just because they're white, and not because they walk into showrooms demanding that staff meet or beat
lower rates from other sources? Such localized prejudice is possible, but not likely.
Every time dealers discount rates, they shift money from their pocket to the customer's. Discounts are subtracted directly from dealer participation rates or from the compensation that lenders set for dealers to cover payroll and other expenses. So favoring whites beyond "meet or beat" deals or other business reasons would go directly against their own financial incentives.
CFPB declined comment. But in a letter to Congress, CFPB chief Richard Cordray wrote, "We cannot identify each control that we apply in the analysis to ensure that borrowers are similarly situated." Added Metrey: "That has been something industry has been crying foul about this whole period, yet they've persisted" in bringing discrimination charges against major car lenders.
Financial Services panel member Rep. Ed Perlmutter, D-Colo., has suggested that CFPB is trying to regulate car dealers indirectly in an "end around" of congressional limits. The Dodd-Frank Act, which created the CFPB, carved franchised dealerships out of the agency's jurisdiction.
CFPB has indicated that it has a broader goal of pushing the industry to adopt flat rates to curb discretion in loan pricing. But a one-price-fits-all system would cost consumers millions of dollars in lost discounts, NADA argues. After the Honda deal, Cordray cheered the carmaker's "proactive decision to move to a new pricing and compensation system" and said, "Other auto lenders should take note."
In a June 16 memo on the proposed Honda deal, top CFPB officials reportedly stated: "The significant limitation of dealer discretion ... is one of the goals we have been seeking with respect to the indirect auto matters." NADA has demanded that CFPB make the full memo public, calling it a "smoking gun" that reveals "exactly what it is they're attempting to do."
Source: Investor’s Business Daily
Editor's note: To download NADA's Fair Credit Compliance Policy & Program, click here.
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