President Obama’s newest regulatory agency, the Consumer Financial Protection Bureau, acted without Congress’ blessing in taking away lending flexibility from auto dealers. And it did so after conducting a discrimination study that it acknowledged was at least 20 percent inaccurate because officials guessed the race of car buyers.
The move has boomeranged big-time inside the president’s own party, which helped create the CFPB in 2011 as part of the Dodd-Frank banking law.
Democrats this summer crossed the aisle in large numbers in voting to rescind the agency’s crackdown on auto loans. They are sounding just like Republicans, accusing the agency of doing an end run around Congress, using sloppy math and engaging in overregulation.
“The CFPB has done the dealers a massive injustice,” Rep. David Scott, Georgia Democrat, declared shortly before the House Financial Services Committee voted 47-10 last week to nullify guidance that the CFPB issued in 2013 regarding car loans.
He was one of 13 Democrats to join Republicans in the vote. The Democrats argue that Congress explicitly exempted auto dealers from CFPB’s regulatory oversight and that the evidence the agency used to accuse dealers of discriminatory lending was deeply flawed.
“When you get into this area of accusing someone of racial discrimination, that is a serious indictment, and no industry deserves that kind of treatment, and certainly not the auto dealers,” Mr. Scott said.
The auto dealer industry has long been a powerful force in local politics and is applauding the bipartisan effort to roll back the CFPB’s action.
“Having an agency swimming so far outside of the very specific lane it was assigned to by Congress is an extremely serious public policy matter, and a growing number of Democrats and Republicans are justifiably concerned about the CFPB’s actions, as well as its secrecy, its methodology and its lack of accountability,” said Jared Allen, a spokesman for the National Automobile Dealers Association.
Democratic concern with the CFPB, however, goes even further.
On Saturday, Rep. Debbie Wasserman Schultz of Florida, the president’s handpicked chairwoman of the Democratic National Committee, joined other lawmakers including Reps. Alcee L. Hastings and Corrine Brown of Florida, and Reps. Jim Costa and Tony Cardenas of California in writing a letter to the agency warning that its proposed rules for payday lenders may hurt consumers.
The nation’s newest federal agency was created five years ago out of the Dodd-Frank legislation and was first headed by Sen. Elizabeth Warren, Massachusetts Democrat, with the explicit mission of protecting everyday consumers against Wall Street.
Yet it has increasingly been the recipient of bipartisan backlash for how it issues guidance and goes about its rule-making process. The CFPB is largely unaccountable to Congress because it is not tied to the appropriations process.
One idea floating around Congress would create a special commission to oversee the agency and keep it in line. Meanwhile, lawmakers are targeting some specific regulatory actions taken by the CFPB.
Rep. Ed Perlmutter of Colorado was one of 56 Democratic supporters of the Financial Services bill, H.R. 1737, to revoke the CFPB’s 2013 auto loan guidance, arguing that the agency exceeded its legal boundaries when it told third-party lenders that allowing auto dealerships the ability to pick interest rates presented a “significant risk” of “pricing disparities on the basis of race” and potential legal action.
Auto dealerships commonly use third-party lenders, such as credit unions or banks, to provide them with auto loans, which they then offer to potential car buyers. Under the practice, banks set the loan they are willing to offer to the dealership, and then the dealership can either charge a higher rate to the car buyer to make a profit or offer the loan as is.
The CFPB, in its guidance, argued that minorities were disproportionately affected by this process — that some car dealerships were charging higher rates to black buyers than they were to white customers. Because it is illegal for applicants of auto loans to disclose their race or ethnicity under the 1974 Equal Credit Opportunity Act, the CFPB had to guess which customers were black or white by their last names and addresses to prove their theory.
“To proxy for race and national origin, exam teams rel[ied] on data associated with consumers’ last names and places of residence. Census Bureau Data is first used to calculate the probability that an individual belongs to a specific race and ethnicity based on their last name. Exam teams then update[d] that probability based on the demographics of the area in which the person resides again using Census Bureau data,” the agency said of its methodology in aggregating the racial information needed to show discrimination.
The CFPB acknowledged in a white paper released last year that its proxy methodology had an error rate of at least 20 percent.
Nevertheless, using this process, CFPB in 2013 ordered Ally Financial Inc. and Ally Bank to pay $80 million in damages and $18 million in penalties for overcharging minorities, representing the federal government’s largest auto loan discrimination settlement in history. CFPB also has doled out $24 million in penalties and restitution to American Honda Finance Corp. on the same discriminatory charges.
In the two years since Ally settled with the CFPB, no damages have been paid because it’s still unknown which car buyers were damaged by the loan-making policy.
Lawmakers argue that the bureau lacks hard evidence that these financial institutions and car dealerships are engaging in discriminatory practices and that it also issued its auto loan guidance without regard to the law.
The CFPB didn’t go through a formal rule-making process, which includes public comment and industry voices to weigh in, before it warned third-party lenders of potential legal action. Moreover, under Dodd-Frank, the bureau is specifically prohibited from regulating car dealerships, with lawmakers concerned that its car lending guidance is a backdoor way to expand its regulatory footprint.
“American citizens have been denied their due process by this attempted non-rule-making rule by the CFPB,” Rep. Jeb Hensarling, Texas Republican and chairman of the Financial Services Committee, said at the July 29 hearing.
Mr. Perlmutter was more explicit: “Section 1029 of Dodd-Frank explicitly exempts auto dealers from CFPB’s jurisdiction. However, the Consumer Financial Protection Bureau is using” other laws to claim authority “to regulate auto dealers despite the exemption.”
Other Democrats took issue with the accusation of racial discrimination by auto dealers.
Car dealerships were among the first to integrate their workforces and were some of the first and most successful black-owned businesses in the country, Mr. Scott argued.
The National Automobile Dealers Association says the CFPB guidance prevents its members from offering discounts on loans and removing the flexibility to offer competitive pricing.
“Consumers have the right to find the best loan possible when purchasing a vehicle, the right to negotiate and the right to seek a better deal — and Washington shouldn’t try to deny that right,” NADA President Peter Welch said in a statement last week. “Discrimination in any form cannot be tolerated, and new-car dealers fully support the nation’s fair lending laws and the commitment of federal agencies to ensure fairness. But the CFPB’s policy of eliminating the ability of a consumer to get a discounted auto loan will restrict access to credit and hurt all consumers.”
Maxine Waters of California, one of 10 Democrats who opposed the bill, said it undermines the important work the CFPB is doing in reining in discriminatory auto lending practices.
“At a time when subprime auto lending is on the rise and major settlements against auto lending companies are reached for discriminatory lending practices, we should be supporting the work of the CFPB,” Ms. Waters said.
The legislation requires the CFPB to open up for public comment and publish all data and analysis related to its auto loan guidance before issuing it. It also would require the bureau to study the costs of the guidance on consumers and the industry.
The bill is headed to the House floor.