Lawmakers Give CFPB's Cordray Earful Over Auto Lending Crackdown
The CFPB hired Dr. Bernard Siskin three years ago to serve as the agency's expert witness when it brings discrimination cases against lenders. But Siskin has also been hired by JPMorgan Chase, Citigroup and other big banks to represent them in bias cases against the CFPB, causing issues for the agency.
The Consumer Financial Protection Bureau has struggled internally with how to end potential discrimination in auto lending, including debating whether it should cite a large lender in the hopes of effectively ending the ability of partnering dealers to mark up loans with all lenders.
In a series of internal documents that were reviewed by American Banker, Consumer Financial Protection Bureau officials repeatedly acknowledge its methodology could overcount the potential discrimination by firms, but say they prefer that to the alternative where bias is underestimated.
WASHINGTON — Lawmakers from both political parties on Tuesday sharply criticized the Consumer Financial Protection Bureau's attempt to restrict or eliminate auto dealers' ability to mark up a loan by citing their partnering lenders, arguing it would result in higher prices for consumers.
At a hearing, House Financial Services Committee members keyed off of stories in American Banker that referenced internal agency documents in which officials acknowledged sometimes overestimating the amount of bias at lenders and detailed efforts to target the dealer markup.
They argued the agency is unfairly pursuing auto lenders and dealers, even though dealers are exempt from the CFPB's jurisdiction, and raised questions about its disparate impact methodology, in which lenders are cited for unintentional discrimination if statistics show minorities receive higher rates at the dealership. Rep. David Scott, D-Ga., noted that the CFPB does not even know which auto lending borrowers are minorities (since laws prohibit such disclosures in auto loans), but instead must rely on an agency-created proxy that includes factors such as surnames and geography to essentially make an educated guess.
"This business with the auto dealers is a bad thing," Scott said. "It was downright insulting to African-Americans because you just assumed our last name was Johnson, or Williams or Robinson or maybe even Scott. Well let me tell you, there are a lot of white people with the same names."
Scott said the CFPB's actions were harming minority auto dealers.
"You directed an extraordinary and deceitful approach that harms some of the very people that you are trying to help," he said. "You've got hundreds of auto dealers that are African-American. But when you put out this blanket indictment, you hurt them. Then you went to the lenders, you pressured them to cut out their ability to discount their loans. The one little measure they got in there in which they can make a profit."
Cordray, who was often cut short as he tried to respond to lawmakers' questions, said he "strongly" disagreed with Scott's characterizations. He said the agency's use of disparate impact is often done in conjunction with the Justice Department.
"The Justice Department feels just as strongly and feels the same way as we do about the concerns here," Cordray said. "We feel that when people go to get an auto loan and lending programs have been established by lenders — even though they may be executed by dealers — that allow … risks of discrimination based on race or ethnic or other prohibitive characteristics, that's an issue we need to investigate."
The majority of criticism came from Republicans, including Rep. Sean Duffy of Wisconsin, who pointed to an American Banker story quoting agency officials who met in 2013 to discuss "a market-tipping settlement that would resolve the discriminatory disparities caused by dealer markup by eliminating markup at many major auto lenders."
Cordray acknowledged there were discussions about eliminating the dealer markup, sometimes referred to as the dealer reserve, but said it was just one of several options discussed.
"Early on, we thought that that might be one of the solutions to the problem. We never said it was the only solution to the problems," Cordray said. "I think we've moved in the direction that limiting the reserve might be a satisfactory solution."
According to documents reviewed by American Banker, CFPB officials debated whether to issue a rulemaking targeting the dealer markup, but were concerned they lacked the legal authority to do so. Asked about the issue, Cordray said a rule is still potentially on the table.
"We haven't ruled it [rulemaking] out but we haven't done that yet," Cordray said.
Some lawmakers and the industry have long pushed the CFPB to consider rulemaking or guidance in this area, arguing that a white paper released by the CFPB last year is not detailed enough for lenders to follow. Duffy said that attempting to curb dealer markup through enforcement actions is disruptive and harmful.
"When you're advised that you can actually do a rulemaking in regard to this issue, and you choose not to, but you try to make rules by way of enforcement, people don't know what the rules are," Duffy said. "So the heavy hand of the CFPB comes bearing down on an institution, making claims of racism. And if you think this is so important, why wouldn't you do a rule? Why wouldn't you let people offer comments? Why wouldn't you give guidance?"
Cordray responded by saying that it was a "fair question" but that rulemaking is also a "difficult choice."
"Where we think a matter is going to involve more in terms of specific facts and circumstances, it's hard for us to write a rule at the outset. We want to get more experience with that," Cordray said. "That's what we've done here. You may think in retrospect that it wasn't the right answer. Maybe years from now, I'll look back and think it wasn't the right answer, but that's how we try to proceed."
Lawmakers on both sides of aisle also continued to raise questions about employee claims of retaliation and discrimination at the CFPB.
Cordray said the internal employee issues "have been very real for me and of great concern," noting that the bureau has since scrapped the performance review system and that it is working with the union to develop a new system as well as adjusting pay-equity discrepancies.
"We've hit you with some hard questions, but I want to say to you that I like your words that you said, 'I want to do better,' " Rep. Rep. Joyce Beatty, D-Ohio, said in response to Cordray after questioning him on the agency's culture issues. "And so we will help you do better."