Like a Dog with a Bone: Is it Time for the CFPB to Drop Disparate Impact?

On Jan. 18, the Republican staff of the House Committee on Financial Services issued Unsafe at Any Bureaucracy, Part III: The CFPB’s Vitiated Legal Case Against Auto-Lenders. This was the third in a series of reports addressing the Consumer Financial Protection Bureau’s attempts to hold auto finance companies responsible for racial and ethnic disparities in portfolios made up of installment contracts purchased from thousands of dealers. According to the press release:

“The report … demonstrates that under recent Supreme Court precedent, the CFPB’s use of the ‘disparate impact’ legal theory in enforcement actions against auto financers would not survive judicial scrutiny.

“Fuzzy logic and false comparisons are unfortunately prevalent in the CFPB’s auto-lending actions. In every aspect of the CFPB’s auto-lending actions, the CFPB’s lack of rigor leads to unsupported and unreliable conclusions.”

This report follows CFPB Fair Lending Director Patrice Ficklin’s blog post on Dec. 16, 2016, regarding the CFPB’s fair lending priorities going forward — i.e., that it will focus on redlining, mortgage, student loan servicing, and small business lending. With respect to auto finance, Ficklin wrote:

“Because the consumer bureau is responsible for overseeing so many products and so many lenders, we re-prioritize our work from time to time, to make sure that we are focused on the areas of greatest risk to consumers. For example, we have examined over a dozen of the nation’s largest auto lenders and achieved important market awareness and movement, and we believe that a wide range of supervisory compliance solutions tailored to each lender will work to secure and advance our progress in protecting consumers.”

In other words, the CFPB does not plan to pursue auto finance disparate impact claims through enforcement. It will favor pursuing the claims that are easier to prove. However, it is clear the CFPB will continue to seek resolutions with auto finance companies through the confidential supervisory process.

The CFPB’s BISG proxy method has been shown to be a poor tool for predicting race and ethnicity, and the CFPB has been wildly unsuccessful in its attempts to drive the industry to a “tipping point” where  he entire industry will move to flat fees or adopt lower rate caps. This is no surprise — every settlement the CFPB has reached has left the subject finance company in a less competitive position than its peers.

Further, consumers are not paying less money for credit, nor are dealers making less money (which the cynic in me fears has been the point of this exercise all along), so what has it really accomplished? It would seem that backing off of enforcement in favor of supervisory action is a fool’s errand without enforcement as a tool and without any case law to support the CFPB’s position.

History is not on the CFPB’s side either. The CFPB lauded the Supreme Court’s decision in June 2015 involving Inclusive Communities and a Texas agency. That case found that the Fair Housing Act’s “results oriented” language was sufficient to support a disparate impact cause of action. You’d have thought by the CFPB’s public reaction that the case put to rest any contention that disparate impact was not a viable claim under the Equal Credit Opportunity Act. Unfortunately for the CFPB, the ECOA contains no results-oriented language, so the case did nothing at all to prop up the CFPB’s position. In fact, it undermined it.

If we assume for a moment that the CFPB is right, i.e., the ECOA supports a disparate impact claim, the court made these claims very difficult to prove. Fearing abuse by plaintiffs’ attorneys and the government, the court made clear that a robust causation analysis is required to support a disparate impact claim. Further, the court made clear that statistical analysis alone is insufficient to support a prima facie case of disparate impact.

To date, it appears the CFPB has relied solely on its statistical analysis to support its disparate impact claims. The court rightly understood that statistics are only as good as the data available, and as the methodology and controls employed in a regression analysis.

It is no surprise the CFPB has been noticeably silent about what happened to the plaintiffs in the Inclusive Communities case after it was remanded to the appeals court. That court further remanded it back to the district court to reconsider, in light of the Supreme Court’s ruling. Predictably, the case was dismissed because it was based solely on statistical analysis. At least one other district court has dismissed a disparate impact case for the same reason.

I think it’s reasonable to assume that the last thing the CFPB or the Department of Justice wants to do is litigate an auto finance disparate impact case, given the heavy reliance on questionable statistical analysis and a lack of further evidence of discrimination. It would be only a matter of time for a case to make its way through the courts resulting in what would very likely be a defeat for the agencies.

Where does that leave the CFPB? It could continue to try to prosecute these cases as unfair, deceptive, or abusive practices. However, its claim is based on finance companies’ “practice” of allowing dealers discretion to set rates.

The CFPB is really left to do what it should have done in the first place: Write a rule and put it through the full notice and comment process. Had the CFPB done this in the first instance, it would have likely achieved its goal of changing the way the industry does business.

Doing it now will be close to impossible given the unfavorable political environment it faces. Absent a successful rulemaking, I expect auto finance will continue to operate as it always has.

Perhaps it’s just time for the CFPB to swallow its pride and let go of this auto finance bone. It could do a lot of good focusing on real and actionable harm.

Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. He is a frequent speaker and writer on a variety of consumer credit topics. Richard can be reached at 202-327-9705 or mbenoit@hudco.com. Nothing in this article is legal advice and should not be taken as such. Please address all legal questions to your counsel.