Compliance Insider: Nobody Likes a Bully

The Consumer Financial Protection Bureau is under increasing fire for its questionable fair lending enforcement activities, both in the media, and in the U.S. Congress. It’s about time that both groups started asking questions, and it’s time the American public started weighing in as well. There is much good the bureau can do for consumers, but its recently exposed actions do anything but.

As you’ll recall, the CFPB issued a guidance document on fair lending in March 2013, outlining the position it was taking with respect to fair lending in the indirect auto finance space. At the time, many of us read it as the CFPB’s shot across the bow, indicating its resolve to take apart the business model auto finance has operated under for decades, despite the fact that other government investigations and lawsuits over the years had failed to find any actionable discrimination. The goal, we perceived, was to do away with the dealer reserve model that has worked so well (and allowed dealers to offer rates lower than what one could get directly from their bank) and replace it with a model that would only work if it was imposed on the entire industry at once, i.e., the flat-fee model.

The House of Representatives recorded a bipartisan vote of 332-96 to rescind the guidance on Nov. 18, 2015. Concerned about the lack of transparency and accuracy with respect to the CFPB’s method of determining whether discrimination has occurred, the bill (H.R. 1737) would require the CFPB to observe a public notice and comment period before it issued any final guidance (much like a normal rulemaking process), make the studies and data it used in formulating its guidance publicly available, and determine the costs and impact the guidance would have on consumers and women-owned, minority-owned, and small businesses. The Senate has yet to act. Shortly after the vote, the Republican staff of the House Financial Services Committee issued a scathing indictment of the CFPB’s activities in its Nov. 24, 2015, report Unsafe at Any Bureaucracy: FPB Junk Science and Indirect Auto Lending. In a nutshell, the report exposes the political nature of the bureau’s attack on indirect auto finance, as well as its decision to prosecute fair lending claims fully knowing that the methodology it used to determine race and ethnicity was horribly flawed. In fact, the report uncovered that the bureau knew that its methodology accurately identified African Americans only 54% of the time when applied to mortgage databases where the actual race and ethnicity of the borrowers were known.

The Republican staff issued a second report on January 20th, showing that the methodology for identifying African American, Asian, and Hispanic consumers entitled to receive restitution from Ally Financial (the first large scale discrimination settlement that resulted in an $80 million fine and $18 million civil money penalty) results in many white consumers receiving restitution checks, i.e., consumers who are not eligible.

The report asserts that the Department of Justice objected to the CFPB’s methodology for that very reason, but the CFPB felt it had to do it, or else far fewer people would receive restitution than it had publicly announced. In other words, the methodology had nothing to do with remunerating the people alleged to have been harmed, and everything to do with keeping up public appearances that the bureau had been right all along.

What’s happened is that the bureau has put politics before justice. It’s opted for a results-oriented focus where the ends justify the means, and the means amount to nothing more than government extortion. The bureau has been taken in by consumer advocates who, I daresay, seem to care more about propagating their own existence by creating solutions in search of problems than about justice and fairness. The auto finance industry is guilty of little, if any, measurable fair lending offense, and the bureau knew it before it started down the rabbit hole. So, query: With so much waving the bureau off of pursuing the indirect auto industry for fair lending violations, why did it go forward?

Perhaps, because it is a new agency that had lots of opposition, at the outset it feels like it needs to make a big mark. It has to — and could — do that by focusing on areas it could address without calling into question its jurisdiction or application of the law. But, perhaps the opposition was around for the reasons identified in the recent House staff reports: they appear to be valid concerns today.

The way to assuage those concerns was to focus on sure wins (which requires sure wrongdoing), not on testing the limits of its jurisdiction and authority. The path the bureau chose is jeopardizing its ability to credibly execute its very important mission. It’s time for a do-over.

We trust our government to do the right thing and set an example for its citizens and the world. We are, and should be, troubled by the evidence set forth in the staff reports, as it belies the purpose and mission of the bureau. I fear it will get worse for the bureau before it gets better, but I’m hopeful that it comes out the other side wiser and more focused on the real problems that exist out there.

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. Michael 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.