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Dealer associations back call for CFPB to correct enforcement bias

February 27, 2015
Five financial services organizations on Feb. 18 urged the Consumer Financial Protection Bureau to adjust its auto financing enforcement policy in light of a new study that casts substantial doubt on the government’s analysis.
The groups, which include the American Bankers Association, the American Financial Services Association, the Consumer Bankers Association, the Financial Services Roundtable and the U.S. Chamber of Commerce, wrote a letter to CFPB Director Richard Cordray urging the Bureau to change its enforcement policy on dealer-assisted financing, in light of findings in a peer-review study that showed there is significant bias in the Bureau’s analysis.
The National Automobile Dealers Association, the American International Automobile Dealers Association, and the National Association of Minority Automobile Dealers applauded the efforts of five financial services organizations to fix the serious flaws in the CFPB’s approach to regulating auto financing.
"Discrimination in the market simply cannot be tolerated," said NADA President Peter Welch. "However, in light of the rigorous peer-review that has cast significant doubt on the CFPB’s findings, the Bureau should change course — or at least hit the pause button — and address these new concerns. We applaud the courage of these organizations for speaking up."
The CFPB issued guidance in 2013 which called on lenders to change the way they compensate dealers for arranging financing for their customers because of a risk of disparate impact in the loans issued. However, an in-depth study by Charles River Associates demonstrates that the analysis the CFPB uses in enforcing its guidance is substantially flawed and that, as a result, the Bureau’s findings are erroneous and overstated — in some cases, dramatically so. 
For example, after reviewing data from more than 8 million financing transactions, the Charles River analysis concluded that the CFPB overstates one of its comparisons by 41 percent. Remarkably, despite the indictment of its methods, the CFPB has yet to address the study or its implications on CFPB policy.
In the current dealer-assisted financing model, consumers benefit as dealers obtain quotes from dozens of finance sources — many of which consumers would not ordinarily have access to. However, auto loan customers are not required to state their race or ethnicity on loan applications. 
To determine this, the government uses complex statistical modeling to estimate the number of minorities in a sample. The Charles River study showed that the CFPB’s use of this modeling contains numerous flaws, thereby casting doubt on the CFPB’s larger policy.
The flaws in the CFPB’s methodology have not stopped automobile dealers from developing procedures to address the CFPB’s concerns about the risk of discrimination in auto financing. 
In 2014, the NADA, the AIADA, and the NAMAD jointly released the NADA Fair Credit Compliance Policy & Program, which provides a dealer with an optional mechanism for ensuring that its credit pricing is established in a consistent manner and is based exclusively on legitimate business considerations. 
The program is modeled on — and fully adopts — a U.S. Justice Department fair credit compliance program that the agency required dealers to implement in prior enforcement actions.
For more information about the CFPB and dealer-assisted financing, visit