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House bill would bring more transparency to CFPB guidance

July 3, 2014
A new bill in the U.S. House would force the Consumer Financial Protection Bureau to seek public comment and share its analyses before issuing guidance on what the CFPB purports to be discriminatory auto lending by dealers.
Dealers are urged to call their congressional representatives at (202) 224-3121 and ask them to cosponsor the Bureau Guidance Transparency Act (House Resolution 4811).
The bill passed the House’s Financial Services Committee on June 19, on a vote of 32-27.
The CFPB has issued guidance that threatens to eliminate dealers’ flexibility to discount the interest rate offered to consumers to finance vehicle purchases. The CFPB attempt would fundamentally change the $783 billion auto loan market without prior public comment or hearing, answering specific bipartisan questions by Congress to justify this policy change, or analyzing the impact of its guidance on consumers.  
The effect of the CFPB’s actions likely would raise the cost of credit for car buyers.
The CFPB promised to provide Congress with a white paper later this summer that will explain in more detail how it detects discrimination in auto loans, in response to criticism from Congress, lenders and dealers that auto lenders don’t have enough specifics on the CFPB’s standards to police themselves.
"It’s been a source of, I think, some frustration to the Committee and to me, and to the Bureau, that we’ve been back on forth on different kinds of information about this, and we think we’re providing a lot of information, but people identify other information that they want," CFPB Director Richard Cordray said at a House Financial Services Committee hearing in mid-June.
"Partly as a result of that, we are going to put out a white paper on the proxy methodology to try to address that very directly later this summer. We’ll continue to try to be responsive on this."
Meanwhile, the National Automobile Dealers Association said in a written statement that even if the CFPB white paper answers all questions about proxy methods, it almost certainly won’t be enough to solve the problem of what the NADA calls a lack of transparency by the CFPB.
The proxy methodology Cordray referred to is the way lenders and the CFPB decide whether consumers belong to legally protected groups, such as minorities or women. Auto lenders aren’t allowed to collect race or ethnic data on borrowers. Instead, they use substitutes or proxies, such as the census tract where a borrower lives or first or last name.
The CFPB uses those results to determine whether protected groups on average pay higher rates for financing than other borrowers. Specifically, the CFPB says it believes lenders allow dealerships to discriminate against legally protected borrowers by allowing dealerships to set their own rate for dealer reserve, or dealer markup. The CFPB calls higher rates for protected groups a disparate impact.
However, there’s a wide margin of statistical error for identifying protected classes by proxy. For instance, some common first names can belong to a man or a woman. Or a woman could have a married name that’s identified with a protected minority when she’s not a member of a protected group, or the opposite could be true.
The CFPB acknowledges it uses proxies, but it hasn’t said much beyond that despite increasingly pointed questions from Congress.
Lenders also don’t like the fact that the CFPB has avoided saying whether there’s even a tiny acceptable level for disparate impact or whether zero is the only acceptable statistical result. With a margin of error, a zero result could mean protected groups actually paid less than everyone else.
The NADA said there are many additional questions, such as how the CFPB determines it is comparing rates for "similarly situated" borrowers. That is, borrowers who are similarly situated in terms of credit history or other factors that could affect the rate, and different only in terms of whether they belong to a protected class.