Congressional report chronicles and criticizes CFPB auto finance ECOA enforcement activity

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Republican members of the House Financial Services Committee recently released a report, prepared by the Republican Staff of the Committee, which chronicles in detail the controversial automotive ECOA enforcement initiative of the CFPB with respect to what it characterizes as “dealer markup.” The highly critical nature of the report is encapsulated by its title, which is “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending.” The report was announced in a press release which is titled “Internal Documents Reveal Weakness of CFPB’s ‘Disparate Impact’ Claims Against Vehicle Finance Business.”

Notwithstanding its scathing title, the report itself is a captivating read with a scholarly tone to it. Moreover, some of its more newsworthy assertions are substantiated with citations to, and quotations from, internal CFPB documents that are posted on the website of the House Financial Services Committee. The report, and the supporting documents, provide the reader with an inside glimpse into the formulation and execution of the Bureau’s enforcement strategies with respect to dealer finance income under motor vehicle retail installment sale contracts. According to the report, some of these internal documents acknowledge areas of potential vulnerability in the event of contested litigation. The areas of litigation risk to the CFPB include several dispositive legal issues, as well as questions relating to the statistical methodology employed by the Bureau.

The legal issues discussed in the report include: (1) whether disparate impact claims are cognizable under the ECOA; (2) whether the asserted assignee “policy” of “allowing” dealerships the discretion to “mark up” wholesale buy rates when negotiating contract APRs with their customers is a “specific policy or practice” within the meaning of Supreme Court disparate impact jurisprudence; (3) whether a potential assignee is a “creditor” under the ECOA with respect to retail installment sale contracts (“RISCs”) entered into on a “spot delivery” basis before the decision of a prospective assignee has been communicated to the dealership; (4) whether the assignee “portfolio imbalance” theory of liability, and the statistical analytical approach employed by the Bureau, would enable it to state a prima facie disparate impact claim under the “robust causality” requirement recently emphasized by the Supreme Court in Inclusive Communities; and (5) the business justification for the asserted “policy” given that “dealers will not assign RISCs to finance companies that don’t make competitive offers, and finance companies that attempt to impose terms and conditions (including costly, impractical compliance procedures) even slightly more burdensome than its rivals can lose most of their business.”

The “portfolio imbalance” theory of liability refers to the approach of analyzing all of the RISCs acquired by an assignee without differentiating among the assignor dealerships. The report says that, “[i]n conducting its fair lending analysis, the Bureau examines a[n assignee’s] entire portfolio rather than on a dealer-by-dealer basis.” As a result, “racial disparities within [an assignee’s] portfolio can be caused by the composition of the portfolio itself.” This analytical flaw was noted in the AFSA report prepared by Charles River Associates, which concluded that “[a]ggregating contracts originated by individual dealers to the [assignee] portfolio level may create the appearance of differential pricing on a prohibited basis where none exists.” Even if each dealership prices its RISCs in a manner that is neutral with respect to race and ethnicity, pricing differences among dealerships may create an appearance of disparities at the portfolio level when the RISCs of different dealerships are aggregated to the portfolio of the assignee.

The report is as fascinating a read as its provocative title suggests it will be. It concludes by saying that “[t]he information and documents accompanying this report should help auto dealers, finance companies, and consumers better understand the Bureau’s flawed approach to indirect auto financing and compliance with [the] ECOA.” According to the New York Times, “a bureau spokeswoman said the report showed that the agency engaged in careful deliberation.”

Various issues and items addressed in the report have been discussed in prior Ballard legal alerts and CFPB Monitor blog posts, including the following: “The CFPB Stretches ECOA Past the Breaking Point with Auto Finance”; “Auto finance: can we really call disparate impact ‘discrimination’?”; “CFPB Releases Report on Fair Credit Exams and White Paper on Proxy Methodology”; “Auto Finance Company Agrees to Change Dealer Compensation Policy to Settle CFPB and DOJ Fair Lending Claims”; and “Ballard attorneys author article on auto finance and disparate impact.” Our article concerning the substantive implications that class certification appellate decisions may have for disparate impact pricing claims alleged against assignees of motor vehicle RISCs is available here.

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