The Wall Street Journal on Friday discussed the continuing efforts of the CFPB to circumvent to clear intent of the Dodd-Frank Act, which does not permit the CFPB to regulate the credit practice of automobile dealers. It's doing in the same way it (and other financial institution regulators at the federal level) regulates retail merchants, tribal online payday lenders, and other "unsavory" sellers of goods and services that people desire: by pressuring the banks that service them to act as the CFPB's deputy sheriffs.
Of course a problem exists! Automobile dealers are making money! That simply can't be right.
Big banks, responding to demands from the U.S. consumer finance regulator, are turning up pressure on auto dealers to prove that they aren't unfairly marking up the cost of car loans to women and minorities.
The scrutiny is setting off a bigger battle in Washington over the role of the U.S. Consumer Financial Protection Bureau, which was prohibited from policing car dealers at its creation in 2010.
The CFPB does oversee banks and other lenders, and in March the agency warned them they had to ensure that car loans complied with fair-lending laws. The move has banks actively confronting dealers about their lending practices, raising the ire of dealers who say the regulator hasn't provided evidence that a problem exists.
According to letters from banks to dealers that were reviewed by the WSJ, banks are apparently using the flavor of the moment of the Obama administration: disparate impact. If the bank performs a statistical analysis and determines that, for example (as did our favorite champion of consumer rights, Bank of America), of all loans sent by a dealer to the bank, female borrowers were charged a dealer discount (markup) of one-third of one percent more than were male borrowers, then that must be evidence of discriminatory lending on a prohibited basis. It's the same theory that consumer advocates at the US Justice Department and HUD have been pushing the past few years and that they will continue to push until the Supreme Court tells them to knock it off.
One dealer complained "There is no way to know why the bureau believes there is a problem in this area—or what standards it is using to measure lender compliance with the law." The bottom line standard is that the Bureau knows it when it sees it, pal. It then will perform a perfectly unbiased regression analysis to back up a claim of disparate impact. Where's there's smoke, there's fire, even if the fire, and the smaoke, are caused by the CFPB rubbing a bank and a dealer together until sparks fly. In the case of automobile dealers, it can't do this directly, so it expects the banks that it supervises to do the job for it.
Although the article notes that a couple of senators are making noises about why the CFPB isn't giving the public a chance to comment on these standards, I wouldn't hold your breath that Congress will take any action. Even Democrats who recognize the inherent end-run the CFPB is doing around the partisan Dodd-Frank Act determination that automobile dealers were off limits, there's no public relations upside to taking the side of a business that consumer advocates are painting as just another profit-hungry leech, sucking the blood from the proletariat. That's something only "Repthuglicans" would do.
I think we'll have to await the SCOTUS ruling in Township of Mount Holly v. Mt. Holly Gardens Citizens. K&L Gates partner Melanie Brodie told an audience last month in Dallas, if the Supreme Court strikes down the use of disparate impact under the Fair Housing Act, it's likely to have a "crossover effect" on the ability of the CFPB to use the same theory under the Equal Credit Housing Act. One way or another, let's hope we get some "certainty" in this area, soon.
I'm attending the Harland Financial Solutions Network of State & Federal Counsel 2013 Conference this week, and speaking on a panel with Rick Eckman of Pepper Hamilton LLP and Keith Rabenold, Deputy GC of Harland Financial Soultions, on technology service agreements and third party relationship issues. Therefore, I'll be "off-blog" until next week.