In June 1940, Sir Winston Churchill addressed Parliament and took to the airwaves to bolster the spirits of the British people as they faced the threat of a Nazi invasion. “We shall not flag or fail. We shall go on to the end. We shall fight on the seas and oceans. We shall fight with growing confidence and growing strength in the air. We shall defend our island, whatever the cost may be. We shall fight on the beaches. We shall fight on the landing grounds. We shall fight in the fields and in the streets. We shall fight in the hills; we shall never surrender.”
We all know the Consumer Financial Protection Bureau wants to eliminate dealer discretion in marking up interest rates. The bureau believes negotiated rates between dealers and their customers create a significant risk of unintentional “disparate impact.”
Unfortunately, we also know the folks out there need to be protected from the evils of capitalism. This devious economic system, better known as “free enterprise,” has been enormously successful over the centuries. It enables hardworking business owners and well-run banks to actually make money from customers by providing them with the financing they want and need.
Using the unproven theory of disparate impact, the CFPB can now examine and question the process every finance source and auto dealer uses to determine finance rates and terms. They put on their X-ray discrimination detector glasses and their top-secret finance markup decoder ring, known as the Bayesian Improved Surname Geocoding (BISG), and go about the business of “estimating” race and ethnicity based on an applicant’s name and census data.
The BISG proxy method, also known as the SWAG (scientific wild-ass guess) method, is then used to measure disparities in dealer reserve. This supposedly enables the CFPB to determine whether the lender’s policies have resulted in a disparate impact.
As a result, the CFPB has quickly become a government-sponsored cabal of lawyers committed to extorting huge amounts of protection money from every major auto financing source they can. In 2013, the CFPB Mafioso scored a $98 million settlement from Ally Financial, which merely whetted their appetite. They continue to be determined to justify their existence and protect Americans from those evil capitalist banks and car dealers by creating and solving a problem that doesn’t exist. More importantly, they’re able to strong-arm lenders into giving them tens of millions of dollars to leave them alone.
And unfortunately, they keep paying.
Last November, the U.S. Department of Justice (DOJ) and their CFPB goons sent a letter to Toyota Motor Credit Corp., claiming that its lending practices “resulted in discriminatory pricing of loans to certain borrowers in contravention of applicable laws."
In a filing with the U.S. Securities and Exchange Commission (SEC), Toyota revealed that, unless they arrived at a voluntary resolution with the agencies, the CFPB was prepared to bring an enforcement action, which would include “monetary relief” in addition to requiring changes in the company’s loan pricing policies.
In December, American Honda Finance Corp. (AHFC) disclosed that the DOJ and CFPB were trying to shake them down for a few million bucks as well, after concluding they too were responsible for illegal discrimination in consumer auto loans.
In its filing, Honda Finance stated, “AHFC has now received a notice that the agencies have authorized enforcement actions against AHFC, alleging discrimination in automobile loan pricing to certain borrowers by dealers and alleging the loan pricing disparities were caused by AHFC’s business practices related to dealers. AHFC has also been informed that the agencies may defer pursuit of this litigation if AHFC works with the agencies to seek a voluntary resolution to these allegations.”
In a Dec. 9 regulatory filing, Credit Acceptance Corp. revealed that it has received a civil investigative subpoena from the DOJ requiring they produce certain documents related to auto lending practices in the subprime market. The CFPB has issued similar requests to Santander Consumer USA and GM Financial in recent months. As a dealer, you too may have received a warning letter from one or more of your finance sources that an assessment of your loan portfolio reflected a disparate impact and was not in compliance with CFPB guidelines.
What a bunch of hooey. You know it. I know it. And every lender knows it.
Some finance source out there has to man up and stop this insanity. Toyota Motor Credit, AHFC, GM Financial, Hyundai Motor Finance, NMAC, CAC, Santander, Fifth Third, Wells Fargo, Bank of America and every other auto finance source out there: I’m talking to you! You have to quit rolling over and “consenting” that you will “comply” with the CFPB mission to stop dealers from discriminating. You are not discriminating!
Somebody has to take a stand and refuse to pay protection money to an out-of-control agency armed with plenty of theories but no actual facts or evidence to back up their accusations. You have friends in Congress. Dealers have friends in Congress. And you have some pretty good lawyers, too. So turn ’em loose.
I don’t care who the accuser is. In this country, you’re not supposed to be guilty until proven innocent. If the CFPB thinks they have a case, force them to prove it — and not with mathematical theories that won’t stand up in a court of law. The fact is, BISG is BS, and disparate impact does not equal discrimination.
Last year, the American Financial Services Association (AFSA) promised to address the CFPB’s concerns regarding dealer participation with an independent study. AFSA commissioned Boston-based Charles River Associates to examine the CFPB’s use of the BISG proxy method to measure disparities in dealer reserve. They picked a strong partner. CRA is a leading global consulting firm that offers economic, financial and strategic expertise to major law firms, corporations, accounting firms and governments around the world.
The resulting study, “Fair Lending: Implications for the Indirect Auto Finance Market,” included more than 130 pages of data and text that examined the proxy methodology that the CFPB is using to determine disparate impact in auto financing. Its authors tested the methodology on more than 8.2 million new- and used-vehicle finance contracts issued between 2012 and 2013.
The average amount financed on those contracts was $25,525 for new vehicles and $18,753 for used, with dealer reserve averaging 110 and 132 basis points, respectively.
Remember, a primary focus of the study was to examine the accuracy of the BISG. The CRA study first tested the accuracy of the BISG against mortgage data, for which race and ethnicity data is known. The proxy method correctly identified African Americans less than 25% of the time. That’s a far cry from the 80% accuracy rate claimed by its users. And when used to identify disparities in interest paid, the methodology inflated what African Americans paid by 87%.
“Alleged pricing discrepancies between minorities and non-minorities for auto financing rates are simply not supported by data,” says Chris Stinebert, the association’s president and CEO. “Our research concludes there is very little evidence that dealers systematically charge different dealer reserve on a prohibited basis.”
NADA officials and every dealer in the country have been saying the exact same thing. The CFPB’s response? “The CFPB is always interested in relevant data regarding important issues like discrimination in auto lending.” In other words, “We’ll get back to you on that.” Meanwhile, they continue to seek enormous financial settlements from numerous financial institutions.
So when it comes to defeating this massive and unwarranted overreach by the CFPB, and with apologies to Sir Winston, we shall not flag or fail. We shall go on to the end. We shall fight in the statehouse and in the courthouse. We shall fight with growing confidence and growing belief in our cause. We shall defend our island of free enterprise, whatever the cost may be. We shall fight on the House floor. We shall fight on the Senate floor. We shall fight in the ballot box and in the media. We shall fight in the court of public opinion; we shall never surrender.
Every financial institution and automobile dealer this country believes strongly in the free enterprise system. As Milton Friedman, the Nobel Prize-winning American economist and statistician so eloquently stated, “The great achievements of civilization have not come from government bureaus. The only cases in recorded history in which the masses have escaped from grinding poverty, are where they have had capitalism and largely free trade. There is no alternative way, so far discovered, of improving the lot of ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.”
So it’s time to man up, boys and girls, and defend it. Because there is no better example of the free enterprise system than the American automobile dealer.
Ronald J. Reahard is president of Reahard & Associates Inc. and ranks among the industry's leading F&I trainers, authors, consultants and speakers. [email protected]