Senate could kill effort to curb bias in auto loans
CFPB overreached in its warning to lenders and dealers, critics say.
The Senate is poised to vote this week to rescind an Obama-era policy warning auto lenders and dealers against charging minority borrowers more than white borrowers.
The legislation, sponsored by Sen. Jerry Moran (R-Kan.), takes aim at one of the Consumer Financial Protection Bureau’s most controversial campaigns and addresses years of complaints by Republicans and the powerful auto industry that the watchdog agency had overstepped its bounds.
It also comes as the Trump-appointed leader of the agency, Mick Mulvaney, works to tame the bureau’s ambitions and pledges that it no longer will push the legal envelope.
The auto lending guidance is the latest example of “runaway regulations,” Senate Majority Leader Mitch McConnell (R-Ky.) said. Repealing it “will protect consumers from a brazen attempt by the past director of the Consumer Financial Protection Bureau to stretch his authority and interfere in the auto industry.”
Consumer advocates have said that repealing the CFPB policy would open the door to discriminatory practices. “We’re concerned that there is a lot of evidence that a person of color will get a worse loan than a similarly situated white one,” said Debbie Goldstein, an executive vice president of the Center for Responsible Lending.
The legislation, which has more than a dozen Republican sponsors, needs 51 votes to pass. After years of lobbying by the powerful auto dealers industry, the bill is expected to attract some Democratic support.
The fight centers on guidance issued by the CFPB in 2013 that took aim at a common industry practice in which auto dealers mark up interest rates offered by finance companies. Finance firms such as Ally, for example, set an interest rate based on objective criteria — including a borrower’s credit history and the size of the down payment. Auto dealers then are free to raise the interest rates within certain limits, splitting the extra profits with lenders.
The CFPB argued that auto dealers were using that discretionary markup to charge black and Latino borrowers more than white ones, even if they had the same credit scores.
Ally Financial, a large auto lender, paid $98 million after the CFPB accused it of charging 235,000 minority borrowers higher rates. On average, black, Latino and Asian American customers paid from $200 to more than $300 more for auto loans than did white customers who were equally creditworthy, officials alleged. American Honda agreed to pay $24 million to borrowers to settle its case, and Fifth Third Bank paid $18 million. None admitted wrongdoing.
Since then, some lenders eliminated discretionary dealer markups. Auto dealers said the guidance made it more difficult for them to offer consumers discounts on their car purchases out of fear they would be accused of discrimination. House Republicans argued the CFPB used faulty data to support the policy.
The Times reported in 2016 that the bureau used an algorithm, one designed for healthcare research by a statistician at Santa Monica’s Rand Corp., to guess the race of auto loan borrowers based on their last names and addresses.
Rep. Jeb Hensarling (RTexas) called the method “junk science,” arguing a statistical model should not be used to accuse companies of racial bias. He and other Republicans also argued that the method is not foolproof and could result in settlement payments going to white borrowers.
Despite the consumer bureau’s new leadership, the auto industry has remained concerned about how and when the guidance would be enforced, industry officials said. “As long as this guidance is out there, there is the possibility that the CFPB will attempt to eliminate auto loan discounts for consumers,” said Jared Allen, spokesman for the National Automobile Dealers Assn.