Tag Archive | "CFPB"

New Study Casts Doubt on Latest CFPB Allegations against Automaker Finance Arms


WASHINGTON – A new study by the research firm Charles River Associates (CRA) casts doubts on recent allegations made by the Consumer Financial Protection Bureau (CFPB) against Toyota Motor Credit Corp. and American Honda Finance Corp. concerning disparate impact in the pricing of auto loans, reported the NADA.

Among the CRA study’s key findings was that, when measuring whether such unintentional discrimination has occurred, the CFPB overestimates the number of minority consumers by as much as 41 percent and the pricing differences between minority and non-minority consumers by as much as 87 percent.

CRA noted that several factors (which appear to be completely ignored by the CFPB) further account for pricing differences which are completely unrelated to a consumer’s background.

CRA also noted that while the CFPB’s own study into its testing methodology reveals a significant overestimation of minority populations, the CFPB still does not explain whether or how it corrects for this flaw. Such failings can produce significant distortions and inaccuracies in the CFPB testing results, and should be fully explained by the CFPB before it relies upon them to support an allegation of discrimination.

The study examined the accuracy and reliability of the method used by the CFPB to test for unintentional disparate impact discrimination in an auto lender’s portfolio. After examining 8.2 million auto finance contracts, CRA concluded in its comprehensive report that the CFPB’s testing method is “subject to significant bias and estimation error.”

The CRA study was commissioned by the American Financial Services Association and released on November 19. The allegations made against the automakers’ captive finance companies were publically disclosed on November 25 and December 2, respectively.

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U.S. Authorities Accuse Toyota Arm of Discriminatory Loan Pricing


Toyota Motor Credit Corp, the lending arm of Toyota Motors Corp, could face an enforcement action from U.S. authorities over its pricing of auto loans through dealerships and could be forced to reimburse borrowers or pay a fine, the company said late Friday, reported Reuters.

On Nov. 25, the U.S. Department of Justice and the Consumer Financial Protection Bureau sent a letter to Toyota Motor Credit, saying that its auto lending practices “resulted in discriminatory pricing of loans to certain borrowers in contravention of applicable laws,” the company said in a filing with the U.S. Securities and Exchange Commission.

Unless Toyota Motor Credit agrees to a resolution with the agencies voluntarily, which would include “monetary relief” in addition to changes to its loan pricing policies, the Justice Department and the CFPB were prepared to bring an enforcement action, the filing said.

Toyota Motor Credit added it would work with the agencies to reach a resolution.

A spokesman for the CFPB declined to comment. A spokeswoman for the Department of Justice did not immediately respond to a request for comment.

In December 2013, Ally Financial Inc (ALLY.N) was forced to pay $98 million to resolve similar discriminatory loan pricing charges from the Justice Department and the CFPB.

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CFPB Takes First Action Against BHPH Dealer


WASHINGTON — Today, the Consumer Financial Protection Bureau (CFPB) took its first action against a buy-here, pay-here (BHPH) dealer. DriveTime Automotive Group was ordered to pay an $8 million civil penalty as well as end its unfair debt collection tactics, fix its credit reporting practices, and arrange for harmed consumers to obtain free credit reports.

“Consumers who purchase a car at a buy-here, pay-here dealer deserve to be treated fairly,” said CFPB Director Richard Cordray in a statement. “DriveTime harassed and harmed countless consumers, many of whom were economically vulnerable. Our action today forces DriveTime to pay the price for its illegal debt collection tactics and for neglecting the accuracy of consumers’ credit information.”

Arizona-based DriveTime and its finance company, DT Acceptance Corporation, make up the largest BHPH dealer in the nation. DriveTime’s average customer has an annual income of $37,000 to $50,000 and has a FICO score between 461 and 554. It operates 117 dealerships in 20 states and, as of Dec. 31, 2013, held more than 150,000 outstanding auto installment contracts.

According to the CFPB, at least 45% of DriveTime’s auto installment contracts were delinquent at a given time. When a consumer fell behind on his or her installment payment, one of DriveTime’s 290 collection employees in two domestic call centers and 80 contractors in Barbados would begin calling the consumer — resulting in tens of thousands of collection calls being made each weekday. At the end of 2013, DriveTime had approximately 69,000 installment contracts past due that these employees would have been calling about.

The CFPB determined that several of DriveTime’s debt collection practices were unfair to consumers and violated the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). According to the bureau, DriveTime employees harassed borrowers at work, a practice that was encouraged by DriveTime management. In one case, a consumer was called 30 times at work, even after making a do-not-call request.

DriveTime also requires consumers to provide the names and phone numbers of at least four references when they applied for financing. When consumers fell behind on their payments, DriveTime called these references excessively. The dealer group also used third-party databases to find the phone number of consumers who fell behind in payments, often resulting in frequent phone calls to wrong numbers.

The CFPB also found that DriveTime gave credit reporting agencies information that inaccurately reflected the timing of repossessions and dates of first delinquencies — a practice which is prohibited by the Fair Credit Reporting Act (FRCA). .

The bureau also said DriveTime mishandled consumers’ complaints about the inaccurate information it had provided to the credit reporting agencies. In several instances, consumers disputed the same account information several times without the inaccurate information being corrected. In other cases, DriveTime informed consumers in writing that the information had been corrected, when it had not been — a violation of the FCRA.

Additionally, the bureau charged DriveTime with failing to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of the information it furnished to credit reporting agencies.

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New Comprehensive Study of Loan Records Refutes CFPB Position on Auto Lending


WASHINGTON – A new comprehensive study of more than 8.2 million loan records by Charles River Associates concludes that the method used by the Consumer Financial Protection Bureau (CFPB) to measure for discrimination in an auto lender’s portfolio is “conceptually flawed in its application and subject to significant bias and estimation error,” reported the NADA.

The peer-review study calls into question the reliability of a testing methodology that the CFPB has used to level allegations of unintended discrimination against—and extract settlements from—auto lenders and to pressure auto lenders to change the way they compensate dealers for originating finance contracts.

The study, released today, reviewed more than 8.2 million new- and used-vehicle finance contracts issued during 2012 and 2013, and measured differences in dealer reserve paid by minorities and non-minorities using the CFPB methodology. Dealer reserve represents the compensation that dealers receive from lenders for their role in the auto-financing process.

The study concluded that the CFPB’s methodology frequently misidentifies the background of consumers and dramatically overestimates differences in dealer reserve paid by different groups of consumers. The methodology also fails to account for numerous factors unrelated to the consumer’s background that affect the amount consumers paid for dealer reserve. The study further explains that the CFPB’s examination of differences in dealer reserve at the portfolio level is meaningless because it completely fails to account for legitimate reasons for pricing differences at the retail level. These collective flaws result in a testing methodology that is inherently unreliable.

“This study shows that the CFPB’s attempt to upend the auto lending process is insufficiently informed and the victim of flawed assumptions and inadequate peer review,” said Peter Welch, president of the National Automobile Dealers Association (NADA). “Allegations of potential discrimination are explosive and certainly should not be made without a reliable foundation in data.”

Currently, 136 members of Congress from both parties – 86 Republicans and 50 Democrats – have cosponsored legislation in the U.S. House of Representatives to rescind the CFPB’s 2013 guidance that serves as the centerpiece of the bureau’s attempt to change the highly efficient and pro-competitive dealer-assisted financing model. The bill, H.R. 5403, co-sponsored by Reps. Marlin Stutzman (R-Ind.) and Ed Perlmutter (D-Colo.), would also require transparency and public input prior to the issuance of future CFPB guidance in auto lending.

The legislation came after dozens of letters—from Congressional Democrats and Republicans to the CFPB—urged the disclosure of the CFPB’s testing methodology, which is lacking in the bureau’s guidance. The CFPB repeatedly failed to fully respond to the questions it was asked, leading to the Stutzman-Perlmutter legislation.

Dealers have also offered up an optional program that addresses fair credit risks. Based on a fair credit risk mitigation model developed by the U.S. Department of Justice in 2007 to resolve fair credit investigations of two dealers, NADA in January 2014 released its comprehensive Fair Credit Compliance Policy & Program. When implemented, the NADA program documents those instances when dealers discount interest rates and ensures the discounts are for legitimate business reasons, like meeting a competitive finance offer. Rather than require costly and inaccurate statistical testing, the program controls for risk on the front end of the transaction. Many dealers, including several large dealer groups, have implemented the program. NADA has called on the CFPB to urge finance companies to incorporate the program into their compliance management system.

“Had the CFPB followed the process set forth in the legislation before it issued its guidance to indirect auto lenders, it could have avoided the flawed assumptions and lack of clarity that have come to characterize this guidance,” said NADA’s Welch. “The way forward is for the government to promote broad industry adoption of NADA’s fair credit program, which would address fair credit risks where they matter—at the retail level.”

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New AFSA Study Refutes CFPB Allegations


WASHINGTON, D.C. – The American Financial Services Association offered its latest rebuttal this morning to contentions by the Consumer Financial Protection Bureau about problems with the indirect auto financing process, reported Auto Remarketing.

A comprehensive study commissioned by AFSA of more than 8.2 million auto financing contracts found that the disparity alleged by the CFPB between the amount of dealer reserve charged to minorities and non-minorities is not supported by data.

The study titled, “Fair Lending: Implications for the Indirect Auto Finance Market,” examined the proxy methodology used by the CFPB and found significant bias and high error rates.

“AFSA is committed to ensuring all consumers are treated fairly. AFSA’s results are much lower than what the CFPB alleges as problematic in the marketplace, because the association’s study factored in complexities of the automotive market that the CFPB did not consider, and errors associated with the CFPB methodology,” AFSA president and chief executive officer Chris Stinebert said.

“The interplay between factors such as geography, new versus used, length of loan, down payment, trade-in vehicle, credit score and competitive factors, such as meeting or beating a competing offer, is evidence of a dynamic market,” Stinebert continued.

AFSA explained that central to the study was an examination of the Bayesian Improved Surname Geocoding (BISG) proxy methodology used by the CFPB to determine disparate impact to legally protected groups.

Officials pointed out that BISG estimates race and ethnicity based on an applicant’s name and census data. AFSA’s study calculated BISG probabilities against a test population of mortgage data, where race and ethnicity are known.

Among the findings:

  • When the proxy uses an 80 percent probability that a person belongs to an African-American group, the proxy correctly identified their race less than 25 percent of the time.
  • Applying BISG on a continuous method overestimates the disparities and the amount of alleged harm and provides no ability to identify which contracts are associated with the allegedly harmed consumers.

“Alleged pricing discrepancies between minorities and non-minorities for auto financing rates are simply not supported by data,” Stinebert said.

“We have reviewed our study results with the CFPB and look forward to continuing our work with the bureau to address the issues we raised and to ensure consumers have access to affordable credit,” he went on to say.

Conducted by consultants at Charles River Associates, the study examined 30 percent of all new and 10 percent of all used retail installment contracts financed during 2012 and 2013.

The complete study is available on the AFSA website.

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Comment Period Opens for CFPB’s New Rule


WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB)’s proposed rule that would give it supervisory authority over larger participants in the nonbank auto finance segment was published in the Federal Register on Oct. 8, kicking off a 60-day public comment period that ends on Dec. 8.

If adopted, the proposed rule would generally allow the CFPB to supervise nonbank auto finance companies that make, acquire, or refinance 10,000 or more loans or leases in a year. The bureau has estimated that about 38 auto finance companies, which originate around 90% of nonbank auto loans and leases, would be subject to this oversight.

“Nonbank auto finance companies extend hundreds of billions of dollars in credit to American consumers, yet they have never been subject to any supervisory oversight at the federal level,” CFPB Director Richard Cordray said at an auto finance hearing on Sept. 18. “These companies have also played a significant role in the growth of subprime auto lending by making loans to consumers with lower credit scores. In this market, as in others, subprime borrowers may be more vulnerable to predatory practices, so direct oversight of their lending practices is essential.”

The CFPB began regulating the auto finance market in March 2013, when it issued a bulletin stating that lenders that offer auto loans through dealerships will be held responsible for discriminatory rate markups on retail installment sales contracts. The regulator has also expressed interest in the marketing of loans and leases, the accuracy of information given to credit bureaus, and the treatment of consumers during debt collection.

The proposed rule is the fifth in a series of rulemaking to define larger participants in consumer financial markets.

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