Consumer Watchdog Played Politics In Pursuit Of Ally Bank Settlement – Report
In March of this year, Jeb Hensarling (R-Texas), Chairman of the House Financial Services Committee, appeared before Congress and stated that the Consumer Federal Protection Bureau (CFPB) “undoubtedly remains the single most powerful and least accountable Federal agency in all of Washington”.

Michael Hiltzik and others have called this an exaggeration (and in Hiltzik’s own words, an exaggeration on a “Trumpian scale”), but there is something to be said about the agency’s lack of transparency. Senator Ted Cruz (R-Texas) has led the crusade for repealing the CFPB, arguing that the structure of the agency “invites regulatory excess and abuse.” Cruz has co-sponsored legislation to abolish the CFPB entirely.

Perhaps nowhere is that abuse as clear as in a report released last week by Republican members of the House Financial Services Committee.

The congressional report investigates a settlement made by Ally Financial (formerly, GMAC) in 2013 regarding supposed discretionary lending practices. According to the CFPB, Ally allowed auto dealerships to charge more than 235,000 minority borrowers higher rates for auto loans with the bank. Ally never admitted to any such wrongdoing, but agreed to pay $98 million in damages, including $80 million that went to minority borrowers; the balance was collected in civil penalties. The settlement was the first big win in the CFPB’s attempt to bring increased protection to consumers in the auto loan market. Last week’s congressional report, though, found that the CFPB’s pursuit of Ally was based on “junk science”.

The 23-page report details correspondence between CFPB officials, in which staff members blatantly acknowledged that the bureau’s methodology for determining discrimination would be challenged.

“Some of the claims being made in this case present issues…that would pose litigation risks,” says a 2013 memo addressed to the bureau’s director, Richard Cordray. That same memo goes on to say that litigation risks would be offset by the likelihood of a settlement by Ally, given the bank’s interest in restructuring, which would need government approval. “Ally may have a powerful incentive to settle the entire matter quickly without engaging in protracted litigation,” wrote CFPB staff.

As CFPB was pursuing Ally for its alleged discriminatory practices, Ally was seeking approval from the Federal Reserve and FDIC to become a holding company. Without approval, Ally would likely have been required to divest itself of important business lines, such as its insurance subsidiaries. A fair-lending violation would “most likely result in the denial of holding company status,” CFPB lawyers wrote in correspondence cited by the report. They went on to suggest that “prompt and robust corrective action” by Ally would be looked favorably upon.

On December 20, 2013, just days before Ally’s deadline to apply to become a holding company, it settled with the CFPB and Justice Department. Their application to become a holding company was approved on December 23, 2013.

The report gives ammunition to those who believe the CFPB is overstepping its bounds by trying to police auto lenders. After all, the CFPB has no control over car dealers. Moreover, CFPB does not have access to the data required to determine if and when discrimination has occurred. Auto loan data—including interest rates, fees and potential markups—is not made available to the public. As such, assessments of discrimination are made based upon incomplete sets of information.

At the time of the 2013 enforcement action, the National Automobile Dealers Association (NADA) expressed its support with the CFPB’s pursuit of lending fairness, but expressed its overwhelming frustration with the consumer watchdog’s transparency.

“Regrettably…the CFPB continues to withhold the secret methodology it uses to determine whether unintentional discrimination has occurred,” NADA wrote in a statement. “The public still does not know whether the Bureau takes into account legitimate factors that can affect finance rates – for example, a dealer’s ability, regardless of race, to lower the interest rate to meet a customer’s monthly budget.  The CFPB’s failure to reveal its approach is particularly troubling given the repeated and recent requests from bi-partisan members of both houses of Congress for this essential information.”

Last week’s report only gives more validity to NADA’s concerns.

For its part, the CFPB has responded to the report by reminding its audience: “The bottom line is that multiple methodologies found that minority Ally borrowers were being charged higher rates than white borrowers without regard to credit.”

Including Ally, the CFPB has reached more than $200 million in settlements with auto lenders since the agency’s inception five years ago through the Dodd-Frank financial overhaul.

Despite the Republicans’ best efforts, the CFPB is not likely to be scrapped altogether anytime soon—but there may be growing support for limiting the agency’s oversight of auto lenders. On November 18th, the House passed a bill to limit the CFPB’s guidance relating to indirect auto lending. The bill had bi-partisan support, with 88 Democrats joining 244 Republicans voting in favor.

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