Working with CFPB is 'balancing act'

The Consumer Financial Protection Bureau at times gives one consumer complaint the weight of 10,000. If an auto lender finds itself under investigation for unfair lending practices, how the lender responds could be key to the probe's outcome, a former CFPB lawyer says.

"The CFPB doesn't care if it's a pattern or practice," attorney Gerald Sachs said last month at Automotive Resource Network's 2015 Automotive Annual Conference in Hollywood, Fla.

Sachs has worked as a senior counsel for enforcement strategy at the CFPB, an attorney for the Federal Trade Commission and an assistant U.S. attorney.

He said he's seen the CFPB call five complaints a UDAAP violation -- short for unfair, deceptive or abusive acts or practices -- and bring a case against the auto lender.

The FTC, on the other hand, would "look for a pattern or a practice to get redress for all consumers," he said. "The CFPB will say, 'We have 100 consumer complaints. We're going to bring a case against you for a UDAAP violation.' If you point out to them that you have 3 million consumer contacts and 100 consumer complaints are statistically irrelevant, they don't care."

"In the CFPB's mind, every single consumer matters," he said. But the cases that the CFPB has settled so far "might affect 10 to 15 percent of the marketplace," said Sachs, now a consumer finance services attorney with Paul Hastings law firm in Washington.

The CFPB will not have a long-term effect on the marketplace unless it "pushes forward with 25 to 30 more cases," Sachs said. "I see that as highly unlikely considering the bipartisan scrutiny they're receiving from Capitol Hill and [lenders'] pushback to not change as much as the CFPB would like them to."

For example, Ally Financial, which paid $98 million, including $80 million in consumer restitution funds, to settle allegations of discriminatory lending by the CFPB, did not change its policies on dealer reserve, the percentage of interest a dealership is allowed to add to an auto loan as a fee for arranging the loan. The CFPB maintains dealer reserve led to minorities with dealership-arranged Ally auto loans paying higher interest rates than other borrowers.

And a spokesman for Toyota captive finance arm Toyota Financial Services, which the CFPB is investigating for discriminatory auto lending, has said that the captive does not plan to change its lending practices.

Even though a bill that would limit the CFPB's 2013 guidance on auto lending is headed to the House floor, Sachs doesn't think the law will change under the current administration. The "CFPB will finish what they've started," he said.

The CFPB "is charged with ensuring that lenders are complying with fair lending laws and addressing discrimination across the consumer credit industry," the bureau said in a 2014 white paper on its proxy method to identify ethnicity. 

The CFPB has concluded that with dealer reserve, "there is a significant risk that [policies] will result in pricing disparities on the basis of race, national origin, and potentially other prohibited bases," which violates the Equal Credit Opportunity Act, the agency said in 2013 when issuing new guidance on indirect auto lending. 

The CFPB recognizes that the levels of indirect lender participation vary, but "information gathered by the CFPB suggests that the standard practices of indirect auto lenders likely constitute participation in a credit decision," the guidance said. 

When dealing with the CFPB, lenders have to figure out when and how to push back, Sachs said. "It's sort of a balancing act, but it's rather important because [the CFPB has] taken a lot of public action to note responsible conduct."

"The Honda case could have been a lot worse" if Honda Finance had fought back aggressively, he said.

In July, in a settlement with the CFPB and the U.S. Justice Department, American Honda Finance Corp. agreed to change its policy and cap dealer reserve at 1.25 percentage points for loans of 60 months or fewer and at 1 percentage point for loans greater than 60 months. As a result of the settlement, no civil penalties were assessed to Honda Finance, the captive said. Honda Finance will establish a $24 million consumer compensation fund.

Lenders and automakers' captive arms should defend themselves through their appeals and "remain cordial with the examiners," working with them rather than against them, Sachs said.

The CFPB relies on public information before launching an investigation.

"If the picture that the regulator has is based on 100 or 1,000 consumer complaints, that's not beneficial if you have millions of customers," Sachs said. If you interact with the CFPB, "try to explain your business model to them and explain the scope of the consumer context," he advised the audience, which was made up of mostly auto lenders.

"A lot of times they don't have that knowledge, and you should never assume that they have that knowledge," he added.

The CFPB also is pushing Fifth Third Bancorp to lower its dealer reserve cap on auto loans, The Wall Street Journal reported last month. The push is part of negotiations to settle the CFPB's investigation into possible discriminatory auto lending practices.

If Fifth Third complies with the bureau's proposal, its monetary fine could be lower, the Journal reported.

If the bank agrees to cap the markups it allows dealers to apply to consumer auto loans, it would be the second financial institution, along with Honda Finance, to change lending practices under pressure from the CFPB.

The bureau also is investigating Santander Consumer USA Holdings Inc. for possible discrimination in auto lending, Santander disclosed in a filing last month with the U.S. Securities and Exchange Commission.

Santander Consumer, which provides private-label financing for Fiat and Chrysler dealers under the name Chrysler Capital, doesn't believe that the probes it described in the filing would have a material impact on its financial results, according to the filing. Santander Consumer, majority owned by Banco Santander SA, of Madrid, has previously disclosed separate investigations by the U.S. Justice Department and SEC into its auto lending and securitization practices.

Bloomberg contributed to this report.