Auto loan discrimination battle continues

After a period of contentious regulation by the Consumer Financial Protection Bureau, auto lenders and dealers welcome a shift under the bureau's new leadership. But when it comes to discrimination in auto lending, the debate is far from over.

"Buying a car is a significant purchase. It should be free of discrimination. Unfortunately, this is not the case for persons of color," said U.S. Rep. Maxine Waters, D-Calif., chairman of the House Financial Services Committee, in a May 1 hearing of the oversight and investigations subcommittee.

The title of the hearing was, "Examining Discrimination in the Automobile Loan and Insurance Industries" — significantly, not whether there's discrimination. That's a sharp change in tone from the CFPB's recent history in Congress. In April 2018, then-Republican majorities in the House and Senate threw out the CFPB's 2013 "guidance" that accused lenders and dealers of discrimination. In the hearing, Waters called the previous CFPB guidance "much-needed."

This year Waters replaced U.S. Rep. Jeb Hensarling, R-Texas, a relentless enemy of the CFPB, as House Financial Services Committee chairman. The committee shares CFPB oversight with the Senate Committee on Banking, Housing and Urban Affairs.

With Waters at the helm of the committee, dealers and lenders can't necessarily count on the CFPB to keep auto loans and dealer reserve — the retail margin dealerships earn for arranging a loan — on the back burner, at least not without a fight. There were no witnesses at the subcommittee hearing who spoke on behalf of auto lenders or dealers.

Rep. Al Green, D-Texas, chairman of the subcommittee, said during the hearing, "We have the ability and the power and the authority in Congress to do this. The question is, do we have the will to make a difference for people who are in need of a car?"

Bo Ranney, a Washington attorney for the Ballard Spahr law firm, said in a National Law Review post recapping the hearing that the "largely unspoken" subtext was: Democratic committee members and hearing witnesses are "grappling with possible options moving forward," given last year's recall of the CFPB guidance.

For their part, Republicans on the subcommittee condemned discrimination, but they also said the CFPB should leave banking regulation to the states, and they criticized how the CFPB used the "disparate impact" legal theory to support charges of discrimination.

Disparate impact means that if legally protected classes of borrowers, such as minorities, pay a higher rate vs. similarly qualified white borrowers, that constitutes discrimination, even if it's unintentional.

"Obviously, race discrimination is abhorrent and should not be tolerated," said U.S. Rep. Andy Barr, R-Ky., the ranking Republican on the subcommittee. But he said the CFPB relied on "flawed" methodologies. Unlike mortgage lenders, auto lenders aren't allowed to collect race data on applicants, so the CFPB assigned borrowers to racial categories based on their names and addresses. The bureau acknowledged the method produced some errors.

"The CFPB knew their methods were flawed and prone to significant error but the bureau released its report anyway," Barr said.

Under former CFPB Director Richard Cordray, critics said the CFPB relied on "regulation by enforcement." That is, instead of writing a rule to apply to everyone, and including input from the industry, the CFPB reached settlements with individual lenders, and other lenders had to figure out how those examples applied to their businesses.

The current director of the CFPB, Kathy Kraninger, said in an April speech that she'll take the more traditional rule-making approach.

Bill Himpler, CEO the American Financial Services Association, a lender trade group, gave that approach high marks. "She very much is setting out what the rules of the road are. From a compliance perspective, we really can't ask for much more," Himpler told Automotive News.

Meanwhile, consumer advocacy groups say they will continue to urge Congress and federal regulators to reverse course.

"The bottom line is, there continues to be discrimination in the auto lending market," Deborah Goldstein, executive vice president of the Center For Responsible Lending, in Durham, N.C., told Automotive News. "As long as that continues, this will continue to be an issue."