On August 2, 2013, the CFPB responded to the June 20, 2013 letter from 35 Republican members of the U.S. House of Representatives, questioning the manner in which the CFPB developed recent guidance regarding indirect auto finance and requesting details concerning the Bureau’s methodology for analyzing potential fair lending violations. Specifically, Congress’ letter took issue with the CFPB “initiating [a] process without a public hearing, without public comment, and without releasing the data, methodology, or analysis it relied upon to support such an important change in policy,” expressed concern that the CFPB’s model must be reliable and accurate, and requested that the CFPB provide all pertinent details regarding its methodology. Additionally, the letter requested that the CFPB provide “all studies, analysis, and information it relied upon in developing its guidance document,” including the CFPB’s analysis of the impact of the prescribed controls on the auto lending industry and any coordination with other agencies in developing the guidance.

In its response, the CFPB left a lot of questions unanswered. With regard to its decision to issue the indirect auto lending bulletin without public comment, the CFPB simply responded that the Administrative Procedure Act “does not mandate notice and comment for general statements of policy, non-binding informational guidelines, and interpretive memoranda.” But the CFPB must realize how seriously its bulletins and other pronouncements are taken by the industry. Failing to heed the CFPB’s “non-binding guidance” risks significant repercussions during an examination or enforcement action. There is simply no other reasonable way to interpret the CFPB’s recent indirect auto finance guidance other than as a specific directive to completely overhaul the industry’s dealer participation method of compensation or implement an across-the-board flat fee program that may carry significant competitive disadvantages for any entity that adopts it.

The CFPB also did not provide much insight into its disparate impact methodology and how it determines whether an ECOA violation has occurred. Instead, the CFPB reiterated what we have already heard – that it uses surname and geographic proxies to conduct its analysis using unspecified, publicly-available methods that have been used before in the discrimination context. However, the CFPB did not provide any further insight to what analysis it has conducted of the indirect auto finance issue, beyond passing references to a perceived lack of controls with regard to this area of the industry. Nor did the CFPB provide any information on which variables should be used in a regression analysis, nor how much of a disparity must be observed in order to determine that an ECOA violation exists, other than saying the analysis must show that the disparity is “statistically significant.”

The CFPB did tell Congress that “[e]ach supervisory examination or enforcement investigation is based on the particular facts presented,” along with making reference to looking at the controls that are in place in each situation and being “open to hearing specific explanations for the decisions [indirect auto finance companies] have made to include particular analytical controls that reflect a legitimate business need.” But what does the CFPB consider to be a “legitimate business need”? What types of explanations in this regard will be deemed sufficient to avoid potential liability? As a result of this lack of a clear explanation, the CFPB’s letter leaves both the industry and Congress in the dark on how to identify and prevent ECOA violations in a way that allows banks and finance companies to remain competitive.