The CFPB has responded to the October 30 letter it received from a bipartisan group of 22 U.S. Senators raising concerns about the fair lending auto finance bulletin issued by the CFPB this past March.  The Senators’ letter posed a series of questions and we expect many of the Senators will find the answers provided by the CFPB in its five-page letter dated November 4 to be less than satisfactory.  

In their letter, the Senators questioned the CFPB’s efforts to “eliminate or severely limit” dealer finance charge participation based on its perception that “permitting negotiation over a consumer’s interest rate” creates a significant risk of discriminatory pricing disparities. They also stated that the CFPB “has yet to explain its basis” for its assertion that “‘disparate impact’ discrimination is present in the indirect auto financing market.”  

To justify the CFPB’s position, Director Cordray relied on “historical experience.”  He stated that “[h]istorically, the failure to properly or consistently monitor [policies and practices that allow discretion in pricing] for compliance with anti-discrimination laws has been a contributing factor in discrimination, both in auto lending and in other product markets, like mortgages.”  He claimed that “this historical experience has been documented by scholars and is reflected in relevant case law and Department of Justice enforcement actions [to which he provided citations].”  

In response to the Senators’ request for complete details about the statistical methodology used by the CFPB to determine whether disparate impact is present in an auto lender’s portfolio, Director Cordray discussed various proxy methods used by the CFPB to determine borrower demographic information such as race, sex and ethnicity.  He did not provide a basis point threshold for determining when statistically significant disparities exist as the Senators requested and instead stated that the CFPB “makes case-by-case assessments of whether to pursue supervisory or enforcement activity in response to statistically significant disparities” and that such assessments are based on a variety of factors. 

The Senators had asked why the CFPB chose to issue a guidance bulletin rather than use the Administrative Procedure Act’s rulemaking process and also had not solicited public comment on the guidance.  Director Cordray responded that the bulletin was published “to remind lenders” of their ECOA responsibilities and that the APA “does not impose a notice and comment requirement for general statements of policy, non-binding informational guidelines, or interpretative memoranda.”  In response to the Senators’ request for the full range of the CFPB’s coordination with the Fed and FTC concerning the development of the guidance, Director Cordray stated only that the CFPB “advised” the Fed and FTC about the bulletin prior to its publication. 

Perhaps most frustrating to Senators will be Director Cordray’s response for information about the extent the CFPB did a cost-benefit analysis into how flat fees would affect the cost of credit for consumers.  He stated that a formal cost-benefit analysis was not “appropriate” because the bulletin does not “change or create any new regulatory requirements.”  Observing that flat fees were mentioned in the guidance “merely as one example of a non-discretionary compensation mechanism,” he stated that the CFPB “has not undertaken a study of how market-wide adoption of a single non-discretionary compensation program would affect the availability of credit.”