Pub. 13 2014-2015 Issue 4

N E W J E R S E Y C O A L I T I O N O F A U T O M O T I V E R E T A I L E R S 9 new jersey auto retailer W W W . N J C A R . O R G DIRECTOR’S MESSAGE  continued from page 7 Independent Study Discredits CFPB’s Fair Credit Testing Method A comprehensive study of more than 8.2 million auto loan contracts by the consulting firm Charles River Associates con- cluded that the proxy method used by the Consumer Financial Protection Bureau to measure for unintended discrimination in an auto lender’s portfolio is “conceptually f lawed” and “inher- ently unreliable.” The peer-review study, Fair Lending: Implications for the Indirect Auto Finance Market , commissioned by the American Financial Services Association and released in late 2014, found significant bias and high error rates. The CFPB, which issued its guidance in March 2013, has used a proxy method to support claims of unintended discrimina- tion against—and extract settlements from—auto lenders and to pressure auto lenders to change the way they compensate dealers for originating finance contracts. The study found that the CFPB’s methodology frequently mis- identified the background of consumers and dramatically over- estimated differences in dealer reserve paid by different groups of consumers. For example, the CFPB’s method overestimates African-American borrowers by 41 percent. The study also concluded that the CFPB’s examination of dif- ferences in dealer reserve at the portfolio level is meaningless because it fails to account for legitimate reasons for pricing differences at the retail level. Dealers have also offered up an optional program that addresses fair credit risks. Based on a fair credit risk mitigation model developed by the U.S. Department of Justice in 2007 to resolve fair credit investigations of two dealers, NADA released its com- prehensive Fair Credit Compliance Policy & Program in January 2014. When implemented, NADA’s program documents instances when dealers discount interest rates and ensures the discounts are for legitimate business reasons, such as meeting a compet- ing finance offer. Rather than require costly and inaccurate statistical testing, the program controls for risk on the front end of the transaction. Many dealers, including several large dealer groups, have implemented the program. Meanwhile, the CFPB has repeatedly failed to fully respond to questions from Congressional Democrats and Republicans urging disclosure of its testing methodology, which is lacking in the bureau’s guidance. Based on this and other f laws in the guidance, 146 members of Congress—which include 90 Republicans and 56 Democrats— have cosponsored legislation in the U.S. House of Representa- tives to rescind the CFPB’s 2013 guidance. The bill, H.R. 5403, co-sponsored by Representatives Marlin Stutzman (R-Ind.) and Ed Perlmutter (D-Colo.), also requires transparency and public input prior to the issuance of future CFPB guidance on auto lending. Moving forward, the federal government should consider pro- moting broad industry adoption of NADA’s fair credit program, which addresses fair credit risks at the retail level while preserv- ing competition in the marketplace. [The preceding was Commentary authored by former NADA Chairman Forrest McConnell.]