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From Banking and Finance Law Daily, November 5, 2013

CFPB fires back against criticism of auto lending guidance

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau is defending its position over what some have called its controversial auto lending guidance. Recently, a group of senators called on the bureau to explain a bulletin the CFPB issued on March 21, 2013, regarding fair lending as it relates to the indirect auto lending industry. Critics charge that the guidance could curtail financial services competition, thus harming consumers.

In a post to its blog, the CFPB fights back by stating that “One key priority for us is protecting consumers from the silent pickpocket of discrimination.” The bureau contends that “Discriminatory markups in auto lending may result in tens of millions of dollars in consumer harm each year. The average loan for a new car is up to $26,691, so a higher interest rate can make the total cost of the car much higher.”

Bulletin. The CFPB referenced the bulletin in question, CFPB Bulletin 2013-02. saying that the bulletin explained that “the so-called ‘dealer markup’ policies that give dealerships discretion in what interest rates to charge consumers and that create incentives for charging higher interest rates may be implemented in a way that violates the law.” The CFPB said in its post that research shows that “lenders’ markup policies may lead to minorities being charged higher markups than other, similarly situated, white consumers.”

The CFPB noted that the fair lending analysis employed in the bulletin was the same as that used by other regulators as well as the Department of Justice.

Lenders. Auto lenders and other non-mortgage lenders generally are not allowed to collect demographic information, the CFPB said in the post. Therefore, they use various approaches to ensure that they are being fair to their customers, the bureau noted. Responsible lenders often rely on a first name database from the Social Security Administration that contains counts of individuals by gender and birth year for first names occurring at least five times for a particular gender in a birth year. Using statistics, they can determine a probability that a particular applicant is male or female based on the distribution of the population across gender categories for the applicant’s first name, the bureau explained.

The CFPB said that there are a greater variety of methods to proxy for race and national origin, including one method used by lenders to check the probability that an applicant is Hispanic or Asian. Lenders use the last name database published by the Census Bureau, in which the Census Bureau reports, by race and national origin, the percentage of individuals with a given surname.

Regulators’ role. “The CFPB and other agencies are charged with making sure lenders are following fair lending laws, whether those lenders are engaged in mortgage lending or other types of consumer lending,” the bureau said. “For auto and other types of non-mortgage lending, the federal regulatory and enforcement agencies typically engage in similar analyses that use a variety of proxy methods, often drawing from the same public databases used by responsible lenders.” The CFPB concluded by saying that its method “integrates two common approaches by combining the respective probabilities generated by the last name and geographical proxies.”

MainStory: TopStory CFPB EqualCreditOpportunity Loans

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