CFPB Director Richard Cordray said yesterday that the agency will issue a white paper later this summer that offers up more details on the use of the proxy methodology for identifying discrimination in indirect auto financing.
Cordray was speaking before the U.S. House Financial Services Committee when he revealed the news.
Back in March 2013, the CFPB issued a bulletin warning banks and finance companies that purchase auto installment sales contracts that, under existing law, any dealer finance charge participation may violate the Equal Credit Opportunity Act and Regulation B.
Since then, auto industry players have been asking the agency for more details on how it determines that lending practices that appear neutral to lenders are nonetheless discriminatory.
During the hearing, Chairman Emeritus Rep. Spencer Bachus (R-Ala) told Cordray that participants in the auto financing industry and automobile dealers were asking for clarification on the use of disparate impact methodology being applied to vehicle financing.
“I mean, you’re enforcing a rule and they really don’t know what your methodology is,” Bachus said.
But Cordray said there had actually been a lot of discussion with the industry around the issue. He said CFPB had presented its methodology in a webinar with the Federal Reserve. He said too, that the Federal Reserve largely agreed on the methodology presented to industry.
Then, Rep. Brad Sherman (D-CA) said there has “been significant dissatisfaction here in this room with the guidance that you provided about indirect auto leasing, particular concern about how you are basing this guidance on methodology that at least our Chairman says he can’t get explained, and sends letter after letter to you, Freedom of Information Act requests. Would you consider another study that would be based on methodology so convincing that you would be willing to share the methodology and the data with Congress?”
Cordray said the agency had been back on forth on different kinds of information about the methodology, and said CFPB thinks its providing the proper information, but industry players disagree.
“The reality is, the auto industry and the auto lenders, they know all about this because they’re constantly having to monitor,” Cordray said. He said there has been ongoing dialogue with the auto lender industry but the white paper will try to address the proxy methodology more directly.
John Culhane Jr., a partner at law firm Ballard Spahr Stillman & Friedman LLP’s Philadelphia office told Auto Finance News that the white paper would be helpful if CFPB spells out the methods it uses to make those determinations.
Culhane, whose regulatory practice includes preparing clients for regulatory examinations, said he believes the white paper is in part a product of all the ongoing dialogue the agency has had with the industry.
“They’ve been feeling their way around us. The fact that they’ve got a white paper ready to come out, show’s that it’s something they’ve been working on for a long time,” he said.
He said the paper would prove very helpful if the agency provides more information on the source of the proxies that it uses as well as the variables it employs or doesn’t. CFPB has said in the past that the proxy method it employs integrates two common approaches. But industry insiders have said, the agency hasn’t been clear on what those approaches entail.
“We’d all like to be able to replicate the kind of analysis CFPB is doing, so more information would be great,” said Culhane. But he also said it would help the industry if CFPB explained what threshold level they feel is indicative of a problem.
“The agency has been reluctant to disclose that. We’d like to get enough information to duplicate their analysis,” said Culhane.