Washington, keep out of auto loan businessposted on 2013-05-13
One of the lessons of the 2008 housing meltdown was that when Washington plays politics with consumer loans, bad things can happen. Claiming mortgage-lending practices created a "disparate impact" on minority home ownership, federal law foolishly pressured banks to lend to high-risk customers.
The disparate impact zealots are back. This time they're targeting the auto market. The Consumer Financial Protection Bureau — created under the Dodd-Frank Act to police bad lending practices — seems intent on subjecting auto lenders to failed regulations of the past.
Congress explicitly denied the CFPB the power to regulate the auto industry, but the agency has gone rogue in targeting vehicle dealers via their financial lenders claiming, without evidence, that they discriminate against blacks and Hispanics in charging higher lending rates. The focus of CFPB's meddling are so-called "dealer markups" — the interest rates charged on vehicle loans that dealers and lenders split. Dealers typically distribute a customer's credit application to several lenders, who then compete for the business, keeping interest rates low. But the CFPB wants to impose a flat rate to prevent its phantom "disparate impact" on minorities.
The CFPB action would force auto lenders "into changing the way they compensate dealers without any indication that the bureau has examined the effect this change could have on the cost of credit for consumers," says the National Automobile Dealers Association and National Association of Minority Automobile Dealers.
"The CFPB is on a fishing expedition," says Minority Auto Dealers president Damon Lester. "The CFPB has not shared any data with us" that proves discrimination. The CFPB did not return phone calls.
Lester sent a letter last week to the White House, saying that if "the CFPB is successful in enforcing a flat rate, small dealerships may be forced to lay off employees (and) dealerships may no longer be incentivized to help buyers find financing (particularly those who have marginal to low credit scores)."
The fishing expedition has cast so wide a net that it even encompasses Harley Davidson Motorcycles, a brand notorious for its minority outreach. Harley is the No. 1 seller of bikes to women, African-Americans and Hispanics — doubling its market share among those groups in the last five years. Yet it too has been targeted by CFPB's lending data witch hunt, compelling the company to hire a Washington lobbyist and law firm.
"The CFPB's proposal is a noxious attempt to solve a problem that doesn't exist and is likely to make a mess of one part of the consumer-loan industry that works," wrote House Financial Services Committee Rep. John Campbell, R-California, in The Wall Street Journal.
Campbell recounts a recent conference call with CFPB staff explaining that auto lenders would be required to comply with the Equal Credit Opportunity Act by using "proxies to give probabilities of the race, ethnicity and gender of borrowers" for the purpose of setting interest rates. That is, the CFPB wants auto lenders to racially profile their customers by last names and ZIP codes.
The Equal Credit and Opportunity Act expressly prohibits lenders from using race on applications for a car loan through a bank or a manufacturer like Ford Motor Credit or Harley-Davidson Financial Services. Customers are approved for loans based on data such as credit score and income. As it should be. But to eliminate "disparate impact," the Obama administration would add race to loan criteria.
If the CFPB has evidence of lender discrimination, it should act on it under current law. Forcing the auto industry to divert resources to a problem that doesn't exist will only weaken one of the bright spots in America's economic recovery.