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A (Crazy) Federal Intrusion into the Auto Lending Industry!

07-Oct-2013

There were many contributors to the 2008 financial crisis—including unsound housing loans and mortgage-backed securities, Fannie Mae and Freddie Mac, excess leverage by major financial institutions, and regulatory failures. Car and truck loans were not among the problems, and their lenders in any event pose no "systemic" risk to the financial system.

And yet, amazingly, the Consumer Financial Protection Bureau—a creature of the Dodd-Frank Act, which was passed to correct and prevent the causes of, and problems that led to, the 2008 crisis—wants to change the way car loans are made. 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.

Currently, if you apply for a car loan through a bank, credit union or one of the car manufacturers like Ford Motor Credit or Toyota Financial, you are judged on matters such as your credit score, income and debt. The financial institution won't know your race or ethnicity or even necessarily your gender. It will approve or disapprove the application and offer you an interest rate based on the data. That's just as it should be.

But it is not good enough for the CFPB. In a quest to make sure that all individuals falling within the "protected classes" under the Equal Credit Opportunity Act get the same interest rate as those who are not covered by it, the agency wants financial institutions to guess your race, ethnicity and gender based on your name and the address on your application. Put bluntly, they want lenders to profile you.

It sounds bizarre. But during a conference call on March 21 to congressional offices explaining how auto lenders were supposed to comply with the Equal Credit Opportunity Act (as outlined in CFPB's Bulletin 2013-02), agency staff advised us that they would recommend that financial institutions use "proxies to give probabilities of the race, ethnicity and gender of borrowers" to guess if an applicant falls into a protected class, or not, for the purpose of setting interest rates. In other words, they would like lenders to use stereotypes associated with your name and location in order to monitor compliance with equal-opportunity requirements.

Does that mean a person named Jefferson who lives in the Bronx is to be presumed an African-American, but not a Jefferson in Wichita? Is Taylor Rosenstein living in Miami a woman or a man? He or she must certainly be Jewish, right?

What I just wrote is absurd and looks offensive. But it is exactly what the CFPB's advice would effectively require.

Under this scheme, banks and finance companies would employ highly questionable methods to presume the race and gender of each applicant and assess whether the interest rates they offer are discriminatory.
 
This guidance is not just stupid; it is incredibly offensive and contrary to standards of fairness and equality upon which our society is based. One can only imagine the legal and other costs it would entail if lenders tried to put it into practice.

The auto industry is one of the economy's bright spots right now. There is no need to knock it off track by diverting resources toward fixing a problem that doesn't exist, resources that might otherwise be used to make credit more available for consumers who want to buy a car. The percentage of consumer complaints on car loans was and continues to be very low, especially when compared with home loans.

The CFPB should withdraw this outrageous and abusive guidance immediately and focus on helping consumers in those areas in which the need for reform truly exists.

One more thought; what happens when certain groups show themselves to be more rewarding than other under performing groups? Will the industry effectively push them out or maybe price them out; or maybe just get out of the business all together? Who knows, maybe the government will start a Federal auto loan program? Either way it’s scary to think that our leaders don’t have anything better to do than to try and solve a problem that doesn’t even exist…

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