We’re from the government and we’re here to help, part 726,914

The Consumer Financial Protection Bureau (CFPB)’s campaign against disparate impact in car loans is raising costs for some borrowers. Thanks, Sen. Warren! “The results highlight the sometimes unpredictable consequences of attempts to regulate lending practices…. Efforts by the CFPB to police the fairness of auto loans have accelerated in recent years under Director Richard Cordray.” [Morningstar/Dow Jones, W$J]


  • “We’re from the government and we’re here to help”

    The biggest lie ever told.

  • What people don’t realize is just how lawless the CFPB’s actions are.

    Here’s the definition of “creditor” under Reg B–a rule put out by the CFPB:

    “means a person who, in the ordinary course of business, regularly participates in a credit decision, including setting the terms of the credit. The term creditor includes a creditor’s assignee, transferee, or subrogee who so participates. For purposes of §§ 1002.4(a) and (b), the term creditor also includes a person who, in the ordinary course of business, regularly refers applicants or prospective applicants to creditors, or selects or offers to select creditors to whom requests for credit may be made. A person is not a creditor regarding any violation of the Act or this part committed by another creditor unless the person knew or had reasonable notice of the act, policy, or practice that constituted the violation before becoming involved in the credit transaction. The term does not include a person whose only participation in a credit transaction involves honoring a credit card.”

    How this allows the CFPB to look at an indirect auto lender’s portfolio and determine that the aggregated dealer markup practices of ALL the indirect auto lender’s dealers cause a violation attributable to the indirect auto lender is beyond any normal comprehension. The fig leaf that that it’s the indirect auto lenders’ policies to allow dealers to mark up rates that causes the violation–but that doesn’t really get it done.

  • BS.

    Interest rates are only going to rise on their face. In reality, they remain the same. The difference is that, with CFPB input, the real interest rates are on documents.

    What do I mean? Well, imagine a $1,000 car. Seller A sells it for $1,000 at 8% per year. Seller B purports to sell it for $1,000 at 5% per year. But, seller B’s finance people are jerks. While seller A follows the letter of the contract, seller B gets away with charging $3 per month in bogus charges. Since there is an arbitration clause in the contract, the buyer has no recourse because it does not make economic sense and is forbidden from a class-action suit. So, at the end of the year, seller A gets $80 or so in interest and seller B gets $50 in interest plus $36 in other (maybe ill-gotten) gains. Enter CFPB. Now, seller B can only get $30 in interest. But it wants more, so it will have to charge a higher interest rate. It is a wash.

    No, CFPB does not hurt consumers. CFPB is just helping consumers get what the are bargaining for.

    I will tell you what. Get rid of CFPB and give me an effective way to ensure fairness for consumers and to force businesses to give up ill-gotten gains, and I will be on your side. And no, getting rid of the FAA will not do it. Then, the money will go to the class-action lawyers (on both sides) and not consumers..

  • If you find yourself in Hell just because you followed the road paved with good intentions, you’re still in Hell.

  • Allan, interesting theory. Lots of assumptions. Not representative of facts on the ground.

    Once upon a time, I did auto litigation. Warranty, Lemon Law, that kind of stuff. I saw plenty of claims related to the financing though. There were, and still are, many, many ways to pursue claims against lenders related to TILA (Truth in Lending Act) / Regulation Z under state law without regard for the existence or opinions of the CFPB. Attorneys continue to bring those claims under state law, without reference to the existence of the CFPB or its opinions.

    Most of those state courts, btw, toss Arb clauses routinely, since they view the whole pre-printed finance contract as a contract of adhesion whose terms are non-negotiable, and for which the consumer is in the weaker bargaining position. California, particularly, is fond of that view and has its own state law, the ASFA (Automobile Sales Finance Act) under which most attorneys pursue these claims (together with more general fraud and unfair competition claims – CLRA, B&PC section 17200,etc). The remedies for a violation are, in my view, rather draconian. Here are a pair of examples I used to trot out for dealers and others who substituted their assumptions for the actual practice of state courts:

    Nelson v. Link at http://caselaw.findlaw.com/ca-court-of-appeal/1531498.html You will note this was a class action.

    or Lewis v. Link at http://caselaw.findlaw.com/ca-court-of-appeal/1411115.html Another class action – pay particular attention to the court regarding the availability of a class action on the state law claims. Note also the structure of the deal – inflating the purchase price of the new vehicle to cover negative equity on the old. The only party put at risk there is the lender, but look at the remedy to the consumer.

    Similar examples in other states, though harder to find in states with low populations (fewer cases to potentially publish) or who lack decent free public search engines for finding cases.

    On this statement, “getting rid of the FAA will not do it. Then, the money will go to the class-action lawyers (on both sides) and not consumers..” we do agree.

  • Forgot to mention this case while I was focused on state law actions. Its kind of important. http://www.supremecourt.gov/opinions/04pdf/03-377.pdf

  • Not my day. Forgot my disclosures.

    I’m not an attorney in CA, or any other state. I am a reasonably well read consumer whose opinions are solely his own. Do not attribute them to my former employer(s).

    Sorry about that.

  • So by “some borrowers” do they mean the people who were not discriminated against (or rather, those who discrimination favored)? If lenders are no longer able to charge higher rates to minority borrowers, and that raises the rates for non-minority borrowers, is that a bad thing? Weren’t the rates previously charged to non-minorities artificially low because of the offsetting discriminatory rates charged to minorities?

    • Josh, the lenders weren’t discriminating, except based on credit score, the ratio of debt to equity in the proposed transaction, length of loan, and (maybe) their best guess as to the likely devaluation of the product being purchased. For which perfectly reasonable business reasons exist which have absolutely nothing to do with the race of the borrower (which, btw, is not disclosed to them on a credit application)

      The discrimination occurred at the dealer level, when the car dealership told the buyer that they were able to secure a loan from a lender at a higher rate than the lender actually offered, and the buyer accepts. The difference in interest over the course of the offered and accepted loans is profit to the dealer, often in an amount greater than the dealer made on the sale of the car. Yes, the car is marked up, and so is the interest rate. Dealer profits on both. If the buyer is also talked into financial products like gap insurance, extended service contracts, and the like, the mark up on those is often (relatively speaking) huge – I’ve personally seen mark ups in excess of 200% on those products on numerous occasion.

      Because the CFPB is prohibited from going after the dealer lending practices directly (the auto dealer lobby is very powerful, and includes politically active large donators on both sides of the aisle – they secured themselves some carve outs), the CFPB is instead pursuing the lending institutions whose loans the dealers are selling. There is legal precedent, as under the “Holder in Due Course” rule, the ultimate lender is held responsible for the actions of their apparent agent (the dealer) in making the sale. Lenders, of course, insist that the dealers authorized to offer their loans comply with their lending practices and defend and indemnify the lender against allegations related solely to the dealers sales practices as part of their standard business agreements, but we know whose pocket is deepest, and who most often is left holding the bill…

      Finally, see disclaimer above.