So, what does a federal watchdog — say the CFPB — do when it wants to crack down on discrimination in lending but knows that the legitimacy of its methods for doing so will be roundly questioned? Well, it seems, in the CFPB’s case, the winning strategy was to beat a market-shaping settlement out of a company unable to fight the charges.
Not because the charges couldn’t be fought, mind you, but because the firm needed government approval on a basically unrelated restructuring model and thus had a better-than-average incentive to play nice.
And while that may sound something like a conspiracy theory dreamed up by the CFPB’s Republican foes in the House and Senate to the average CFPB booster on the street, it seems that story is taken directly from internal documents and emails written by the staff of the Consumer Financial Protection Bureau. Those documents were released Tuesday (Nov. 24) by congressional Republican critics of the discrimination probe.
“Some of the claims being made in this case present issues…that would pose litigation risks,” CFPB staff members wrote in a 2013 memo addressed to the bureau’s director, Richard Cordray, which was included in the report.
And while the CFPB apparently was well-aware of the “issues” it had with its anti-discrimination case, the CFPB was also well-aware that the folks over at Ally Financial were unlikely to ever litigate any of those issues.
“Ally may have a powerful incentive to settle the entire matter quickly without engaging in protracted litigation,” the agency’s lawyers wrote, noting that the company’s failure to secure approval to become a holding company would force it to divest itself of key businesses, primarily its insurance subsidiaries.
And though the CFPB cannot write this off to staff gone wild, Cordray initially signed the report.
Samuel Gilford, a CFPB spokesman, had no immediate comment to offer, instead noting it would need to familiarize itself with the specifics on the release.
“The CFPB’s goal has been, and continues to be, the elimination of illegal discrimination,” he said, adding that the bureau will fairly and consistently enforce the related law to “ensure borrowers harmed by discrimination receive the relief they deserve.”
And while it is noble to give consumers what they deserve, it seems at least open for interpretation whether Ally got what it deserved.
The $98 million settlement with Ally was the government’s biggest case involving alleged discrimination in the auto loan market and the first case for the CFPB in the industry. Ally faced accusations that it, in its capacity as an underwriter for auto loans, was complicit in a pricing system that resulted in 235,000 minority borrowers being charged higher interest rates than white customers by auto dealers.
Ally, notably, was accused of being complicit but not responsible. The pricing system that the CFPB has a problem with revolves around the institution of something called a “dealer reserve,” which allows auto dealers who act as a middleman in securing loans for car buyers with a lender like Ally to increase the cost of the loan on offer from the lender. The CFPB, through an analysis method many have questioned, determined that auto dealers were employing dealer reserves far more often on minority borrowers than their white counterparts.
The CFPB, however, is explicitly barred from regulating auto dealers, so instead its methodology focuses on the lenders they partner with, with the intent to deliver a message: If your partner discriminates against minority borrowers, the lender will be held responsible. In Ally’s case, it was found to be almost $100 million worth of responsible.
Industry officials and lawmakers have been less than wholly supportive of this move by the CFPB for two main reasons thus far: 1) The CFPB is making use of a backdoor loophole to regulate where it has been barred from it; and 2) The agency’s methodology for determining whether or not discrimination has taken place is less than wholly rigorous science.
And the recent release — and the gamesmanship it brought to pushing through the auto lending regulation — indicates that the CFPB was apparently very aware of both of those complaints, though apparently not concerned enough to proceed gently.
At least where Ally Bank was concerned.