Attorneys Wonder If CFPB Would Win in Court

HOLLYWOOD, FL – A government financial regulator that won dealer-related discrimination settlements against two major automotive lenders may go after more.

So says attorney Gerald Sachs, who once worked for the federal regulator, the Consumer Financial Protection Bureau. It was created as a result of the Dodd-Frank financial reform act of 2010.

Calling the CFPB “resolute” and on a “crusade,” Sachs, who served in its enforcement unit and now is in private practice, says: “They feel their mission is to protect consumers, so they are not going to back off filings.”

CFPB Director Richard Cordray “has not backed down from his people’s filings,” he says.

The agency won settlements against American Honda Finance and Ally Financial.      

At issue is the so-called dealer-reserve system in which auto lenders allow dealers to increase loan rates by varying percentage points as payment for acting as middlemen between lenders and car buyers.

The CFPB has criticized that practice, saying it causes unintended discriminations of certain minorities.

The bureau says its claims are supported by an analysis using surnames and zip codes to determine alleged lending disparity. But the methodology of the analysis has come under fire.    

In its complaint filings, the bureau has cited lenders, not dealers, because it has direct oversight over the former but not the latter.

Last year, Ally agreed to pay $80 million in restitution and $18 million in fines because some of its dealer clients allegedly charged higher loan rates to African-Americans, Hispanics, Asians and Pacific Islanders.

Honda recently agreed to institute new measures to reduce dealer discretion and compensation practices and pay $24 million in restitution to allegedly affected minority borrowers.

“The Honda case could have been a lot worse,” Sachs says at the annual Automotive Resource Network conference here.

Some conference attendees say the CFPB is squeezing settlements from targeted lenders, but lacks evidence that would stand up in court. “If they ever took anyone to court, they’d be clobbered,” Randy Hendrick, general counsel for DealerTrack, says of the bureau.

Sachs replies: “I agree all they have are statistics, not overt discrimination (evidence). Whether they would prevail at trial or not (is an open question). But I think they’d file suit against a company that refuses to work with them. Whether they win is something else.”

Hendrick points to an American Financial Services Assn.-commissioned study that challenges the accuracy of the CFPB analysis that led to the government discrimination claims.

The Charles Rivers and Associates study involving more than 8.2 million auto-financing contracts says data fails to support disparity allegations of differences in the amount of dealer reserve charged to minorities and non-minorities.

The association’s research cites significant bias and high error rates in the proxy methodology the CFPB used in reaching its conclusions last year.   

“(CFPB’s) statistics are severely undermined by the (AFSA-commissioned) study,” Hendrick says. He adds that in a Fair Housing Act legal dispute, “the U.S. Supreme Court said a case cannot be brought based on statistics.” 

Sachs offers advice to lenders who may find themselves in the bureau’s crossfires: “Find middle ground. Push back, yet be accommodating at the same time. There is an effective way to do both. Honda did it, and didn’t get hit hard.”

In similar investigations, other companies have mistakenly taken a contentious stand, he says. “They’ve said, ‘This is privileged information, this claim is ridiculous, there’s no room for compromise.’ That is 100% wrong. To say that to regulators makes them more resolute.”

Another tip from him: “Be cordial to examiners.”

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