CFPB Stands up for Servicemembers by Stopping Financial Company Abuses

Over the last few months, the CFPB announced enforcement actions against two companies that repeatedly targeted servicemembers with abusive products. The first company, Fort Knox National, and its subsidiary, Military Assistance Company, charged servicemembers recurring hidden fees by abusing a payment system many servicemembers use send money home or pay creditors while deployed.  This process, known as the military allotment system, deducts payments directly from earnings. In this case, it also allowed the company to charge repeated, undisclosed fees to servicemembers’ accounts. The company also made it extraordinarily difficult to learn of these fees: online account information did not include fee charges, and monthly statements were not distributed.  As a result, tens of thousands of servicemember accounts were drained of millions of dollars in fees. The CFPB is now requiring the company to pay $3.1 million in relief to the people they harmed, as well as to stop its deceptive practices.

The CFPB also brought an enforcement action against Security National Automotive Acceptance Company, an auto lender, for illegally threatening current and former servicemembers in order to collect debts. The CFPB is charging the company exaggerated the potential disciplinary action that servicemembers could face after failing to pay their loans; contacted and threatened to contact commanding officers to encourage repayments, threatened to garnish wages, and threatened borrowers with legal action. The Bureau’s lawsuit charges that the company violated the Dodd-Frank Act prohibitions on unfair, deceptive and abusive practices and it is seeking financial penalties, an injunction from further abuses and compensation for victims.

Because servicemembers and their families receive steady paychecks and have unique financial challenges such as lengthy deployments and frequent moves, they are all too often the target of predatory lenders and other financial fraudsters that congregate outside military bases.

With these two actions, the CFPB has now brought six enforcement cases against companies that have violated servicemembers rights.  Those and other enforcement actions can be seen here. To date, more than 100,000 servicemembers have been helped by the Bureau’s work to protect servicemembers from financial abuse and the companies responsible have been hit with fines and restitution charges of over $100 million total.

For more on the CFPB’s work to help servicemembers, see this fact sheet.

— Rebecca Thiess

CFPB Takes on Payment Processors for Facilitating Fraud

The CFPB recently brought legal action against a number of companies, including Universal Debt & Payment Solutions, for defrauding consumers by using threats, deception, and harassment to collect “phantom debts” that the consumers did not owe to the collectors or, in most instances, to anyone else.   In this instance, consumers collectively paid millions of dollars to the debt collectors after being subject to illegal threats and false statements, including threats of arrest or wage garnishment.  In some cases, the phony collectors took money out of consumers’ accounts without any authorization at all.

In a noteworthy move, the  CFPB’s complaint named not only the debt collectors, but also the various companies alleged to have been “service providers” to the debt collectors—those serving as payment processors, without whom the scammers could not have collected the consumer’s debit and credit card payments. With this enforcement, the CFPB is insisting that payment processors—and not just the companies directly dealing with consumers—are also subject to its enforcement authority under the Consumer Financial Protection Act (CFPA).

The Bureau’s complaint charges that while the debt collectors in this case were guilty of threatening and intimidating consumers over debts that were falsely claimed to be owed, the payment processors were also in the wrong for their role in facilitating the debt collectors’ actions in this scheme—ignoring clear signs that the collectors were committing fraud.

In one example that the complaint highlights, two payment processors, Global Payments and Pathfinder, ignored extremely high chargeback rates.  (‘Chargebacks’ occur after a consumer successfully disputes a charge as unauthorized or otherwise improper and the payment is reversed.)  Chargebacks are rare in legitimate card transactions, and every chargeback requires an inquiry.  The major debt collection company in this suit as well as an affiliate had chargeback rates of close to 30% in some months, rates that should have prompted termination of the processing agreement.  Another payment processor, EMS, ignored complaints from consumers who reported unauthorized payments taken out of their accounts and fraud detection reports that flagged the collectors because there was “[n]othing found to confirm the existence of the business.”

The CFPB’s actions in this case are in some ways similar to steps the Department of Justice has taken though Operation Choke Point, where the DOJ is holding banks responsible for processing payments despite evidence of fraud or other illegal activity.  All three DOJ cases filed as part of Operation Choke Point are instances – like this one – in which the banks or payment processors in question knowingly facilitated illegal activity that did serious harm to consumers.  See this new fact sheet from NCLC outlining the three cases brought by the Department of Justice, against CommerceWest Bank, Plaza Bank, and Four Oaks Bank & Trust.  Banks and payment processors that comply with their responsibilities to know their customers and look out for signs of fraud, as most do, play important roles in safeguarding consumers.  Actions by the CFPB and DOJ against banks and payment processors who enable fraud are critical to cut off fraudsters from access to the payment system.

— Rebecca Thiess

Big Finance’s Ploy to Keep Consumers in the Dark

The Consumer Financial Protection Bureau recently announced a plan to significantly expand the information that consumers can choose to make public when they file complaints. The bureau currently takes complaints involving credit cards, student loans, mortgages and checking accounts (among other financial products and services), posting a record of the company name and complaint category in each case. If the new plan goes forward, its public database will begin to include individual stories as well, minus identifying information.

The financial industry has let us know just how much it dislikes this proposal: enough to misrepresent it through and through.

The bureau has plainly said that it will continue forwarding every complaint to the appropriate company and giving the company 15 days to respond before a complaint is published. In addition, the bureau is now proposing to give both parties a chance to tell their stories, with the company’s account posted directly alongside the consumer’s.

You would never know this, however, from the massive media campaign launched on Monday by the Financial Services Roundtable, the trade association of the nation’s biggest banks, insurance, asset management, finance and credit card companies. In a blitz of public statements, blog posts, social media messages and attack ads on the walls of the Washington Metro system, the Roundtable paints a menacing picture of “bureaucrats” posting baseless complaints and giving companies “little opportunity to respond,” so that, as Roundtable CEO Tim Pawlenty wrongly put it, people see “only one side of the story.” The Roundtable has created an entire mini-website based on this falsehood.

What’s going on here? Were Pawlenty & Co. in such a rush to denounce the proposal that they forgot to read it? More likely, they’re playing fast and loose with the truth because they would rather not come right out and say that what they really object to is the whole idea of a public database where people can learn about specific consumer grievances and how they’ve been addressed by the companies the Roundtable represents.

The Consumer Bureau (the target of this and many previous industry attacks) is the agency originally proposed by Elizabeth Warren in 2007, and formally established by the Dodd-Frank financial reform law of 2010. Its mission is to bring basic standards of safety and transparency to a market that had become notorious for its abusive practices – practices that imposed huge hidden costs on consumers, besides contributing to the financial crisis of 2008 and the economic meltdown that followed.

The complaint system provides the bureau with valuable real-world insights to apply in its rule-making, supervision and enforcement. By making some of the data public, the bureau hopes to empower consumers and, at the same time, to inspire companies to seriously investigate and respond to complaints, since it would be impractical for the bureau to investigate them all. (There were 113,000 filed last year.)

That system is already making a difference. The bureau’s Office of Consumer Response has received more than 400,000 complaints since it got up and running in 2012. More than 30,000 consumers have gotten monetary relief. Tens of thousands more cases have been resolved by other forms of remedial action.

But the complaint database has the potential to be far more effective if, as consumer groups have long urged, it includes a record of the specific problems that consumers have encountered, and the specific ways in which companies have dealt with those problems. This additional information will make it easier for consumers to spread the word about unfair practices, to compare competing companies and products, and to avoid dangers and pitfalls. It will help spur a virtuous cycle in which more people decide to use the system, and their contributions make it more useful still.

Financial companies also stand to benefit from the ability to compare their experiences with those of competitors, spot opportunities for improvement, and correct problems before they get out of control, the way bad mortgage lending did in the runup to the financial crisis.

For now, though, the industry seems to be stuck on a course of no-holds-barred opposition, and willing to traffic in multiple untruths in service of the cause. The Roundtable would have us believe, for example, that the “vast majority” of complaints filed with the bureau are totally unfounded and thus unworthy of publication. Its evidence? The fact that 70 percent of last year’s complaints “were closed with a simple explanation or clarification.”

Several large factual problems lurk inside this assertion. First of all, a “simple explanation or clarification” can be just what a consumer wants and needs; take the case of someone struggling with a mortgage and trying to find out what can be done to avoid foreclosure.

The use of the word “closed” is misleading in its own right. As the Consumer Bureau admits, its ability to follow up on individual complaints is limited. Cases can be closed without any investigation or adjudication by the agency; and they can be closed with a simple explanation or clarification essentially because that’s what the company saw fit to do. By no means does “closed” equate with resolved, as the industry implies.

Legitimate issues are often raised in complaints even if they involve no clear violation of law. The bureau has already drawn on the complaint database to identify worrisome patterns of conduct in credit card, debt collection, mortgage servicing and other areas, sometimes leading to proposals for new rules or procedures to make the financial marketplace safer.

In its ads, the Roundtable suggests that there is something extraordinary or unprecedented about having a government agency publish consumer complaints. That, too, is inaccurate; the Consumer Bureau is proposing a system that resembles, among other existing databases, one on product safety maintained by the Consumer Product Safety Commission.

The financial industry will probably not stir a great wave of public sympathy with its attacks on this proposal. Then again, public sympathy is not what it’s after. The sympathy it seeks is from lawmakers and regulators, and we can be sure it has other techniques – both cruder and more artful – for reaching them. We’re talking about an industry that (as documented in a new report from Americans for Financial Reform) spends about $1.5 million a day on campaign contributions and lobbying, leaving aside the cost of such ancillary activities as the Roundtable’s ad campaign.

So we can depend on the financial lobby to go all-out in its effort to derail the Consumer Bureau’s plan. That means that others must work equally hard to keep this worthy proposal on track.

– Jim Lardner

Originally published on USNews.com

Paying Off for Consumers – the CFPB Is Getting the Job Done

Getting credit card companies to cough up more than $1.8 billion in refunds to consumers they had cheated. Directing mortgage lenders to limit charges and stop making loans that borrowers can’t afford. Cracking down on “last dollar” scams that collect up-front fees from financially desperate people for help that is never actually delivered. Establishing a consumer complaint database to track financial market trends and help consumers get individual problems addressed

All that and more is the doing, so far, of the Consumer Financial Protection Bureau, which was created just four years ago by the Dodd-Frank financial reform law, and could not begin to wield its authority until a year after that.

The idea for such an agency was put forward in 2007 by then-professor (now Senator) Elizabeth Warren. At the time, as she pointed out, consumer protection in the financial marketplace was a responsibility scattered across multiple agencies, and treated by none as a priority. Key regulators lost sight not only of consumer safety but of systemic safety too, tolerating and even encouraging many of the reckless and deceptive practices that fueled the financial and economic meltdown of 2008.

The big banks and financial companies opposed the bureau as a concept, and they don’t much care for the reality, either. From the start, the bureau has been the target of ferocious attacks from industry lobbyists and their too many friends on Capitol Hill, who have concocted a series of bogus controversies in an effort to depict the agency as out of control.

What it all boils down to is that, unlike some of the watchdogs the financial industry has faced in the past, the bureau has been energetically doing the job it was meant to do: bringing basic standards of safety and transparency to the markets for credit cards, mortgages, student loans, auto loans, checking accounts, debt collection and other common financial products and services.

The bureau has the authority to write rules, supervise a broad range of financial companies, carry out enforcement actions, educate consumers and analyze relevant patterns of industry behavior. In its work to date, it has made fruitful use of all these powers.

In the mortgage market, for example, the bureau has issued rules that discourage high fees and deceptively structured loans, in addition to requiring verification of every borrower’s ability to repay before a loan can be issued. Its new rules, which took effect in January, hold the potential to help save borrowers and the economy from another wave of dangerous and unsustainable lending.

The bureau has also taken a number of noteworthy enforcement actions, producing refunds and fines of more than $4.8 billion so far. These actions, often coming on the heels of multi-agency investigations, have targeted illegal kickbacks for mortgage referrals, unfair billing practices and deceptive telemarketing and sales tactics, among other offenses. More than 15 million consumers have received some restitution, while countless others have benefited from settlement provisions requiring companies to change their practices and from the deterrent effect of serious enforcement.

Another important bureau accomplishment has been to create a complaint system and database where consumers can go with problems involving credit cardsstudent loansbank accounts and servicesdebt collection and more. The agency’s Office of Consumer Response has already received more than 400,000 consumer complaints. Besides helping consumers get monetary relief (such as refunded fees) and non-monetary relief (such as errors fixed on credit reports or an end to harassing phone calls from debt collectors), the complaint system provides the bureau with a reservoir of precious information. Complaints can help highlight repeat problems or law-breaking, and identify important gaps in consumer understanding, letting the agency know where it needs to focus its educational, supervisory, enforcement or rulemaking efforts to improve specific markets, products or practices. Members of the public can use the complaint data both to evaluate different companies and to find out if their personal experiences reflect a wider pattern.

By law, the Consumer Financial Protection Bureau has a special duty to protect seniors, students and military personnel. In its efforts to fulfill that mandate, the bureau has released important reports on student lending and set up an online tool called “Paying for College,” which makes it easier for people to compare financial aid options and figure out a successful repayment strategy. Its Office of Older Americans has gone after scammers who prey on senior citizens. Its Office of Servicemember Affairs has worked with other agencies to add extra protections for military personnel in rules and enforcement actions involving mortgages, payday loans, student loans and debt collection.

In its short life, the bureau has already done much to vindicate the trust of the hundreds of consumer, civil rights, labor, faith and other groups that banded together to insist that such an agency be part of the Dodd-Frank package. But it’s just a start. Plenty of important work lies ahead on payday loans, student loans, prepaid cards and debt collection, among other trouble zones of the financial marketplace. And as the agency takes on industry self-interest in these areas, it will continue to face intense opposition from those in the financial world and from legislators under their sway.

new poll commissioned by Americans for Financial Reform and the Center for Responsible Lending shows overwhelming, bipartisan support for the concept of an agency focused on protecting financial consumers and cracking down on deceptive and abusive practices.

Now it’s important to raise public awareness of this still-young agency, so more people can benefit from its complaint system, educational tools and other resources – and so the voices of the many who value the bureau’s work can continue to be louder than the voices of the few who want it to go away.

– Rebecca Thiess

Originally published on USNews.com

Consumer Agency Files Lawsuit Against ITT for Predatory Lending Practices

The Consumer Financial Protection Bureau has taken its first public enforcement action against a company in the for-profit college industry, filing a lawsuit against ITT Educational Services, Inc. The company, based in Indiana, is a for-profit provider of post-secondary technical education, with tens of thousands of students enrolled online or in the school’s 150 institutions. The agency is accusing the for-profit college chain of engaging in predatory student lending by pushing students into high-cost private student loans that, in Director Rich Cordray words, “were destined to default.” In fact, the company itself projected a default rate of 64 percent, predicting that well over half of students who borrowed would be unable to repay. The CFPB is seeking refunds for victims, a civil penalty, and an injunction against the company, among other forms of relief.

The CFPB asserts that ITT coerced students into taking on high-cost loans with interest rates of more than 16 percent. These loans additionally had opaque terms, with some students not even aware they had a private student loan until they received a collection call. The CFPB alleges that the company knew students would have no way to pay the temporary loans they were encouraged to take out to fund tuition gaps (the amount of tuition owed after federal financial aid resources were exhausted). ITT’s programs cost significantly more than similar programs at public colleges, and because the tuition is higher than the maximum federal student aid limit, many students had to fill that gap with outside financing. To fill this hole ITT offered students no-interest loans that looked appealing, but were due in full at the end of a student’s first academic year. When the end of the year came and students couldn’t repay, the company pushed them into new high-cost private student loans to repay both their temporary loans and their second year of tuition. ITT’s CEO even told investors that the plan all along was for students to end up converting the temporary loans to long-term loans.  In addition to misleading students on loans, the company also misled them on future job prospects, leading students to believe they would earn enough money upon graduation to repay their loans even though past experience showed otherwise.

Four state attorneys general, from Illinois, Iowa, Kentucky, and New Mexico, joined the CFPB in announcing legal actions. New Mexico Attorney General Gary King—who filed a separate suit in New Mexico—explained: “A significant percentage of the New Mexico students that entered the ITT nursing program were unable to complete the program; cannot get a job in their chosen field; because their ITT credits will not transfer, they must start over at another institution; and, these students continue to suffer under their heavy student loan debt.” Kentucky Attorney General Jack Conway, who is heading a group of 32 attorneys general investigating for-profit colleges, added that “some of these schools are more interested in getting their hands on federal and state dollars than educating students.”

The CFPB is using its authority under the Dodd-Frank Act to take action against institutions engaging in “unfair, deceptive, or abusive practices” in this case. Relatedly, the CFPB also recently finalized a rule, which takes effect on March 1, allowing the agency to supervise certain nonbank servicers of private and federal student loans.

— Rebecca Thiess

CFPB Remittance Rules Go Into Effect This Week

New protections are now in place for people wiring money overseas. Consumers need to know about these safeguards, so they can exercise their rights, get the information to shop for the best prices, and make sure their hard-earned money ends up where they mean for it to go.

The Dodd-Frank financial reform law of 2010 called for these new remittance rules, and the Consumer Financial Protection Bureau is implementing them. The rules apply to transfers of $15 or more handled by a bank, thrift, credit union, or remittance company. Payment processors will have to do three things that were not previously required:

  1. Provide prepayment disclosure of most fees, taxes and the exchange rate (or in some cases an estimate of the exchange rate), enabling customers to know how much the process costs, and how much the people on the other end of the transaction will actually receive – before they decide how to send the money.
  2. Allow most customers at least half an hour to cancel a payment without charge.
  3. Set up a complaint system with a timeline, and assume responsibility for abuses or mistakes committed by their agents. In short, if the money never reaches the specified destination, that simple fact will now be grounds for consumers to get a refund.

Transparent CFPB Database Makes Banks Work Better

Last week, my organization released “Big Banks, Big Complaints,” a report documenting how the Consumer Financial Protection Bureau is helping bank customers solve disputes through its searchable public online complaint database. The views of U.S. PIRG and its coalition partners at Americans for Financial Reform mirror the CFPB’s: transparency helps good companies do better in the market; and bad companies will either need to become good, or lose customers.

Yet, in a story today, “Feds Solve Problems for Unhappy Bank Customers,” by Herb Weisbaum of CNBC, American Bankers Association lobbyist Nessa Feddis criticized our study by simply repeating the industry’s tired arguments that it had unsuccessfully used to try to kill the database itself when it was still just an idea. “No serious analyst would use this data to draw conclusions. This is data that is unverified, unrepresentative, incomplete and potentially inaccurate,” she told Weisbaum.

Actually, transparency works. The CFPB database is getting results. Indeed, just the other day, the industry trade paper American Banker (not affiliated with the ABA) ran a story, “Customers Are Now Banks’ Greatest Regulatory Threat.” Why? Because, as the story itself points out, if banks don’t handle their complaints quickly and well, their customers will complain to the CFPB. If they want to avoid public shaming or even enforcement action, industry lawyer Alan Kaplinsky told the American Banker, they would do well to “have a very good system in place from the get go to resolve a complaint quickly.”

We’re not surprised, not surprised at all. Our Tax and Budget Project regularly ranks states and municipalities on how transparent their disclosure of budget spending is to taxpayers. We’ve seen dramatic improvements in the quality of disclosure.

It’s a simple lesson that the smart banks will learn. Firms that behave better in the marketplace by handling complaints quickly or eliminating unfair practices will be rewarded with more, and happier, customers. Conversely, firms that persist in dragging out or ignoring complaints about unfair practices may make money in the short run, but ultimately, transparency wins out.

Last week, the CFPB announced a $20 million civil penalty against JP Morgan Chase, which was ordered to refund $309 million to more than 2 million consumers over the deceptive marketing of junky credit card add-on products, some of which were never even delivered to the people who had bought them. This wasn’t the CFPB’s first move against the add-ons, which range from credit card debt cancellation products (“Who will pay your card if you get sick or laid off … or die?”) to the more common credit monitoring and identity theft products. Last year, CFPB went after Discover and Capital One credit cards for deceptive sales of similar products. Our advice:  You don’t need any of them, but check your statements to make sure you haven’t already inadvertently been signed up to pay for them.

The CFPB’s enforcement actions help consumers just as the database does. While some banks will no doubt keep selling junky products, smart ones will to preempt the CFPB with their own enforcement action. No bank will want to be Number One in the CFPB database.

In any case, it is clear that the CFPB is getting results for consumers and making markets work better. As Scott Pluta, who heads the CFPB database project, told Weisbaum of NBC: The database may not be popular with the financial services industry, but it’s “making a real difference in people’s lives and in the marketplace.”

— Ed Mierzwinski

Originally published on USNews.com.

A Real Scandal Is the Senate's Consumer Bureau Obstruction

Forty–three Senators will soon get the chance to reconsider their assault on the Consumer Financial Protection Bureau. They should take a moment, along with the rest of us, to look at what this agency – created after the financial meltdown of 2008 to set basic rules of the road for the banking and lending world – has done so far.

Among other things, it has formed a team of investigators and advocates to guard members of the military against illegal foreclosures and other scams; warned auto lenders that they will be held accountable for practices that lead to more expensive credit for African–Americans, Latinos, women or seniors; and laid down rules to end the era of mortgages designed to rake in up–front fees before they self–destruct.

The Bureau has also filed criminal charges against two debt–relief companies over illegal advance fees extracted from borrowers at the end of their rope and returned nearly half a billion dollars to consumers cheated by credit card companies including Discover and American Express.

In short, it has begun to be what Elizabeth Warren envisioned when (before she became a Senator) she first proposed the idea: a financial watchdog with the sole mission of protecting consumers.

That is a mission that most Americans, regardless of party, can get behind. And the Bureau has won wide support for its thoughtful and open approach under former Ohio Attorney General Richard Cordray, who has held the job of Director since his recess appointment at the beginning of 2012. In January, when the Bureau came out with new rules for the mortgage industry, the head of the Mortgage Bankers Association praised not only the rules themselves, but also the bureau’s “deliberative, inclusive, transparent process.”

Nevertheless, with a vote on Cordray’s nomination to a full term set for consideration by the Senate (after the Banking Committee approved it on a party line vote), 43 of the 45 Republicans in that chamber have pledged to not even allow an up or down vote .

What gives? It’s nothing personal, they say; in fact, it’s not about the nominee at all. “I think you have done a wonderful job so far in carrying out your duties,” Senator Tom Coburn, R–Okla., told Cordray at his confirmation hearing.

No, their grievance is with the agency itself. Four years ago, they came up with a demonized vision of the Consumer Bureau at the behest of Wall Street megabanks and lenders big and small, who were battling for the right to go on enriching themselves through the sort of tricks and traps that it was meant to prevent.

The industry and its friends in public office argued that traditional bank regulators, in the words of the Financial Services Roundtable, “were best positioned to monitor and enforce consumer protection ” – despite their glaring failure to do so in the past. They denounced the Consumer Bureau, before it had even opened its doors, as an over–powerful regulator that would churn out pointless rules and trample on liberties . Senator Lindsey Graham, R–S.C., described it as “something out of the Stalinist Era.”

And now, stuck on auto–pilot, they are using their power to advise and consent (and filibuster) to demand “reforms” that would undermine the Bureau’s authority and independence.

Above all, they are after two changes that are a well–known Washington formula for gridlock and ineffectuality: they want the bureau placed under a commission chosen by party leaders and they want it funded through annual congressional appropriations rather than (as the law currently provides) out of a fraction of the budget of the Federal Reserve.

Cordray and the Bureau have mostly tuned out the attacks and gone about their business. Just in the past month, the bureau released a major study of payday lending and put out a report on student debt as a barrier to economic opportunity, incidentally giving more than 28,000 people the chance to tell their stories and propose remedies for those trapped in high–cost private education loans. Both these initiatives point toward sorely needed policy changes that the bureau can help bring about in months to come .

But in the long run, having a confirmed director matters. Cordray’s recess appointment runs out at the end of 2013, and faces a court challenge to boot. Under the terms of the Dodd–Frank financial reform law, which established the Bureau, it could lose some of its authority over nonbanks if it has to function without a director. That would put banks in the uncomfortable position of being governed by rules that their storefront competitors could ignore – a scenario that has led to speculation that bankers and bank lobbyists may eventually tire of this fight.

Certainly, financial consumers – all of us, that is – have a stake in persuading a crucial few of those 43 Senators to back away from their dogmatic stand. Majority Leader Harry Reid, D–Nev., had planned to bring the issue before the Senate later this week; now he has decided to put it off for a while. That should give the Consumer Bureau’s opponents extra time to contemplate the long–term implications of a course of action that promotes abusive lending, Wall Street greed and endless partisanship and obstructionism in a country that is fed up with all those things.

In the scheme of current Washington scandals, this is one that deserves far more attention than it has received. And attention is one key to setting it right.

Originally published on USNews.com

 

Car Buyer’s Best Friend: Car Dealer?

Surprise, surprise: the nation’s auto dealers do not approve of the Consumer Financial Protection Bureau’s crackdown on a loan compensation system that rewards dealers for sticking car buyers with unnecessarily high interest and fees.

But the dealers assure us they are not looking out for themselves. A joint statement by the National Automobile Dealers Association (NADA) and the National Association of Minority Automobile Dealers (NAMAD) laments the potential loss of “a financing model” that “has been enormously successful in both increasing access to, and reducing the cost of, credit for millions of Americans.” The dealers go on at some length about the threat to convenience, competition, and consumer choice; by contrast, they have not a word to say about any possible impact on their own bottom line.

Here, then, are a few salient facts that, while nowhere to be found in this high-minded document, were rightly examined and considered by the CFPB before it decided to issue a guidance bulletin on potential violations of the Equal Credit Opportunity Act (ECOA):

  1. The practical effect of the indirect-financing system that the dealers defend is to create incentives for charging higher interest and/or fees than borrowers would otherwise qualify for.Typically, a third-party lender determines the least costly loan that it would be willing to give, and offers to pay the dealer extra for convincing the borrower to pay extra.
  2. It adds up to a lot of extra. Markups resulting from what a layperson might call dealer kickbacks (but which are politely known in the auto lending field as “reserves” or “dealer participation programs”) add an estimated $25.8 billion in hidden interest alone over the lives of the loans involved. Research also shows that the mere presence of a dealer interest rate markup increases the odds that borrowers will fall behind on their payments or have their cars repossessed.
  3. Repeating a well-documented pattern of the subprime mortgage era, the cost of these dealer markups falls disproportionately on Latinos, African-Americans, women, the elderly, and other historically disadvantaged population groups.
  4. Needlessly expensive auto loans, like needlessly expensive mortgage loans, aggravate the persistent divide in average wealth between white and Latino and African-American households. Nationally, the average auto loan stands at $26,691, and total auto loan debt has reached $783 billion, more than Americans collectively owe on credit cards and edging up toward what they owe on mortgages.

The CFPB has put the lenders on notice: if their commission arrangements lead to higher costs for car buyers of color and other protected groups, they could be found in violation of the fair-lending rules of the Equal Credit Opportunity Act.

The lenders say: don’t punish us for the sins of dealers. The dealers, for their part, protest that while they “strongly oppose any form of discrimination in auto lending,” they should not be punished on the basis of “a theory of discrimination that is based on a statistical analysis of past transactions – not intentional conduct…”

Another way of putting all this is that the lenders and dealers have, between them, constructed a loan-making apparatus expertly designed to cheat, and to cheat certain classes of people disproportionately, regardless of anyone’s provable intent. The CFPB is to be commended for finding a way to confront that outrage with the authority it does, in fact, possess.

Senator Warren’s Question: Why Is This Agency Different from Other Agencies?

At Tuesday’s confirmation hearing, Massachusetts Senator Elizabeth Warren had no questions for Richard Cordray, the nominee to lead the CFPB. “You’ve already testified 12 times [and] CFPB officials have testified more than 30 times,” she pointed out. “You’ve been an open book… and you’ve won widespread praise for both your balance and your judgment.”

Instead, Warren addressed her questions to the 43 Senators who have pledged to block a confirmation vote:


“What I want to know is why, since the 1800s, have there been agencies all over Washington with a single director including the OCC, but unlike the consumer agency, no one in the U.S. Senate has held up confirmation of their directors, demanding that the agency be redesigned.

“What I want to know is why every banking regulator since the Civil War has been funded outside the Appropriations process, but unlike the consumer agency, no one in the United States Senate has held up confirmation of their directors demanding that that agency or those agencies be redesigned.

“And what I want to know is why there are agencies all over Washington whose rules are final, subject to the ordinary reviews and oversight, while the CFPB is the only agency in government, subject to a veto by other agencies.  But unlike the CFPB, no one in the U.S. Senate holds up confirmation of their directors, demanding that those agencies be redesigned.

“From the way I see how other agencies are treated, I see nothing here but a filibuster threat against Director Cordray as an attempt to weaken the consumer agency.  I think the delay in getting him confirmed is bad for consumers.  It’s bad for small banks.  It’s bad for credit unions.  It’s bad for anyone trying to offer an honest product in an honest market.

“The American people deserve a Congress that worries less about helping big banks and more about helping regular people who’ve been cheated on mortgages, on credit cards, on student loans, on credit reports.  I hope you get confirmed.  You have earned it, Director Cordray.”

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