The CFPB Embraces Junk-Science And Wants Banks To Do So As Well
There was a time when class-action lawsuits against lenders who financed dealer-generated automobile loans were all the rage. Plaintiffs claiming to represent ethnic minorities or other protected classes of car buyers sued banks and captive non-bank finance companies on the theory that allowing automobile dealers the discretion to mark-up the interest rate on an installment sale contract over the "buy-rate" calculated by the lender was inherently discriminatory and constituted a violation of the Equal Credit Opportunity Act [ECOA] by the lender. These plaintiffs claimed that whenever dealers had the opportunity to mark-up an interest rate "minorities always pay more." They supported this claim with statistical models that employed dubious devices such as "surname algorithms;" the assumption, for example, that someone whose last name was "Lee" came from China rather than Virginia. Sure enough, under every scenario, these statisticians concluded that "minorities always pay more."
Most of the lenders sued in these ECOA cases ultimately reached court-approved settlements that placed caps-usually 300 basis points-on the amount that lenders would allow dealers to mark-up interest rates. One lender avoided having to settle by proving that the named plaintiff had in fact not been discriminated against when she financed her car. The court dismissed her case on the unassailable basis that a person who has not been the victim of improper discrimination cannot represent the interests of those who have been. With these settlements constraining the limits of dealer discretion the class-action plaintiffs' bar moved on to more fertile hunting ground. The CFPB, however, is now rushing in to fill the void.
On March 21, 2013, the CFPB issued its Advisory Bulletin 2013-02 which blithely adopts the premise that dealer discretion in marking up interest rates is discriminatory per se. The Bureau compounds this affront to common sense, by ignoring the limitation placed on lender liability by the ECOA itself. Under the Act and its implementing Regulation B, one lender is liable for a violation committed by another lender when the first lender "knew or had reasonable notice of the act, policy, or practice that constituted the violation" prior to becoming involved in the credit transaction. The CFPB's Bulletin makes the self-proving assertion that ECOA and Reg. B do not limit a creditor's liability for its own violations. It then states that such "violations" can...
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