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U.S. News: Take Away the CFPB's Keys
The Consumer Protection Bureau's plans for auto loans show just how out of control it is.


Washington, December 2, 2015 -

WASHINGTON -- If all you knew about Mr. Brown was his surname, sex and zip code, do you think you could tell if he was black or white? The Consumer Financial Protection Bureau thinks it can – which is just one more reason it should be abolished. 

The regulatory frenzy that accompanied President Barack Obama's first two years in office produced an awful lot of bad law, the worst perhaps being the massive Dodd-Frank legislation that was supposed to fix what was wrong on Wall Street and with the big banks.

It didn't. If anything it made things worse, especially through the establishment of the badly misnamed Consumer Financial Protection Bureau, which is supposed to protect borrowers from predatory lenders but is instead driving up the cost of borrowing money for everybody without doing anything to appreciably reduce the risk to anybody.

The CFPB, when it's not busy taking advice from the same so-called consumer non-profits that helped engineer the housing bubble with their sub-prime lending schemes, now wants to stop auto dealers from being able to give loan discounts to car buyers on the grounds that they have up to now been doing it in a discriminatory fashion.

Let's walk through the process of buying a new car. You scan the papers, read a few car magazines, take a few test drives, settle on the make and model you want and then hammer out the price. In about eight of every 10 cases, some kind of financing is going to be involved, either through a bank or credit union or through the dealer.

Going through the dealer provides an opportunity to save some money on the back end. The dealership has a software system that in seconds can float a customer's credit application to dozens of lenders. And dealers usually have access to better rates than an individual consumer can get on their own because of the volume of business they do and because they have access to more lenders than you or I typically have. Sometimes they can even tap into promotional financing through a manufacturer -- think Ford Finance or Honda Motor Credit – which the local bank can't touch. 

This means that dealership rates are usually better -- even though dealers are compensated by lenders for arranging the financing. That's because dealers have economies of scale and don't need to set up a whole bank branch to set up a loan, and new customers are often coming in. If the customer does come in with an interest rate quote from his local bank better than what the dealer offers, the dealer can discount his compensation to buy down the rate and meet or beat it with a better one. That rate discounting benefits the consumer and the dealer still gets to make the sale. 

The CFPB wants the discounting practice to stop because it believes it creates a risk to fair credit. It says, in theory, that the folks with higher credit scores are the ones getting discounts – which one might expect – but also that a disproportionate share of those people are white. 

Is there any evidence for this? Supporters of the ban on discounts would say "yes" but their argument is specious. That's because there's no box to check for "race of applicant" on the credit application when buying a car. The process, as far as the financing goes, is colorblind.

In order to make its case, to provide the "evidence" that discrimination existed, the CFPB fell back on the practice of statistical modeling by matching last names with zip codes in order to make an educated guess about the race of someone attempting to finance the purchase of a new car.

In some cases this is an accepted practice but, when trying to determine if actual harm was done to an individual or a group of individuals because of race, it's not enough to be able to show that if your surname is Smith and your address is someplace in northwestern Washington, D.C., that some computer or statistical model says the chances you are black is 55 percent. 

Even the CFPB, while pushing Congress to change the law, recognized this was an absurd way to evaluate data, although it didn't tell anybody. It took The American Banker's publishing of internal CFPB memos that had at least one senior official suggesting the policy had been pursued though "there may be some risk of overestimating disparities" to bring that to light.

Call it a case of happy bureaucrats striving for good government. The House Financial Services Committee released a devastating report showing the CFPB was fully aware of these shortcomings and still pressured banks into settlements, hoping that other banks would get the message. All the worst nightmares about coercive government regulators seem to be coming true.

Fortunately, the Congress is on the ball. The House passed a bill that smacked the CFPB hard, ordering it to ensure that a cost impact and other real studies are conducted before this kind of policy can take effect. It further ordered the implementation of a transparent process where the agency must share how it comes to these conclusions and take comments from those potentially affected by its regulatory proposals before it can act. Which isn't exactly radical despite what some critics of the legislation say; it just puts on the CFPB the same requirements already in place on the rest of the regulatory state and its agencies.

In a stunning rebuke to the president who created the CPB, 88 House Democrats voted in favor of the change and to clip the agency's wings just a bit. The bill is now headed to the Senate where, one hopes, it will pass and go to Obama's desk and be signed into law. If you want to argue discrimination, you should have to prove actual discrimination – not just submit a statistical model that is vulnerable to the "garbage in, garbage out" defect. Hopefully other regulatory agencies will get the message.

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