Today's Trends in Credit Regulation

CFPB Watch for Auto Dealers
By Michael A. Benoit

The Consumer Financial Protection Bureau remains active with a number of initiatives. These include investigations into the use of military allotments for payment, fair lending, and collection activities. To date, there appear to be no rulemakings in the offing, although a rule to identify "larger participants" in the auto finance business is rumored to be on the horizon for late 2014.

On December 12, the CFPB held a field hearing in Dallas, Texas, on arbitration. The event featured remarks from CFPB Director Richard Cordray, as well as testimony from consumer groups, industry representatives, and members of the public. (See Eric Johnson's article CFPB Holds Field Hearing on Arbitration Results: Round 1) A copy of Cordray's prepared remarks are available at .

On November 4, the CFPB posted a blog entry about its use of proxies to assign sex, race, or ethnicity to credit applicants for credit products other than mortgages for purposes of its fair lending exams and investigations. This increased transparency has been helped along by a steady stream of information demands from Congress requesting details on the statistical methodology the Bureau uses to determine disparate impact in indirect vehicle financing. In the blog entry, titled "Preventing Illegal Discrimination in Auto Lending," Patrice Ficklin, the head of the CFPB's Office of Fair Lending, says a key priority for the Bureau is "protecting consumers from the silent pickpocket of discrimination." In order to calculate the likelihood that a particular borrower is male or female, Ficklin states that "responsible lenders" use first name proxies, often relying on a first name database from the Social Security Administration. The CFPB notes that there is a greater variety of methods to proxy for race and national origin. One method used by lenders to determine if a borrower is Hispanic or Asian is to use the last name database published by the Census Bureau, in which the Census Bureau reports, by race and national origin, the percentage of individuals with a given surname. A method to proxy for race and national origin uses the demographics of the census area in which an individual's residence is located and assigns probabilities about the individual's race or national origin based on the demographics of that area. The blog post notes that the CFPB uses a combination of geography and surname to estimate race and national origin and links to an article from the health field stating that this approach is more accurate than using surname or geography alone. The CFPB states that it is continuing to refine its proxy methodologies.

On November 6, the CFPB issued an Advance Notice of Proposed Rulemaking announcing that it is collecting information on a wide array of issues, including the accuracy of information used by debt collectors, how to ensure that consumers know their rights, and the communication tactics collectors use to recover debts. The CFPB also announced that it will begin adding consumer complaints about debt collection to its public Consumer Complaint Database. The Dodd-Frank Act revised the Fair Debt Collection Practices Act, the principal federal law that governs the industry and protects consumers, making the CFPB the first agency with the power to issue substantive rules under the statute. Comments on the ANPR must be received by February 10.

On November 14, the CFPB hosted an Auto Finance Forum. Some industry observers thought the event was held in response to pressure the Bureau has received on its car financing anti-discrimination efforts based on disparate impact. The forum's principal topic was credit discrimination and dealer participation, and the participants included regulators, consumer advocates, and industry representatives. CFPB Director Richard Cordray spoke to open the event. A recording of the event is now available on the Bureau's website.

And speaking of disparate impact, on November 13, the Mount Holly, New Jersey, town council approved a settlement in a housing bias lawsuit set for hearing before the United States Supreme Court, which would have addressed the viability of disparate impact claims under the Fair Housing Act. This is the second time that a case that would have tested the disparate impact theory has been pulled from the Supreme Court's docket as the result of an eleventh-hour settlement. Last year, the Supreme Court was set to hear an FHA disparate impact case involving the City of Saint Paul, Minnesota, but the city withdrew its appeal at the last minute. The Saint Paul and Mount Holly cases had been closely watched by the lending industry, as federal regulators have used the disparate impact theory to extract millions of dollars in fair lending settlements over the past few years. While the federal circuit courts of appeal have consistently found that disparate impact is a viable means of proving discrimination under the FHA and that intentional discrimination need not be shown, the fact that the Supreme Court had agreed to hear two cases that would have tested that argument had given the industry hope that the Court might find differently. With the resolution of the Mount Holly case, the industry is back to square one.

On November 20, the CFPB and the Federal Reserve Board announced that they are increasing the dollar thresholds in Regulation Z (Truth in Lending) and Regulation M (Consumer Leasing) for exempt consumer credit and lease transactions. The Dodd-Frank Act provides that the thresholds for TILA and the CLA must be adjusted annually by any annual percentage increase in the consumer price index. Based on the recent CPI adjustments, the protections of TILA and the CLA generally will apply to auto finance consumer credit transactions and consumer auto leases of $53,500 or less in 2014, an increase of $500 from 2013.

Also on November 20, the CFPB took its first enforcement action against a payday lender by ordering Cash America International, Inc., to make refunds to consumers for robo-signing court documents in debt collection lawsuits. The CFPB also found that Cash America - one of the largest short-term, small-dollar lenders in the country - violated the Military Lending Act by illegally overcharging servicemembers and their families. Cash America will pay up to $14 million in refunds to consumers, and it will pay a $5 million fine for these violations and for destroying records in advance of the Bureau's examination.

Michael A. Benoit is a partner in the Washington, D.C., office of Hudson Cook, LLP. He can be reached at 202-327-9705 or by email at

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