Today's Trends in Credit Regulation

The First Shoe Drops
By Michael A. Benoit

On April 19, the Consumer Financial Protection Bureau announced a consent order relating to alleged pricing discrimination by Ally Financial. Ally was ordered to pay $80 million in damages to African-American, Hispanic, and Asian and Pacific Islander borrowers and $18 million in civil penalties. The CFPB and the Department of Justice alleged that more than 235,000 minority borrowers paid higher rates for their auto financing between April 2011 and December 2013 as a result of Ally's discretionary pricing system, which allows dealers to mark up Ally's wholesale buy rate by up to 250 basis points. This consent order represents the federal government's largest auto finance discrimination settlement in history.

First, let's be clear that this is a settlement, and Ally neither admitted to wrongdoing nor believed any measurable discrimination occurred. Second, let's be clear that the basis of the CFPB's theory of liability (disparate impact, i.e., discrimination that is theorized to occur when a facially neutral policy "disparately impacts" persons in protected classes, with no "intent" to discriminate required) has never been addressed by any federal appellate court looking at it through the lens of the Equal Credit Opportunity Act. District courts have acknowledged the theory in procedural motions, but I don't think any of them have ruled on the merits either. Finally, let's understand that the CFPB's methods for identifying disparate impact discrimination are based on imperfect assumptions and estimates.

All that said, one might be curious why Ally settled when it doesn't believe it violated any laws in any measurable way. I'm sure it had its reasons,whether or not related to the CFPB's claims. You see, the CFPB carries a big stick and understands that parties under its jurisdiction have a plethora of reasons to take responsibility for things no sane person would take responsibility for. For example, what company wants to fight its regulator in court? It's one thing to litigate on principle, but it's quite another when you have a brand to protect and your adversary, who isn't ever going to go away, has unlimited funds and holds all the cards.

Ally won't be the first to strategically retreat in this campaign to eliminate dealer reserve. The CFPB simply doesn't like dealer reserve, and this is the tool it's decided to use to eliminate it. It can't regulate franchise dealers, so the next best thing is to hold the finance sources (which have infinitely deeper pockets and make for much better headlines) liable. So why not start picking them off, one by one, until the business model crumbles?

The disparate impact theory, as applied in auto finance, relies on probabilities that someone's name is an indicator of his or her race, gender, and ethnicity. It is an imperfect science, one that is only as good as the methods one employs. Dealers and finance companies are prohibited from collecting the data necessary to determine if a finance customer is part of a protected class, so the CFPB must use proxies (i.e., probabilities about race, ethnicity, and gender) to make guesses about the "protected" characteristics of a finance customer.

One of the things that I like about the law is that, when crafted correctly, it provides clarity and certainty to those seeking to comply with it. Reasonably intelligent people can read it and know what they're supposed to do. Elizabeth Warren famously said that the purpose of Dodd-Frank is to level the playing field - everyone should be subject to the same rules. Ironically, the CFPB's position on the disparate impact theory only levels the field to the extent the industry can predict how the CFPB will apply it in any given situation. How much disparity is OK? Where does one draw the line? Most importantly, why won't the CFPB write a rule that outlines disparate impact standards in a way that can be easily applied?

I don't profess to know the outcome of this particular chapter in the history of our industry, but I do know that folks who can't easily tell if they're operating within the limits of the law tend to get conservative in their actions. While driving on the highway, imagine for a moment that you see an official-looking sign that says, "Don't break the speed limit," but the limit isn't posted anywhere. Then you get a ticket, but the officer won't tell you what the limit is. You'd probably fight the ticket (I'd like to be the judge that got this case!), but you'd be very cautious until you had some certainty about the limit.

Same for our industry. Disparate impact is liability based on assumptions and estimations, not certainty. Its standards are opaque, fluid, and vague, not clear and concise. Absent some brave finance source willing to litigate, I'm guessing we'll not see any definitive statement of specific wrongful behavior.

I think it's not unlikely that we'll soon see finance rates and vehicle prices rising and the pool of creditworthy consumers contracting. I'm not worried about the industry - I've come to appreciate the resourcefulness of dealers when it comes to protecting their interests and profits. So, if they experience a loss on financing, I'm confident they'll find ways to make it up elsewhere. Finance sources are just as resourceful with equally strong survival instincts.

Wherever this goes, I'm pretty sure I'll have to pay a statistically significant higher price for my next car financing. Probably for the car, too. Such is the result of liability based on assumptions and estimations, using standards that are opaque, fluid, and vague. With that as our workspace, strap in. It's going to be a long and adventure-packed ride.

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

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