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Prepared Remarks of CFPB Director Richard Cordray at the Auto Finance Field Hearing

On May 21, 2018, the President signed a joint resolution passed by Congress disapproving the Bulletin titled “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” (Bulletin), which had provided guidance about the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B. Consistent with the joint resolution, the Bulletin has no force or effect. The ECOA and Regulation B are unchanged and remain in force and effect.
The materials relating to the Bulletin on the Bureau’s website are for reference only.

Thank you all for joining us today, and allow me to recognize Chair Tedesco, the Commissioner of the Financial Consumer Agency of Canada, who is here, as well as Director Bassett from the Indiana Department of Financial Institutions. We are here in Indianapolis to discuss a market that matters deeply, both to our everyday lives and to our nation’s economy. That is the market for financing the sales of cars and trucks. Nearly nine out of ten Americans commute to work by automobile, and in vast areas of the country ownership of a vehicle is almost essential to personal mobility.

As for the economy, we all know that automotive manufacturing is a substantial driver of jobs, income, and growth in this country – especially here in the Midwest. The deep penetration of this industry in our economy is more than a century old, and the numbers are staggering. Almost four million people are employed in auto-related industries and after-market service businesses, typically at relatively high wages. Millions more rely on the automotive industry for their health care or collect pensions from prior work in the industry.

Sixty years ago, an industry executive made the famous statement before Congress that “for years I thought what was good for the country was good for General Motors and vice versa.” His statement was exemplary of a widespread state of mind about our way of life in America. Jack Kerouac defined the “beat generation” with his classic, On the Road, which starts with bus travel but later steps up to a rickety Ford sedan. In The Grapes of Wrath, Steinbeck memorably sends the Joad family in a converted Hudson truck west from Oklahoma on Route 66 to seek a new life in California. And just think of our many iconic songs about our little cars (“Little Deuce Coupe” by the Beach Boys), our big cars (“Pink Cadillac” by Bruce Springsteen), and our trucks (“Roll on (Eighteen Wheeler)” by Alabama). And, of course, there was the British band Queen’s emphatic anthem that spoke for many Americans: “I’m in Love with My Car”!

Although the automotive industry has been through dramatic ups and downs in our lifetime, it is notable that in September 2014 the facts on the ground and the signs for our economy are quite good. Five years after the fast-track bankruptcies of Chrysler and General Motors, automotive manufacturing is back and the reborn industry is leading the economic recovery. And make no mistake about it: our view at the Consumer Financial Protection Bureau is that strong auto sales are good for consumers, good for producers, and good for the American economy.


A different aspect of the broader market, and more our focus today, is the financing of auto sales.

As with many consumer financial markets, financing here is driven by two distinct historical dynamics: loans generated by the automakers themselves through their own finance companies to help move their product, and loans that banks and other lenders make to their customers to fund purchases of all kinds, including cars and trucks. The auto finance market is yet further complicated by financial mechanisms that have grown up around lease arrangements, which are increasingly common, and used by consumers instead of loans for outright purchases.

Our intense reliance on our cars and trucks is underscored by the fact that consumers often pay their auto loan before other types of consumer debt, like a credit card or mortgage payment. This makes sense if people feel unable to do without their regular mode of transport, especially in vast areas of the country where mass transit is less common or convenient. (It also explains how powerful the collateral can be on small-dollar car title loans, though those are not our focus today.) It is not surprising, then, that auto loan debt is the third largest source of consumer debt in America, exceeded only by mortgages and student loans.

In fact, at the beginning of this year, American consumers had more than 87 million auto loans outstanding, valued at nearly $900 billion. Over time, the average loan for a new car has crept up to nearly $27,000, though it is also noteworthy that those cars are staying on the road longer. Given the significance and breadth of this market, it is critical that we keep a watchful eye on how consumers are being treated.

Back in 1903, President Teddy Roosevelt gave a speech about his “Square Deal,” which included some of this country’s earliest consumer protection legislation. The Rough Rider said, “Let the watchwords of all our people be the old familiar watchwords of honesty, decency, fair-dealing, and commonsense. . . . We must see that each is given a square deal, because he is entitled to no more and should receive no less.” Those are watchwords we live by at the Consumer Bureau because honest businesses and America’s consumers all deserve a fair financial marketplace.


In order to understand the actual consumer experience, let us go back and understand how the market functions. Whether a consumer is financing an auto purchase or leasing a car, they have two main options. They can take out a loan or lease directly from a lender, such as a bank or an auto finance company. Or they can go through an intermediary to get a loan or lease from a third-party lender, which is known as indirect auto financing. Roughly 80 percent of consumers who obtain credit to finance their auto purchase use indirect financing and get their loan through an auto dealer.

Banks and other financial institutions engage in both direct and indirect financing. While some nonbank auto finance companies engage in both direct and indirect auto lending, the so-called “captive” finance companies, owned by the automotive manufacturers themselves, focus on indirect financing. Many captives provide consumers with financing for the primary purpose of facilitating sales for their parent companies and associated dealers.

Nonbank auto finance companies extend hundreds of billions of dollars in credit to American consumers, yet they have never been subject to any supervisory oversight at the federal level. These companies have also played a significant role in the growth of subprime auto lending by making loans to consumers with lower credit scores. In this market, as in others, subprime borrowers may be more vulnerable to predatory practices, so direct oversight of their lending practices is essential.

Today we are announcing a proposal to extend our supervisory oversight to larger nonbank auto lenders, including these “captive” lenders. This proposal is needed to level the playing field for banks and nonbanks in the auto lending market. We already supervise the auto lending practices of banks with more than $10 billion in assets, and this step would extend our supervision to the larger nonbank companies as well. It should not matter whether you get a loan or lease from a company that has a banking charter versus one that does not – every auto lender should be following the law and be subject to the same level of oversight. This expansion of coverage is important to protect consumers, but it also will remove a distortion in the marketplace and is a matter of simple fairness to competitors who should play by the same rules in the same way.

When consumers set out to bring home a car or truck, the process can be uniquely complex as it encompasses many decisions. First, people have to pick out their vehicle of choice – the make, the model, the price, and its features. At some point, they may encounter certain add-on products such as a warranty, rustproofing, roadside protection, service plans, and more. By the time they have made all those choices, they may be invested in the car and impatient to finish up and drive it home. Financing can come to seem like almost an afterthought or a mere detail, rather than a key product in its own right. Consumers may have very little sense of what financing options are available beyond the first deal described to them.

We need to make sure that loans offered by auto finance companies are marketed honestly and fairly. Companies cannot use deceptive tactics to sell loans or leases. Consumers should not be lured into a deal by misleading statements about the benefits of the product they are being sold. And consumers should get clear and intelligible contracts centered on terms they can understand.

Once the deal is finalized and people are making payments on their loans, we want to make sure that the finance companies are providing accurate information to the credit bureaus. Over the summer, we took action against an auto finance company that distorted consumer credit records. For years, the company knew it was sending incorrect information about tens of thousands of its own customers to the credit bureaus. That is against the law, and we will be vigilant to ensure that companies have processes in place to ensure they are reporting accurate information about their customers to the credit bureaus.

When consumers fall behind on their loans, we have authority to ensure they are not subjected to unfair, deceptive, or abusive debt collection tactics. When auto loans reach a certain stage of delinquency, the finance company has the option to repossess the car. We have heard complaints that cars and trucks are being repossessed while people are current on the loan or have a payment arrangement in place. Consumers also complain about inaccurate deficiency balances following repossession. We are working to make sure that collectors are relying on accurate information and fair processes whenever they collect on debts or seek repossession.

In all these areas, our proposal to assert supervisory authority over the larger nonbank auto financing companies would help us make sure that these companies are playing by the rules just like everyone else. Specifically, we are proposing to supervise nonbank auto finance companies that enter into or otherwise acquire 10,000 or more loans, leases, and/or loan refinances per year. We would cover about 90 percent of the nonbank auto finance market activity and bring more accountability for about 6.8 million consumers who obtain financing from these companies each year.


In addition to all the matters just described that would fall within the orbit of our supervision, the extension of our oversight to the nonbank auto lending companies would also allow us to protect consumers better against the silent pickpocket of discrimination. As anyone could see and hear, the Bureau has long expressed concern about this serious problem. In March 2013, we issued a bulletin reminding indirect auto lenders that it is illegal under the Equal Credit Opportunity Act for a creditor to discriminate in any aspect of a credit transaction on prohibited bases such as race, religion, national origin, or sex. And that is so whether the discrimination is grounded on a claim of disparate treatment or a claim of disparate impact, as federal law has long provided.

Simply put, discrimination hurts us all. Whether in our personal lives or through transactions in the financial marketplace, discrimination disadvantages people for reasons beyond their control, and it also hurts the larger economy by artificially distorting the marketplace. It is both wrong and economically inefficient. All consumers deserve an equal opportunity to access credit.

In the auto lending market, we have expressed our concern that policies which allow dealers the discretion to mark up “buy rates” beyond an accurate assessment of a person’s creditworthiness create risks of discrimination that could impede equal access to credit. And in our supervisory experience, we have found that when an indirect lender has a policy allowing the dealer to use its discretion to mark up the loan without regard to the actual credit profile of the consumer, and to benefit from that markup, the risk of discrimination increases.

Whether this is done openly and expressly, on the one hand, or silently and implicitly, on the other hand, does not change the fact that the consumer has been financially disadvantaged in violation of the law. Unbeknownst to the consumer, the discretion to charge distinctly different rates can dramatically increase the risk of unlawful discrimination.

Discriminatory markups on auto loans may result in tens of millions of dollars in consumer harm each year. With the average loan for a new car nearing $27,000, even a slightly higher interest rate can cost consumers hundreds of dollars over the life of a loan.

Where we have seen such discrimination, we have taken action through our enforcement and supervisory tools. Last December, we announced our determination that one of the nation’s biggest indirect auto lenders, Ally Bank, had pricing practices that cost about 235,000 minority consumers many millions of dollars. In the largest resolution ever in an auto loan discrimination case, we worked with the Department of Justice to obtain $80 million in remediation for those consumers. Ally also had to pay $18 million in penalties for its actions. Other matters may result in further enforcement actions, as the work and the investigations we do in tandem with the Justice Department remain ongoing.

We have also taken action against auto lenders through our supervision program. Today we are publishing a new “Supervisory Highlights” report, which describes our efforts to combat discriminatory auto lending practices at other banks we supervise. Here again, we have found that their discretionary markup practices have created greater risks of fair lending violations and in fact we have found that some of these practices have resulted in discrimination against African American, Hispanic, and Asian and Pacific Islander borrowers. This is not a minor matter; in total, these supervisory actions have led to $56 million in additional relief to 190,000 consumers so far, nearly approaching the scope of relief provided in the enforcement action against Ally.

In these cases, minority borrowers were paying more for their loans than similarly situated non-Hispanic white borrowers. Such discrimination is wrong and deeply unfair to consumers, and we will continue to be aggressive about rooting it out of the market.

We are pressing auto lenders to conduct more of their own internal monitoring to prevent and remedy discrimination. Notably, our recent supervision work has revealed that some lenders have done a much better job of managing their compliance programs and have been able to limit the size of the disparities in their loan portfolios. We have previously suggested that one way to accomplish this result is to eliminate dealer discretion to mark up interest rates, which some lenders are doing while finding other ways to compensate dealers appropriately for the work they do to secure new loans.

Another more intrusive way to proceed is by developing and implementing more intensive compliance management systems that inevitably involve lenders more directly in evaluating and correcting the practices of their dealer networks, as embodied in the Ally enforcement action. In our latest report, we also note that some companies have sharply reduced but not eliminated dealer discretion, which has reduced the size of disparities and may allow a solution that does not require dealer-specific monitoring and corrective action. We remain open to discussing these approaches or any others that appropriately address the risks of discrimination in auto lending.


Finally, we are responding today to what we have heard about the need for more transparency by publishing a white paper that provides greater detail about the mechanics of our approach to these issues and offers new research into the statistical validity of this approach. In order for us to evaluate whether a lender is following fair lending laws, we need to know to whom the lender is extending credit. Auto and other non-mortgage lenders are not generally allowed to collect demographic information. Since they do not collect this data, our fellow regulators and we have developed proxy methodologies to model this information as accurately as possible.

As we indicate in our white paper, the Consumer Bureau’s Office of Research, working in close collaboration with our exam teams, uses a statistical approach similar to methods used by other federal financial regulatory agencies. In order to estimate consumers’ race and national origin, our researchers use borrowers’ last names and their place of residence. Census Bureau data allows us to calculate the probability that an individual belongs to a particular race and ethnicity based on their last name and the demographics of the area where they live.

By considering these factors together instead of separately, we are able to more accurately assess which consumers are getting which loans, and to spot discriminatory lending patterns. Much of this approach is fairly well known in the financial industry, which already engages in similar modeling to gauge its own fair lending risk, not only for regulatory purposes but also to manage the risks of private litigation. But to ensure that lenders can replicate our methodology, we are releasing, in an open source format, the computer code we use to calculate these probabilities.


To echo President Roosevelt, consumers deserve a square deal based on fair dealing. We are working to ensure that all consumers can have equal access to financial opportunities. Cars and trucks can help people drive towards economic success. Maybe it can take them to a new job or a new town. Or maybe the goal is to save commuting time so they can work longer or have more time with their families. Millions of American families buy cars and trucks every year – more than 15 million last year, I am glad to say – for all these reasons and more.

It is important that the financing of these purchases does not come at an unjustifiably high cost. The Consumer Bureau will continue to work to ensure that people can get fair access to credit, on terms that reflect their actual creditworthiness, that marketing is honest and factual, that the terms of the deal can be made plain and readily understood, that companies are not furnishing wrong information about their customers, and that people are treated with respect and dignity in the debt collection process. As Roosevelt framed the issue, each of us “is entitled to no more and should receive no less.” And particularly when it comes to discrimination, we will insist that this must be so in accordance with federal law. Everyone must be treated fairly. Thank you.

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