NEW YORK and WASHINGTON, D.C. — As Ally Financial reported its third-quarter performance and
indicated the Consumer Financial Protection Bureau believes the financial
company "failed" to fulfill obligations regarding possible discrimination, a
top CFPB official restated the bureau's position on regulating indirect auto
lending.

Ally offered an update on what the CFPB is investigating as
part of its filing with the Securities and Exchange Commission on Tuesday following
its Q3 financial report.

"The Consumer Financial Protection Bureau (CFPB) is
currently investigating credit practices of certain participants in the
automotive finance industry," Ally officials said. "In connection with these
investigations, the staff of the CFPB has recently advised us that they believe
we have an obligation to prevent independent automotive dealers with which we
do business from engaging in certain retail financing practices that the CFPB
staff believes violate the anti-discrimination provisions of the Equal Credit
Opportunity Act, and that they believe we have failed to fulfill this
obligation.

"We understand that the CFPB has similarly advised other
automobile finance companies," officials continued. "We are currently in
discussions with the CFPB with respect to these matters.

"It is possible that this could result in material adverse
consequences including, without limitation, settlements, fines, penalties,
adverse regulatory actions, changes in our business practices or other
actions," Ally officials went on to say. "However, we are unable to estimate
any potential financial or other impact at this time that could result from
these investigations, should any occur."

CFPB Reiterates Position

Dealer associations, legal service providers and industry
organizations have sought clarity as to how the CFPB plans to determine if
discrimination is taking place within indirect auto lending.

Just before Halloween, a bipartisan group of 22 Senators —
11 Republicans and 11 Democrats — urged the CFPB to be more transparent about
policy guidance it issued for indirect auto lending, which some suggest will
curtail a pro-competitive financing service and may result in increased costs
for consumers.

Then in response this week, Patrice Ficklin reiterated the
CFPB's position. Ficklin is the bureau's assistant director for fair lending.

"The auto bulletin indicated that we are engaged in the same
type of fair lending analysis and scrutiny that our fellow regulators and the
Department of Justice have engaged in for many years," Ficklin said.

"In addition, responsible auto lenders have regularly
engaged in similar analyses to monitor their own lending practices for
compliance with the law," she continued.

In a blog post on the agency's website, Ficklin elaborated why
auto lending is much different than other kinds of financing the bureau
oversees.

"We know that many lenders are committed to fighting
unlawful, discriminatory practices and creating a fair marketplace for all
consumers. In the mortgage market, laws and regulations require most lenders to
collect and report demographic information about their borrowers so that they
and their regulators can analyze which mortgage loans are made or denied and
how they are priced, for potentially discriminatory patterns," Ficklin said.

"However, auto lenders and other non-mortgage lenders are
not generally allowed to collect demographic information. Since they don't
collect this data, they use various approaches to make sure they are being fair
to their customers," she continued.

With that fact in mind, Ficklin repeated what the CFPB
included in its indirect auto lending guidance back in March — the material
that's made so many industry players unsure.

"Let's say a responsible auto lender wanted to make sure
that their female customers are not paying more for a loan than
similarly-situated men. Before analyzing the pricing patterns, the lender needs
to calculate the likelihood that a borrower is male or female," Ficklin said.

"Without actually recording the gender of each borrower, to
substitute, or ‘proxy,' for gender, responsible lenders often rely on a first
name database from the Social Security Administration. The public database
contains counts of individuals by gender and birth year for first names
occurring at least five times for a particular gender in a birth year," she
continued.

"Using statistics, they can determine a probability that a
particular applicant is male or female based on the distribution of the
population across gender categories for the applicant's first name," Ficklin
went on to say.

And the CFPB is using this method not only to check for
gender, but also for race and national origin, too.

"One method used by lenders to check the probability that an
applicant 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," Ficklin said.

"Another method to proxy for race and national origin uses
the demographics of the census geography (such as census tract or block group)
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
as reported by census," she continued.

"This method is also used to proxy the probability that an
applicant is African American, and it can be used to proxy for other racial and
ethnic groups as well," Ficklin went on to say.

CFPB's Auto Finance Forum

The bureau plans to drill deeper into vehicle financing
during a public forum next Thursday at CFPB headquarters in Washington, D.C.

The event will feature remarks from CFPB director Richard
Cordray and a discussion with consumer groups, industry representatives, and
members of the public.

Continue the conversation with SubPrime Auto Finance News on LinkedIn and Twitter.


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