Consumer Law & Policy Blog

American Banker: Car Dealers Fight Back Against CFPB Auto Financing Rule

by Jeff Sovern

Here. The piece begins:

 Auto dealership advocates are warning that costs will rise for borrowers if the Consumer Financial Protection Bureau presses banks to curtail auto loan markups determined by dealers.

The warning followed the CFPB's bulletin this week that said banks are responsible for discrimination if their partner dealers mark up the interest rates on loans for minority borrowers or engage in other fair lending abuses. The agency is encouraging lenders to adopt a flat-fee model for dealer compensation.

But dealer industry representatives said doing so would hurt competition and ultimately boost car prices.

Of course, the industry always argues that regulation will increase costs.  But in this case, it's not clear why that would occur.  At present, some lenders sometimes tell dealers the lowest rate they would provide a particular consumer and then allow the dealer to negotiate a higher rate.  The Bureau claims that some dealers respond to that ability to negotiate by consistently charging higher rates to protected groups. If dealers can no longer bargain for a higher rate, won't everyone get the lowest rate, including protected groups?  Or is the thinking that lenders will increase the lowest rate they will charge to offset the loss from discriminatory pricing? In that case, some groups will pay higher rates than they now get because of disrimination. It's hard to see as a bad thing that some consumers won't benefit from discrimination that others pay for. 

Ginger Chouinard Paper on Lesser-Known Credit Reports

Ginger Chouinard of New Mexico has written The 'Other' Credit Report: What You Don't Know Can Hurt You.  Here's the abstract:

Nearly 90% of financial institutions use ChexSystems or similar account screening reports in their account opening process, yet they are under no duty to disclose this to consumers until an account is denied due to information contained in the report. For those consumers denied accounts, it is too late. They had no idea information was being collected on their checking account usage, much less that it could be used to deny them an account in the future, and are subsequently forced to go outside the mainstream and use expensive alternatives like check cashing services and money orders to conduct their everyday financial business. Increased consumer awareness of these reports is necessary so that consumers better understand the impact poor account management may have on their future usage of traditional banking services.

This article examines these reports, the impact on consumers when they can’t open a new account based on information contained in such reports, and how changes in overdraft practices have encouraged poor account management, which in turn may have resulted in even more negative reports. The article also examines how the Fair Credit Reporting Act (“FCRA”) applies to account screening reports and whether new overdraft practices technically result in loans, triggering additional disclosure. The article concludes with recommendations, discussing how the reporting system could be improved and how consumers could be better informed and protected.

 

 

Ray Brescia Paper Calls for Strengthening the CRA

Raymond H. Brescia of Albany has written The Community Reinvestment Act: Guilty, but Not as Charged.  Here's the abstract:

Since its passage in 1977, the Community Reinvestment Act (CRA) has charged federal bank regulators with "encourag[ing]" certain financial institutions "to help meet the credit needs of the local communities in which they are chartered consistent with [] safe and sound” banking practices. Even before the CRA became law — and ever since — it has become a flashpoint. Depending on your perspective, this simple and somewhat soft directive has led some to charge that it imposes unfair burdens on financial institutions and helped to fuel the subprime mortgage crisis of 2007 and the financial crisis that followed. According to this argument, the CRA forced banks to make risky loans to less-than creditworthy borrowers. Others defend the CRA, arguing that it had little to do with the riskiest subprime lending at the heart of the crisis.

Research into the relationship between the mortgage crisis and the CRA generally vindicates those in the camp that believe the CRA had little to do with the risky lending that fueled these crises. At the same time, recent research by the National Bureau of Economic Research attempts to show that the CRA led to riskier lending, particularly in the period 2004-2006, when the mortgage market was overheated.

This paper reviews this and other existing research on the subject of the impact of the CRA on subprime lending to assess the role the CRA played in the mortgage crisis of 2007 and the financial crisis that followed. This paper also takes the analysis a step further, and asks what role the CRA played in failing to prevent these crises, particularly their impact on low- and moderate-income communities: i.e., the very communities the law was designed to protect. Based on a review of the best existing evidence, the initial verdict of not guilty — that the CRA did not cause the financial crisis, as some argue — still holds up on appeal. At the same time, as more fully described in this piece, an appreciation for the weaknesses inherent in the law’s structure, when combined with an understanding of the manner in which it was enforced by regulators, lead one to a different conclusion; although the CRA did not cause the crisis, it failed to prevent the very harms it was designed to prevent from befalling the very communities it is supposed to protect.

The defects in the CRA that emerge from this review, in total, suggest not that the CRA was too strong, but, rather, too weak. They also point to important reforms that should be put in place to strengthen and fine-tune the CRA to ensure that it can meet its important goal: ensuring that financial institutions meet the needs of low- and moderate-income communities, communities for which access to capital and banking services on fair terms is a necessary condition for economic development, let alone economic survival.

 

 

Bloomberg: Consumer Bureau Said to Warn Banks of Auto Lending Suits

by Jeff Sovern

Here.  The first two sentences say:

The U.S. Consumer Financial Protection Bureau has told at least four banks that it may sue them over vehicle loans and interest-rate markups by auto dealers that appear discriminatory, according to three people briefed on the matter.

The banks received letters from the CFPB last week giving them 15 days to provide an explanation of the practice, said the people, who asked not to be identified because the plans aren’t public. The letters indicate the bureau believes the banks may have violated the Equal Credit Opportunity Act, a 1974 law that bars discrimination in lending.

It's hard to tell from the article exactly what the Bureau thinks the banks may have done, but in the past lenders have told car dealers a minimum interest rate that they were willing to offer customers and given the dealers discretion to offer higher rates (the lenders and dealers share the excess over the minimum rate). Consumer advocates later claimed that many dealers given such discretion charged higher rates to people of color, and so the act of the lenders of giving the dealers discretion led to discrimination against protected classes in violation of ECOA.  Perhaps the Bureau suspects that that is what is happening, or maybe something different is going on. 

Times Editorial on FTC Credit Reporting Report

Victimized by Credit Reports.  An excerpt:

Given the evidence, it is imperative that the federal government do more to make the credit-reporting process transparent and to protect consumers from errors that can drive up their borrowing costs and cause them to be denied jobs or be turned away by landlords.

* * *

* * * Congress . . . could require all credit or background check agencies to register with the federal government and to adhere to strict accuracy standards. It could give consumers the right to view all credit information that agencies collect about them.       

Finally, it could strengthen an existing law that requires that consumers receive notice when they are denied jobs, credit or are in any way disadvantaged by unfavorable credit report information. Sometimes such notices are never sent; Congress should give the consumers the right to sue when this happens.

OCC lowers JP Morgan Chase's CRA Grade to Satisfactory

by Jeff Sovern

The Wall Street Journal has the story here.  Previously the grade had been outstanding.  The other three giant US banks retain ratings of outstanding.  Two thoughts: If JP Morgan Chase undertakes new lending to improve its rating, that will say something about the importance of the Community Reinvestment Act in spurring banks to act.  And second, this may be more evidence that the Office of the Comptroller of the Currency (now led by Thomas Curry) under the Obama administration is more protective of consumers than under earlier administrations. 

Consumer Issues Are Everywhere, Even on First Dates

So the Times reports here.   

Major CFPB Report on Credit Reporting Agencies

by Jeff Sovern

Here.  Two points from the Executive Summary, though there's quite a bit more than this: 

The NCRAs have created an automated system for handling consumer disputes and forwarding them to data furnishers. Through this automated system – called e-OSCAR – the NCRAs provide furnishers with one or two numeric codes indicating the nature of the consumer’s dispute and in a minority of cases (26%), explanatory text. At present, the NCRAs generally do not forward documentation that consumers submit with mailed disputes or provide a mechanism for consumers to forward supporting documents when filing disputes online or via phone. The NCRAs resolve an average of 15% of trade line disputes internally (without furnisher involvement) and refer the remaining 85% of the disputes they receive from consumers concerning trade lines to data furnishers through e-OSCAR. The furnisher of the disputed data is then required by the FCRA to investigate the dispute and report back to the NCRA.

• The NCRAs’ reliance on furnisher responses as the principal means of resolving disputes is a source of controversy. The NCRAs report that in seeking to maximize accuracy and in resolving disputes, they rely on furnishers meeting their obligations under the FCRA to report information accurately and to respond to disputes appropriately. Consumer advocates have argued that the NCRAs have an obligation to monitor and manage furnisher practices as part of their broader obligation to achieve credit report accuracy.

The first point quoted above from the CFPB Report seems to confirm statements that appear in the National Consumer Law Center's report, Chi Chi Wu, Automated Injustice: How a Mechanized Dispute System Frustrates Consumers Seeking to Fix Errors in Their Credit Reports (2009).  Here is a striking excerpt from the Wu Report, at pp. 18-19, quoting from a 2007 deposition of Equifax’s Vice President of Global Consumer Services:

 Q: What knowledge do you have as to the mechanics of how a DDC Filipino employee would process an Equifax dispute?

[. ..]

A: The electronic image would be displayed on their screen. They would have an ACIS [Automated consumer Interview System] screen that they would use. They would then look at the electronic image. They would read off the identifying information, enter [. . .] that ID information into the system, access that credit report. At that point, they'd be able to determine if they were looking at the correct file. If they were, they'd go further. They'd read the letter, they gain an understanding of the issues at hand, and they'd look at the credit report to see if the credit report at that time reflects that. If it does, they would send those particular items to the data furnisher or furnishers. They would request that an investigation be started.

[. . . .]

Q: Right. But they're not -- they're not going to handle whatever response the creditor may provide?

A: That's correct.

Q: Do DDC employees have telephones on their desk?

A: I do not believe so.

Q: As part of their compliance with Equifax's procedures, do DDC's employees telephone consumers as part of conducting a reinvestigation?

A: They do not.

Q: Do they telephone creditors, the furnishers, as part of conducting a reinvestigation?

A: They do not.

Q: Do they telephone anybody from outside DDC or Equifax as part of conducting a reinvestigation of a consumer dispute?

A: They do not.

Q: What about e-mailing any of those non-Equifax, non-DDC people, creditor, consumer, or third party?

A: They should not be -- they do not e-mail them.

Q: And what about fax machines?

A: [. . .] They do not have fax machines either.

Q: Under what circumstances will a DDC employee forward the consumer's actual dispute letter or documents the consumer provided to the furnisher, the creditor, as part of a reinvestigation?

A: A mechanism does not exist to forward the actual documents.

The Wu Report states that the automated forms also include a place where a clerk can type a line of text and reportedly about 30% of the time the clerk writes something in that line.  Under the Fair Credit Reporting Act, 15 U.S.C. 1681i(a)(1)(A), credit bureaus must conduct a "reasonable reinvestigation" upon receiving notice of a consumer dispute. I sure would not want to defend the reasonableness of the process described above. 

Community Groups Urge OCC to Give Wells Fargo Failing CRA Grade

by Jeff Sovern

One of the groups, the Woodstock Institute, has a report here.  Among the reasons given are Wells Fargo's payday lending practices. The following excerpt from the Woodstock report has more:

"Wells Fargo's mortgage servicing practices unfairly push some borrowers into foreclosure, devastating families and harming neighborhoods. Our clients continue to have their paperwork lost, phone calls not returned, and are arbitrarily denied loan modifications," said Peter Skillern, executive director of Reinvestment Partners, based in Durham, NC. "Housing counseling and legal service agencies across the country believe Wells Fargo often does not follow servicing guidelines mandated by the $26 billion National Mortgage Settlement."

The Community Reinvestment Act has sometimes been a tool community groups use to pressure banks to change their behavior. The groups threaten to seek a bad grade and then back off in exchange for concessions.  I don't know if that's the plan here or not. If it isn't, and the community groups continue to press their point, this may turn into an interesting and revealing test for the OCC's new head, Thomas Curry. In the past, the OCC has seemed to be a captive agency of the banks.  There have been signs that Curry is changing that.  If the OCC does want to be more protective of consumers, the CRA, often falsely blamed for causing the lending that led to the Great Recession, may be one vehicle for pursuing that goal.  No doubt other banks are watching to see what happens and if Wells Fargo's grade is lowered (its most recent grade, given in 2008, was "outstanding"), will think about whether they are vulnerable. 

What Proportion of Consumers With Material Errors in Their Credit Reports Complain to Credit Bureaus?

by Jeff Sovern

For the credit reporting section of our casebook, I've been looking into studies of credit report errors.  The FTC is in the process of conducting a long-term study of that subject, and along the way has conducted some pilot studies.  One such pilot study subjected the credit reports of 128 people to in-depth review.  Though 88 reports did not contain errors, 40 consumers found alleged mistakes they wanted to dispute, of which 15 were material.  The researchers assisted the consumers claiming material errors to complain to credit bureaus, and 12 did so. Of those, the requested changes were made in seven cases, and partly made in three others.  In two cases, no changes were made.  The pilot study is probably too small to draw conclusions about how common credit report errors are, though the final FTC study should not suffer from that weakness, and other studies have also been larger.  The thing that caught my eye about this study was that not all the consumers with material errors were willing to complain about them to credit bureaus, even when they had assistance in doing so. Again, 15 consumers is too small a sample size to conclude much, but the study does make me wonder how many consumers don't bother complaining about errors, especially when they don't have assistance.  An ample literature on consumer complaining behavior makes clear that many consumers don't complain about issues (the classic article is Best & Andreason, Consumer Response to Unsatisfactory Purchases: A Survey of Perceiving Defects, Voicing Complaints, and Obtaining Redress, 11 Law & Soc. Rev. 701 (1977)), and it seems entirely plausible that it is no different for credit reports for at least some consumers.