The Consumer Financial Protection Racket - er, Bureau | Citizens Against Government Waste

The Consumer Financial Protection Racket - er, Bureau

The WasteWatcher

The Cambridge Dictionary defines a “protection racket” as “a situation in which a criminal group demands money from a store owner, company, etc. in exchange for agreeing not to harm them:  run a protection racket [:] These thugs ran a vast protection racket with which all property-owners had to co-operate if they hoped to survive.”

In a similar vein, the Merriam-Webster Dictionary defines a “shakedown” as “the act of taking something (such as money) from someone by using threats or deception…  an act or instance of shaking someone down; especially: extortion.”  Merriam-Webster goes further, with the definition of extortion:  the crime of getting money from someone by the use of force or threats.

Were it not an agency of the federal government, the Consumer Financial Protection Bureau (CFPB) could otherwise fall well within the definition of an extortion (or protection) racket, threatening companies (such as banks) that facilitate the operations of industries (such as payday lenders or automobile dealers) disdained by the CFPB.

In the case of automobile dealers, the CFPB decided that minority groups are being victimized by day-to-day auto loan financing transactions.  The do-gooders at CFPB rely on “disparate impact,” a theory that holds that “illegal discrimination occurs when actions disproportionately hurt minorities, regardless of intent.”

According to the National Automobile Dealers Association (NADA), dealerships work with multiple lenders, including include banks, credit unions, and dealerships themselves, to find money-saving automobile loans for their customers.  When these entities compete, the customer is able to obtain more favorable monthly payments.  And as part of that competitive process, dealers have the flexibility to reduce interest rates, which themselves are often a reflection of the credit risk involved with any given customer:  less risky purchasers are more likely to earn lower interest rates.

Therein lies the rub.  The CFPB, assuming that dealers will consider any purchaser from the minority classes as higher risk and thus ineligible for lower rates, sees inherent discrimination.  Therefore, according to the NADA, the agency is threatening to “eliminate dealers’ ability to discount interest rates that they offer to their customers.  Ultimately, customers will lose the ability to negotiate a better deal on their financing.  The CFPB’s proposal would harm consumers by ending dealers’ ability to ‘meet or beat’ the interest rates offered by their competitors.  Competition cut!  Discounting gone!  No reduced rates!”

The government has already used disparate impact in its investigation against Ally Bank.  On Friday, December 20, 2013, the CFPB and the U.S. Department of Justice (DOJ) resolved their first joint fair lending action in the indirect auto lending arena against Ally, and its parent Ally Financial, Inc., alleging that the company’s dealer compensation policy, which allowed for discretionary dealer pricing, had a disparate impact on certain borrowers in protected classes.

According to an alert published by the law firm Goodwin Procter on Monday, December 23, 2013, Ally’s $98 million in settlement payments represent not only the third-largest settlement ever in a DOJ fair lending action, but also the largest in any matter involving auto lending.  This settlement was only a part of a larger joint effort to address disparate impact in the auto lending market.

Of course, neither the CFPB nor the DOJ alleged that Ally intentionally discriminated against any consumers.  Intent appears to be irrelevant in these shakedown scenarios.  Nor do the proceeds of these shakedowns redound to the benefit of the taxpayer (i.e., being returned to the Treasury for debt payment and/or deficit reduction); rather, the CFPB is using the money to fund “financial literacy” programs, which have no proven effectiveness.

According to a DOJ press release, “The settlement provides $80 million in compensation for victims of past discrimination by one of the nation’s largest auto lenders and requires Ally to pay $18 million to the CFPB’s Civil Penalty Fund.”  According to the CFPB’s website, the fund makes “payments to people who were harmed by the illegal actions that gave rise to civil penalties and who aren’t expected to otherwise get full compensation for the kinds of harm that the Fund covers. If we can’t locate the victims or it’s otherwise not feasible to pay them, we may use money in the Fund on consumer education and financial literacy programs designed to help consumers.”

On May 29, 2014, seven financial organizations sent a letter to the U.S. House of Representatives in support of an amendment to H.R. 4660, the Commerce, Justice, Science and Related Agencies Appropriations Act for Fiscal Year 2015.  The letter, co-signed by the American Bankers Association, the American Financial Services Association, the Consumer Mortgage Coalition, the Credit Union National Association, the Independent Community Bankers of America, the Mortgage Bankers Association, and the National Association of Federal Credit Unions, stated, in part:

All of our organizations and their member companies view illegal discrimination in housing and lending as morally, ethically, and legally abhorrent and do not tolerate it in any size, shape or form.  They are committed to providing financial services to American consumers in full compliance with all lending laws...

Under the disparate impact theory, even when a lender takes every step to prevent discrimination and treats all consumers fairly and equally, a neutral policy can serve as a basis for very serious and harmful claims in the absence of intentional discrimination.  Smaller lenders, in particular, will find it difficult to manage this type of litigation risk.  Left unchecked, disparate impact enforcement could increase the cost and undermine the availability of credit throughout the economy.

The amendment, offered by Rep. Scott Garrett (R-N.J.), would prohibit any funds made available by the act from being used for litigation in which the Department of Justice (DOJ) seeks to prove illegal discrimination based on the “disparate impact” theory.  The amendment passed the House of Representatives the next day by a vote of 216-190.

The CFPB is also issuing “guidance” to press its case against certain industries.  Guidance falls short of the traditional rulemaking process that allows for reasonable back-and-forth with impacted industries through a structured comment period.  In an effort to push back against such regulatory overreach, Rep. Marlin Stutzman (R-Ind.) sponsored H.R. 4811, the Bureau Guidance Transparency Act, which passed the House Financial Services Committee on June 11, 2014, by a bipartisan vote of 35-24.  Rep. Stutzman’s bill would require that the CFPB, in issuing any guidance, provide a public notice and comment period before issuing the guidance in final form.  The agency must also make public any studies, data, and other analysis it relied on in preparing and issuing its guidance.

The committee also discussed a draft bill sponsored by Rep. Andy Barr (R-Ky.), the Preventing Regulatory Abuse Act of 2014.  The legislation would require the CFPB to go through a formal rulemaking with public notice and comment in order to publish a final rule that creates a clear definition of an “abusive” act or practice.  It would enact a moratorium on any enforcement action using the CFPB’s definition until the final rule is published, and it would repeal the CPFB’s authority to prohibit abusive acts or practices if it fails to conform to specified rulemaking timelines.

In another move intended to rein in the CFPB, Rep. Shelley Moore Capito (R-W.Va.) introduced H.R. 3389, the CFPB Slush Fund Elimination Act of 2013.  This bill, which passed the committee on June 11 by a vote of 31-27, would eliminate the Bureau’s Civil Penalty Fund and requires the CFPB to remit fines it collects to the U.S. Treasury.

Despite these legislative successes at the committee level, it is doubtful that a robust package of CFPB reforms will get floor time before the November elections.  Even if it did, the effort would almost certainly die in the Senate, as currently constituted.  It is therefore likely that legally-sanctioned CFPB shakedowns will continue until the next Congress convenes.  And it may take a Republican ascendancy to the White House before the protection racket – er, bureau—is repealed, or, at the very least, significantly circumscribed.

Ironically, in their ideological devotion to the disparate impact theory, the CFPB and its cronies in the DOJ will end up preventing lower-income households from negotiating lower interest rates, thus creating a real disparate impact where one has yet to be proven.  By eliminating auto dealers’ flexibility to lower interest rates for anyone, the government has ensured that all households, to include those of modest earnings, must all pay an artificially higher interest rate.  Now that’s disparate impact.

Post-script:

In addition to those measures referenced above, several other initiatives were passed by the House Financial Services Committee on June 10 and 11.

H.R. 3770, the CFPB-IG Act of 2013

Introduced by Rep. Steve Stivers (R-Ohio), the bill would create a separate, independent inspector general (IG) for the CFPB. The CFPB currently shares an inspector general with the Federal Reserve System.  The bill passed the committee on June 11 on a bipartisan vote of 39-20.

H.R. 4262, the Bureau Advisory Commission Transparency Act

Introduced by Rep. Sean Duffy (R-Wisc.), the bill clarifies that the Federal Advisory Committee Act applies to the CFPB.  This bill was approved by a voice vote of the committee on June 10.

H.R. 4383, the Bureau of Consumer Financial Protection Small Business Advisory Board Act

Introduced by Rep. Robert Pittenger (R-N.C.), the bill creates a small business advisory board at the CFPB.  This bill was also approved by voice vote on June 10.

H.R. 4539, the Bureau Research Transparency Act

Introduced by Rep. Mike Fitzpatrick (R-Pa.), the bill requires that CFPB research papers made available to the public be accompanied by all studies, data, and analyses on which the paper was based.  This bill was approved by the committee on June 11 by a vote of 32-27.

H.R. 4604, the CFPB Data Collection Security Act

Introduced by Rep.  Lynn Westmoreland (R-Ga.), the bill requires the CFPB to create an opt-out list for consumers who do not want the CFPB to collect personally identifiable information about them and to delete or destroy information about a particular consumer within a specified period of time following collection.  It further requires CFPB employees accessing personally identifiable information about consumers to hold a “confidential” security clearance.  The bill passed the committee on June 11 by a vote of 32-27.

H.R. 4662, the Bureau Advisory Opinion Act

Introduced by Rep. Bill Posey (R-Fla.), the bill establishes a process by which covered persons can submit inquiries concerning the conformance of prospective products and services with Federal consumer financial law and receive a confidential opinion from the CFPB Director.  This bill also passed on June 11 with a vote of 32-27.

H.R. 4804, the Bureau Examination Fairness Act

Introduced by Rep. Mick Mulvaney (R-S.C.), the bill would prohibit the CFPB from including enforcement attorneys in examinations, regulate CFPB data requests during the course of examination, place time limitations on the completion of examination field work and the issuance of exam reports and supervisory letters, and prohibit concurrent limited-scope exams at the same institution.  The bill passed the committee on June 11 by a vote of 33-26.

 

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