PORTLAND, Maine -

In an exclusive interview with SubPrime Auto Finance News, Hudson Cook partner and former assistant director at the Consumer Financial Protection Bureau Rick Hackett offered quick-hitting analysis of the three main segments of the CFPB’s latest moves in connection with vehicle financing.

First, Hackett acknowledged the threshold the CFPB established in its newest supervisory proposal — a rule that would generally allow the bureau to supervise nonbank auto finance companies that make, acquire or refinance 10,000 or more loans or leases annually — is the general metric he and his agency team used as a starting point when they began to craft oversight guidelines nearly three years ago.

Hackett explained he arrived at that level based on dissecting information compiled by several sources, including the Royal Media’s “Big Wheels” report, Experian’s AutoCount and the National Automotive Finance Association.

According to the CFPB, companies that handle 10,000 or more contracts per year originate around 90 percent of nonbank auto loans and leases, and in 2013 provided financing to approximately 6.8 million consumers. This group would include most if not all captive finance companies for domestic and foreign automakers such as Toyota Financial Services, Ford Motor Credit, American Honda Finance and Nissan Motor Acceptance Corp.

But in the phone conversation today, Hackett pointed out the threshold also would include indirect auto finance companies that often specialize in subprime financing such as Credit Acceptance, Exeter Finance, Consumer Portfolio Services and Westlake Financial Services.

“As the bureau noted, it’s a concentrated industry at the top, and then the other players drop off rather rapidly into the sub-1 percent of the market, so you had to draw a line somewhere,” Hackett said. “The threshold doesn’t strike me as surprising given the size of the groups the bureau has chosen to try to supervise in the past. It’s also consistent with the way industry has looked at itself in the past.”

Furthermore, Hackett referenced industry data when he mentioned that finance companies that purchase large amounts of paper from buy-here, pay-here dealers — operations such as CAR Financial — would be under the CFPB’s jurisdiction should the proposal come to be.

The CFPB indicated the proposed rule is open for comment for 60 days after the rule is published in the Federal Register.

Next, Hackett touched on the supervisory action the CFPB has taken that up until Wednesday was not made public.

Through announcements released only hours before its special field hearing set for today in Indianapolis, the CFPB also shared a supervision report that details the auto-lending discrimination that the bureau said it has uncovered at commercial banks.

Officials indicated the report highlights that the bureau’s supervisory actions against banks will result in about $56 million in redress for up to 190,000 consumers harmed by discriminatory practices.

While the CFPB didn’t offer much more specifics, Hackett said, “You should assume that’s more than one bank. It’s probably more than two or three because usually that kind of supervisory highlights come out after you’ve made a substantial dent when looking at banks on a confidential basis.”

Though still significant amounts, Hackett noted that a single commercial bank likely wasn’t hit with an individual penalty with the magnitude the CFPB and the Department of Justice levied on Ally Financial late last year. As finance company leaders might remember, regulators ordered Ally to pay $80 million in damages to harmed African American, Hispanic, and Asian and Pacific Islander borrowers, along with another $18 million in penalties.

The CFPB and DOJ determined that more than 235,000 minority borrowers paid higher interest rates for their vehicle loans between April 2011 and December of last year because of what federal officials described as “Ally’s discriminatory pricing system.”

Based on the depth of the newest CFPB enforcement actions, Hackett said, “One might take away that some of the other institutions that are composing that $56 million had less of a problem.”

Finally, the CFPB also released its highly anticipated white paper on evaluating and determining disparate impact.

In order to evaluate a finance company’s compliance with fair lending laws, CFPB explained its examination teams use a proxy methodology just as other federal supervisory agencies and many private companies do.

To proxy for race and national origin, exam teams rely on data associated with consumers’ last names and places of residence. Census Bureau data is first used to calculate the probability that an individual belongs to a specific race and ethnicity based on their last name. Exam teams then update that probability based on the demographics of the area in which the person resides again using Census Bureau data. 

The CFPB is releasing a white paper which details the precise methodology the bureau uses to calculate these probabilities, and is also releasing the bureau’s computer code so that lenders can perform the same analysis that the bureau’s examination teams perform.

The white paper also reports on a study the bureau has conducted which finds that the integrated approach to building a proxy is more accurate than either surname or geographic data individually.

With so much information contained in the latest CFPB materials, Hackett said, “I will be the first one to confess that some of the metrics that are being used are very statistically sophisticated and go beyond the immediate first-read understanding of an average car guy like me.”

“I think one of the things we need to do is to talk to serious economists about the predictive quality of each of the metrics that they have used to assess (Bayesian Improved Surname Geocoding) against known race and ethnicity information from the mortgage side and how they stack up against the uses of proxies in other situations,” he continued.

“The takeaway is this gives us a lot of information to figure just how good or bad the bureau’s method really is. That’s a very important thing,” Hackett went on to say. “It also gives us very clear guidance, if we didn’t know already, on exactly what the bureau is doing.”