More on the CFPB Auto Financing Rules: A Reply to Christopher Willis

by Jeff Sovern

Earlier this week, I commented on car dealer opposition to the CFPB's auto financing rules.  Chris Willis replied on Ballard Spahr's informative CFPB Monitor Blog.  I want to respond to two of Chris's points: first, that compliance, policing, and later enforcement steps will increase the cost of credit; and second, that dealers will respond to the loss of revenue from financing by increasing the cost of cars.

As to the first point, Chris may well be right that compliance, policing and enforcment efforts will increase the cost of credit; I don't know enough to say.  No doubt efforts to eliminate discrimination in other contexts–such as employment, housing, and consumer credit transactions–have also increased costs.  But the country has been willing to accept those costs as the price to pay for blocking odious discrimination.  In addition, sometimes warnings of harms caused by regulation turn out to be off the mark.  For example, back in 2000, before the Federal Reserve Board adopted regulations lowering the APR trigger for coverage under the Home Owners Equity Protection Act (HOPEA), see Regulation Z, 12 C.F.R. § 226.32(a)(1)(i), a banking industry association predicted that the regulation would drive legitimate lenders from the subprime market. See Sandra Fleishman, Fed Favors Tougher Loan Rules; Abuses in Subprime Lending Are Targeted, Wash. Post., Dec. 14, 2000 at E01. We now know that lenders did not leave that market, and that the economy might be in much better shape if they had.  That doesn't mean that Chris is wrong to call attention to the possible cost increases. But, in my opinion, it does mean that we need to know more about the likelihood that such predictions will come true and the amount of the cost increases before allowing them to derail rules which serve the important purpose of blocking discrimination. 

Moreover, lenders have a history of predicting higher costs when opposing regulation than they later incur when the regulation takes effect.  I don''t say that to imply dishonesty; rather, at the point at which the lenders predict the higher costs, they are unlikely to devote resources to minimizing costs.  Once the regulation is adopted, the lenders have an incentive to minimize costs and find that they are able to do so when they put their ingenuity towards such an effort.  For example, before the amendment of the Equal Credit Opportunity Act to require disclosure of reasons for an adverse action, which in its current form appears in 15 U.S.C. § 1691(d), Congress was told:

Sears Roebuck and Company stated that its annual estimated cost for such compliance would be approximately $5 per letter. * * * Even if all creditors could operate as efficiently as Sears, the aggregate annual cost of this requirement could easily amount to hundreds of millions of dollars. The requirement is staggeringly inflationary.

Testimony of National Retail Merchants Association, Hearings on S. 483, S. 1900, S. 1927, S. 1961, and H.R. 6516, Subcommittee on Consumer Affairs, U.S. Senate Committee on Banking, Housing and Urban Affairs 399 (1975).

After enactment, the Federal Reserve Board surveyed large creditors to determine the actual costs of furnishing rejected applicants with statements of reasons for adverse actions under Reg. B § 202.9. Board of Governors of the Federal Reserve System, Exercise of Consumer Rights Under the Equal Credit Opportunity and Fair Credit Billing Acts, 64 Fed.Res.Bull. 363 (1978). Sears reported that the average cost of providing rejected credit applicants with the reasons for rejection was 59 cents.

Chris also argues that dealers will increase the price of the cars they sell to recoup the revenues they would otherwise get from financing.  This assumes that dealers are not already charging as much as they can get for their cars (and if they aren't, why aren't they? Car dealers are not known for kindness).  It also assumes that dealers will not simply absorb the lost profits or find another source of revenue.  But let's suppose that dealers across the board find that they need to raise car prices because of the CFPB's efforts. We still don't know how much that increase would be.  In addition, given the past willingness of consumers to absorb price increases to eliminate discrimination, why would we assume they would not be willing to do the same here?

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