Inside Financial Services

The CFPB’s Shameful Shakedown of Ally Financial

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Via the New York Post, more from the annals of regulatory insanity:

The former CEO of Ally Financial Inc. says the Obama administration abused its power by holding the bank’s business hostage in order to coerce a record settlement of “trumped-up” racism charges and push profit-killing new regulations on the entire auto-lending industry. . . .

Michael A. Carpenter, who helmed Detroit-based Ally from 2009 to 2015, complained in an exclusive interview that Obama’s powerful consumer watchdog agency threatened to derail the bank’s efforts to obtain key regulatory approvals if it didn’t agree to settle the allegations out of court.

“To be strong-armed by a regulator was inappropriate to say the least,” he said. “They absolutely knew they had tremendous leverage over us.” [Emph. added.]

Do you recall the CFPB-Ally Financial saga? What a disgrace. The government accused the company of discriminating against minority auto borrowers on the basis of the “disparate impact” of its lending decisions: blacks were turned down more often and charged higher interest rates than whites, on average, and the CFPB took that as de facto evidence Ally was discriminating. Except that Ally didn’t even know the applicants’ race—there’s not even a box for it on the loan application—when it underwrote the loans, and that if you adjust the data for factors like FICO score and vehicle type, evidence of discrimination disappears. So, no, Ally wasn’t discriminating. But the company had a crucial regulatory issue in front of the FDIC, on which the head of the CFPB sits, and so had no choice but to settle; it agreed to pay $100 million in restitution to “wronged” borrowers. The results since then, as you can imagine, have been downright ludicrous. More from the Post:

[The] CFPB could never ID the alleged 235,000 Ally minority “victims” harmed by loan mark-ups. The auto industry does not report borrower race, so CFPB resorted to guessing race by last name and zip code, a so-called “proxy” method that’s wildly inaccurate and often misidentifies whites as black.

As a result, an estimated 20% of the settlement checks the government is now mailing out are actually going to whites.

So Ally is paying money to a bunch of white people a result racial discrimination against blacks by Ally that never happened in the first place. Fairness! But wait, it gets worse. The regulatory situation Ally now finds itself in has devolved from the merely unfair to the farcical:

In a preemptive strike against future prosecution, Ally has been randomly cutting refund checks to car borrowers on its own, outside the settlement, advising pleasantly surprised recipients a mistake may have been made in calculating their interest rate.

“We didn’t want that same problem again,” Carpenter said, “so we said to ourselves, what are we going to do to make sure we pass the (CFPB’s fair lending) test?”

In effect, the industry is now having to pay protection money to the government as a cost of doing business.

Thus Ally, as a result of its deal with the government, is cutting checks to random people for no reason. This is of course insane. Donald Trump says we’re being ruled by idiots. I’m not so sure. Based on what the government is putting Ally Financial through, he may be giving the people who run the country the benefit of the doubt.

What do you think? Let me know!

11 Responses to “The CFPB’s Shameful Shakedown of Ally Financial”

  1. sgr

    Can something be absolutely shocking and totally predictable at the same time? The CFPB is the perfect example of this administration’s approach to “governance”. It’s all about threats and shake downs. Do you think Ally is unique here? Have a beer with any number of community bankers who have had their businesses and careers thrown into chaos over the past 7 years of we-make-the-rules-up-as-we-go regulation. I disagree with the idea this government is full of idiots. Idiots make mistakes. These guys intend to do this damage. It’s not a bug of the CFPB…it’s a feature.

  2. jsc173

    The “business model” for the CFPB is that of your typical district attorney.

    In today’s legal world, actual prosecutions are rare and trials are even rarer.

    It’s all about the Benjamins. As soon as a prosecutor has some evidence — maybe not enough to convict but enough to make palms sweaty — they drag the person of interest in their office, apply foot-to-neck and offer a free walk for some admissions, fines and restitutions.

    Headlines. Reputations wrecked. Notch on the belt of the DA. Rinse. Repeat a few times. Run for higher office.

    As Cordray was Ohio’s AG, you think he knows how to do this??

  3. Anonymous

    This is a disgusting example of how government should not work. This brutal approach does not help consumers and in the long term makes them lose faith that the system is fair. This situation demands a serious bureaucracy overhaul and more individual accountability. This is horrible!!! R3

  4. Lenny the Lumberjack

    Read Saul Alinsky’s 1971 book, Rules for Radicals, and you will get a very clear picture of how the CFPB operates. Alinsky points out that Machiavelli’s, The Prince, was a textbook/primer for how the HAVES hang on to power, and then explains that his (Alinsky’s) writings are all about how to help the poor take that power for themselves. Evidently this administration thinks that they are championing the poor at the expense of “Big Business”, but really, like the Ally exec’s claim… it’s just a big shakedown of the banks. Couch it in racial overtones with a suggestion of screwing over the poor and disenfranchised and it justifies totalitarian tactics. This is just more of the same that we’ve experienced for the past seven years. Elizabeth Warren and her ilk must be ecstatic about how much chaos they have created for small town bankers (my family) but with no real idea of the consequences for the small town people (less credit opportunity, less local support for community events, etc…). A completely predictable outcome, but one that the “omniscient ones” in D.C. failed to predict. And they wonder why the current economic recovery is sub-par.

  5. Mike in GA

    Tom, just another example of the extortion this government has committed against businesses and shareholders! Where are the legal challenges to this activity from the US Chamber of Commerce and others who purport to be the voice of business?

  6. etoleary

    My experience suggests that there are opportunities for abuse in indirect auto lending but to then try to make the case that it exists by the application of Fair Lending criteria and dependent on spurious methodology is an abuse in its own right.

    One way to understand the current situation is to recognized that the banks, generally the giants, behaved in very “high handed ways” that have infuriated the American public. The industry has largely painted itself into this corner. The enormous fines and penalties are a reflection of how pervasive the problems were.

  7. Stays72

    Tom left out this inconvenient fact of the case: Ally Financial allowed auto dealers, who meet face to face with the customer, to increase the interest rate charged to the customer, and then were allowed to keep a share of the markup. African Americans, Latinos and Asians were charged a higher interest rate at a much greater frequency than other (white) customers. Ally Financial didn’t have to know the ethnicity of the customer — they relied on the auto dealers to do that, and Ally gained financially from that arrangement.
    Funny how Tom leaves out the key points that don’t support his premise. Funny, but not surprising, since this is a consistent pattern for him.

  8. Tom brown

    Stays72. Do you believe in any personal responisibility for consumers who borrow money?


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