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CFPB Takes on Auto Lender Discrimination
Politico PRO (03/21/13) Davidson, Kate

In a bulletin issued today, the Consumer Financial Protection Bureau (CFPB) announced that it would target and investigate auto dealers who may be discriminating against customers because of their race. The bureau warned that allowing dealers to mark-up interest rates they give to consumers increases the risk of discriminatory activity occurring. The bulletin and consumer advocates argue that the practice of marking up interest rates may lead to African American and Hispanic borrowers receiving higher rates than others.

“Consumers should not have to pay more for a car loan simply based on their race,” said CFPB Director Richard Cordray. “Today’s bulletin clarifies our authority to pursue auto lenders whose policies harm consumers through unlawful discrimination.” The bulletin also highlighted that even though dealers may be the ones performing the actual mark-up, the policies and compensation packages of banks and non-bank lenders may be enough to trigger an investigation of discriminatory practices. The CFPB bulletin also recommends that lenders develop fair lending education programs for employees and continually monitor compliance.

The guidance applies to all financial institutions under the CFPB’s jurisdiction, including those banks with more than $10 billion and certain other non-bank lenders.

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Kentucky Executive Joins AFSA Board

AFSA welcomes Jeff Adams, Executive Vice President of ABC Finance Company, Inc., to the AFSA Board of Directors. Adams recently was approved by the board to take the seat of his father, Ron Adams. He has been involved full-time with the financial services industry for the last nine years.  He has served as vice president and president of the Kentucky Consumer Finance Association from 2009 to 2012. He currently serves on AFSA’s State Government Affairs Committee and Ancillary Product Working Group.

ABC Finance Company is a Kentucky-based lender that specializes in consumer installment loans.

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AFSA Responds to CFPB Inquiry on Financial Products Marketed to College Students

On March 18, AFSA submitted a letter to the Consumer Financial Protection Bureau (CFPB) in response to its request for information on how current and future partnerships or arrangements between institutions of higher education and financial institutions can be structured to promote positive financial decision-making and build money management skills among young consumers. AFSA’s letter focused on the CFPB’s press release regarding the request for information. AFSA expressed concern with the press release’s language, which signaled the CFPB may be looking at creating a new legal standard for providing consumers with products that are a “good deal” and in the consumers’ “best interest.”

“AFSA is concerned that the ‘best interest’ and ‘good deal’ language in the press release suggests that the CFPB will create a new legal standard for products marketed to students. The language in the press release suggests a new obligation to do more than avoid unfair, deceptive, and abusive acts or practices. It suggests an affirmative fiduciary-like obligation to enter into business arrangements or offer products or services only if the product or service is subjectively in the student’s best interest or is a good deal for the student. Therefore, we ask that the CFPB clarify that the language in the press release does not create a new legal obligation,” AFSA wrote.

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Inside the Beltway
CFPB Focuses on Consumer Choice or Lack Thereof
American Banker (03/20/13) Wack, Kevin

Consumer Financial Protection Bureau (CFPB) Director Richard Cordray laid out a series of plans concerning consumer choice last month in a speech that has not received much media attention. "Without consumer choice, a key element of market discipline is lacking," Cordray said in the Feb. 20 speech. "The result is to permit or even facilitate a distinct indifference to the interests of individual consumers."

Both industry analysts and consumer advocates do not yet know what to make of this idea, but it suggest that the CFPB is prepared to regulate the portions of the financial services industry that tie consumers to specific companies. These would include mortgage servicers, debt collectors and credit reporting. In his speech last month to the Advisory Board at the CFPB, Cordray gave the example of debt collection. "When a consumer does not pay back a debt, the creditor may decide to sell it to or contract with a debt collector to secure payment of what is still owed. Once this occurs, the paying business relationship has shifted; it now lies between the debt collector and the creditor, not the consumer and the creditor.” He said that this activity can lead to the mistreatment of customers. Cordray hinted at shifting the focus toward a consumer-driven way of operating financial services businesses.

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OCC Targeting Bank Relationships with Payday Lenders
American Banker (03/21/13) Witkowski, Rachel

The Office of the Comptroller of the Currency (OCC) announced that it will begin scrutinizing the relationship between large national banks and payday lenders, announced Comptroller of the Currency Thomas Curry. "This is a significant issue that we're looking at closely at the OCC from a variety of angles," Curry said. In particular, the OCC will be looking at how payday lenders may be circumventing state laws by partnering with large banks.

Recently, banks have been criticized for allowing automatic withdrawals from customer’s accounts if they owe a payday lender money. Consumer advocates argue that withdrawing money without the knowledge of the consumer is both unethical and illegal. "That is something we're revisiting closely and likely to make an announcement in the future," Curry confirmed.

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Congress Should Act on Housing Finance Reform: FHFA's DeMarco
American Banker (03/16/13) Borak, Donna

As Fannie Mae and Freddie Mac continue to operate under conservatorship, Edward DeMarco, the acting director of the Federal Housing Finance Agency (FHFA), has called on lawmakers to define the role that the two financial institutions will play and allow them to begin building for the future. The lack of a plan from either the White House or Capitol Hill has caused the FHFA to move forward virtually on its own, prompting DeMarco to release a plan earlier this month for a new independent entity that would securitize the mortgages underwritten by Fannie and Freddie. "I think this could serve as a building block for Congress to realize a future mortgage market," DeMarco told lawmakers.

DeMarco made clear that creating such an entity would be a multi-stage, multi-year effort and that it would not be a merger of the two companies. Rather, it would serve as a platform that would allow the securitization of mortgages and would provide additional market liquidity. The new entity is one of three goals DeMarco has set for the organization in 2013, including continuing to wind down the presence of the two companies in the mortgage market as well as aggressively keeping up anti-foreclosure activities.

"Fannie and Freddie are operating a combined $5 trillion book of business – we've got to continue to invest infrastructure for that business," DeMarco said. Ultimately, the goal is for the entities to sell much of the portfolio to private investors so that taxpayers are not left holding the bill in case of default.

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Cordray Advances in Senate, but Big Fight Likely Ahead over Confirmation
The Columbus Dispatch (03/20/13) Wherman, Jessica

The Senate Banking Committee approved Consumer Financial Protection Bureau (CFPB) Director Richard Cordray’s nomination, sending it to the full Senate for a vote, although 43 Republican politicians have vowed to block the appointment until structural changes are made with the bureau. The senators argue that the CFPB has been given too much unilateral power, and without congressional budgetary oversight, they will ensure that the Cordray nomination remains in limbo. Additionally, Republicans point out that such a powerful agency should be headed by a board, instead of a single director.

Democrats assert that Congress approved of the structure when it passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the CFPB. Cordray was appointed by President Obama last year while the Senate was in recess. In January, three members of the National Labor Relations Board (NLRB), who were appointed in the same manner and at the same time as Cordray, had their appointments invalidated by a federal appeals court. Republicans maintain that this should invalidate Cordray’s appointment as well.

Director Cordray’s term will expire at the end of 2013 if it is not renewed.

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National and State News
Banks Brace for Looming Crackdown in Auto Lending
American Banker (03/15/13) Wack, Kevin

The Consumer Financial Protection Bureau (CFPB) is preparing to crack down on dealer participation. Consumer advocates compare the practice to the now-banned yield spread premium. The CFPB has been looking into whether the practice is being applied in a discriminatory way. To date, four banks have been warned that they are under investigation.

Automobile sales and indirect lending have exploded in recent months as more consumers purchase and finance new vehicles. During a recent trade association conference, Patrice Ficklin, assistant director of fair lending and equal opportunity at the CFPB, outlined two factors that the bureau uses to determine if dealer participation is possibly discriminatory. Because no statistics are kept on the race and ethnicity of car buyers, the CFPB uses a combination of surname and address as a proxy for the buyer’s race.

Ficklin declined to comment when asked if the CFPB would recognize a floor or threshold when considering fair-lending cases, leaving some to worry that a mark-up as little as 10 or 15 basis points could trigger an investigation by the bureau. However, Ficklin  made clear that she did not find the markups inherently or institutionally unlawful, which garnered mixed reaction from attendees. "Everyone thought there was going to be a complete outlawing of dealer rate participations," said Kenneth Rojc, managing partner of the auto finance group at Nisen & Elliott LLC. "I don't see the CFPB going there." Others, however, felt that banks may actually benefit from the prohibition of dealer participation in favor of a flat-fee structure.

"The bureau has made it clear that nonmortgage lending and, in particular, auto finance are going to be major focuses of enforcement in 2013," said Anand Raman, a banking lawyer at Skadden Arps.

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More Homeowners Dig Out
The Wall Street Journal (03/19/13) Dougherty, Conor

The rebound of home values across the country have helped more homeowners dig their way out of debt while allowing them to stay in their homes, according to a new study released by CoreLogix on March 19. More homeowners no longer owe more on their home than it is worth.

In the final quarter of 2012, underwater homes declined by 1.7 million from the same period in 2011; 25.2 percent of homes were underwater in 2011, as opposed to 21.5 percent in 2012. "Home equity is the biggest source of wealth, so if equity is increasing that has a very large effect on household spending and consumer psychology," said Sam Khater, an economist at CoreLogic. Past studies have shown that homeowners who have more equity in their home tend to spend more money elsewhere in the economy, because they are able to refinance their mortgage for extra cash and they are happier about their financial condition.

Many underwater homes still remain at the breakeven point, nearly 10.4 million nationwide remain worth less than the owner owes. However, trends are ticking upward as the economy improves positively and the success of short sales in many cities has shrunk the inventory of available homes. For example, Phoenix, which was one of the hardest hit markets by the housing crisis, has seen a 23 percent recovery in home prices, according to the Case-Schiller Index.

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Springfield City Council Upholds Anti-Foreclosure Ordinances by Refusing Settlement with Banks
The Republican (03/18/13) Goonan, Peter

The Springfield, Mass., city council unanimously approved to uphold two city ordinances that will require banks to post a $10,000 bond for each foreclosed property that has become vacant within the city limits. Many local and large national banks filed suit to stop the ordinances, claiming that the amount of the bond was unfairly high. The city council and consumer rights groups claim that the bond motivates banks to ensure that homes do not become blighted and fall into disrepair.

The banks had initially filed suit in U.S. District Court, but Judge Michael A. Ponsor upheld the legality of the ordinances last year. The banks then appealed to the U.S. First Circuit Court of Appeals in Boston, which was followed by mediation.

The banks offered a proposed settlement: The bond would be waived if properties were registered within 21 days, a $100 registration fee was paid to the city and a local agent or property management company was listed on the registration to ensure the city had a local, reliable contact for the property. The city turned down the offer.

The banks continue to argue that the ordinances not only overstep the city council’s power, but violate state law. The city may now start implementing the ordinances, but the banks also can appeal their case in federal court.

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New Hudson Cook Partner to Establish Oklahoma City Office
SubPrime Auto Finance News (03/20/13)

Eric Johnson, a former shareholder and director with Phillips Murrah, has been added as a partner at Hudson Cook, LLP, and will open a new Kansas City, Mo., office. Johnson is listed in the 2013 edition of the “Best Lawyers in America” and is an also an adjunct professor Oklahoma City University School of Law, where he teaches students in the field of consumer protection. At Hudson Cook, Johnson will focus on federal and state consumer financial services laws and automotive finance.

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March 21, 2013

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AFSA Newsbriefs

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