What could possibly be more brainless than turning off credit to the housing industry? Maybe stifling auto lending qualifies.
Gains in the housing and auto industries have been among the few economic bright spots during the Obama presidency. The Fed’s quantitative easing and consequent low interest rates have led to rising home prices and robust car sales – both important to the economic recovery. Now these industries are at risk, critics say, thanks to a Consumer Financial Protection Bureau.
In December, as it was sharpening its teeth, the CFPB demanded $98 million from Ally Financial in settling charges that it had discriminated against minority customers. Ally, one of the largest indirect auto lenders in the country, agreed to the payment since it was eager to gain special status allowing it to borrow from the Federal Reserve, and because management wanted the government to go ahead with selling a large holding of Ally stock acquired during the financial crisis.
Note that Ally collects no information about the race of the customers who apply for a loan, making it unlikely that the company engaged in any sort of purposeful discrimination. No matter. The CFPB claimed that computer models could determine that minority buyers (African-Americans, Hispanics, Asians and Pacific Islanders) paid higher rates, but submitted no data to make that case.
If this sounds preposterous, it is. It was, to all appearances, a successful shakedown – perpetrated by a new federal agency keen to be taken seriously. Richard Cordray, CFPB czar, celebrated this first major “win” in prepared remarks which described the settlement as the largest auto loan discrimination case ever. He claimed that because Ally and the auto dealers with which it works share interest charges above a certain set amount, they have an incentive “for interest rates to be marked up to consumers.”
He added, “These incentives have unjustly hurt minority borrowers.” Ally’s sin was not making “sufficient efforts to ensure that it was complying with fair lending laws….” Cordray crowed that “today’s order establishes a new compliance framework.”
Boom – so much for scaring the daylights out of auto lenders. Could this be one reason that auto sales plunged in January and surprised industry experts by falling year-over-year? Yes, the weather was cold, but is it possible that lenders are trying to figure out how to dodge the next CFPB bullet?
The Ally charges are worrisome, because industry observers expect the CFPB hounds to soon be loosed on the mortgage industry. Last month the agency issued some eight hundred pages of new rules defining who should be considered a “qualified” borrower. Though the mission of the agency includes making financial transactions simpler and more transparent, industry participants describe the rules as hideously complicated and open to interpretation.
In a letter to Cordray last November, 54 bankers associations from around the country asked that the new Ability to Repay/Qualified Mortgage rules (technically, Federal Reserve Regulation Z) be postponed, so as not to disrupt lending. They did not ask that the regulations be changed – just delayed, so that software vendors and other compliance specialists would be able to prepare products that would guarantee that the banks were abiding by the new rules.
The letter acknowledges that the agency had agreed to make allowances for some confusion (since the rules had been frequently changed), but states that “many banks will not move forward with lending until they are certain they are in full compliance and within the bounds of acceptable risk.”
The bankers claim that “it is a virtual certainty that mortgage lending in our states will be curtailed.” They cite studies concluding that about 20 percent of current mortgage loans are not in compliance with the new rules, and that the credit shrinkage could well exceed that amount.
Mr. Cordray, with the bit now between his teeth, is unmoved, and the new rules are now in effect. Rafferty Capital Markets analyst Richard Bove, who has frequently faulted bank regulators for overreaching and stifling the flow of credit in the process, says in a new note to clients that the CFPB “no longer believes that lending money to potential homeowners is a transaction between the borrower and the lender.” In his view, the rules are so onerous, and the risks to banks so significant, that “no low income household is ever likely to be able to obtain the funds to buy a home in this country again.”
Mr. Bove may be guilty of hyperbole, but it appears that the evangelical Mr. Cordray is guilty of recklessness. Early on, Republicans balked at the proposed structure of the CFPB, which is funded by the Federal Reserve and therefore does not answer to Congress. They also objected to the appointment of Mr. Cordray, fearing that he, and the agency, would operate with little oversight.
In fairness, the arrangement reflected the reasonable view that complacent financial industry regulators had failed to prevent the unstable and unscrupulous lending that led to the mortgage meltdown and the recession. Financial firms played one group of overseers off against another, while legislators with ties to the banks softened regulations. The concept of an independent agency may have been sound, but its zeal could well create a whole new set of problems.
Most worrisome is that Mr. Cordray’s avenging team, not content with suppressing auto and mortgage lending, is now investigating loans to small businesses. Heaven help us, and heaven help the U.S. economy.
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