This week, former Ally Financial Inc., CEO Michael A. Carpenter said the Consumer Financial Protection Bureau 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. He said the 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. The charges were made in an exclusive interview with the New York Post.
Ally agreed to a $100 million consent order in 2013 after the CFPB accused them of racial bias in the interest rates they charged borrowers. Carpenter claims that the CFPB knew its charges were false, and that protecting consumers wasn’t even the goal of the agency. He claimed CFPB activists refused to consider exculpatory evidence acquitting Ally of the charges, and warned him that he would lose holding company status for the bank if he fought the charges. Without such status, Ally would have had to divest key businesses and wouldn’t have been able to raise equity in the markets to repay billions in taxpayer dollars pumped into Ally under the TARP program.
Instead of protecting consumers, Carpenter said the CFPB was trying to coerce a deal out of Ally that would reshape the auto lending market. By making an example of one of the largest auto lenders, he said, the government hoped to reform the way the industry finances car loans. “They were using us as a way to regulate the industry,” he said. Carpenter believes the CFPB wants to force car dealers to abandon discretionary pricing and to equalize credit outcomes, regardless of borrower creditworthiness. He warns moving to flat-rate financing would limit the industry’s ability to make a profit and cover risk and would be like “signing our own death warrant.”
There is evidence to support Carpenter’s claims. Since the Ally consent order, the bureau has accused the industry’s largest lenders of victimizing minority borrowers by charging them higher interest rates than whites. Players such as Toyota Motor Credit, Fifth Third Bank and American Honda Finance have agreed to cap interest rates, and a handful of smaller banks have agreed to adopt flat fees. A confidential CFPB memo detailing how the agency would approach Ally strongly confirms the strategy. The document says that leveraging Ally would “send an important message” to the entire auto-finance industry to “eliminate discretionary pricing.”