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.
The huge $100 million deal has spooked several other major lenders into resolving similar race-bias charges and offering below-market rates to minorities for car loans.
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.”
Since the 2013 deal, the Consumer Financial Protection Bureau has accused the industry’s biggest lenders of ripping off black and other minority customers by charging them higher interest rates than whites.
But Carpenter says there’s no merit to the accusations. He suggests they’re merely a means to a political end: forcing car dealers to abandon discretionary pricing and equalizing credit outcomes, regardless of borrower creditworthiness. He warns moving to flat-rate financing, as the administration wants, would limit the industry’s ability to make a profit and cover risk and would be like “signing our own death warrant.”
Congressional critics in both parties agree. In fact, some argue the CFPB, created in 2010 to educate and protect American consumers, is acting more like the NAACP but with subpoena power.
Carpenter says the CFPB’s civil rights 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.
“We would have fought the CFPB’s trumped-up accusations in every court in the land if paying back the American taxpayer had not been the compelling priority,” said Carpenter, who remains a consultant to the Ally board.
He says the administration was trying to beat a potentially market-reshaping deal out of the company. By making an example of one of the largest auto lenders, the government still hopes to reform the way the industry finances car loans.
“They were using us as a way to regulate the industry,” he said. And it may be working. Several of the nation’s biggest lenders, including most recently 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 go after Ally strongly confirms the strategy. The October 2013 document says being able to roll the financial giant would “send an important message” to the entire auto-finance industry to “eliminate discretionary pricing” — or face similar discrimination charges.
Carpenter says he’s dealt with federal bank regulators his entire career, which includes high-level stints with Citigroup and Kidder Peabody, but “I’ve never seen anything like” the bullying he’s seen in this administration.
“There is no intellectual honesty in their approach,” he said.
Under President Obama, the feds so far have managed to extract more than $220 million from several major car financing firms, along with some $1.2 billion from the nation’s biggest mortgage lenders, over unproven, unsupported racism charges.
Of the dozens of cases prosecuted, none has been based on actual discrimination complaints. All the cases hinge on statistics generated by the flawed disparate-impact methodology.
Carpenter says the CFPB tried to hide its metrics for the analytical screens it used to determine discrimination. After Ally obtained them and ran the numbers itself, it found that non-discriminatory factors — such as credit differences, vehicle type purchased, trade-ins and down payments — explained virtually all the disparities in the loan data. It also found that many white borrowers were charged dealer rates that were higher than the white average, further undercutting the administration’s case.
Ally quickly learned the agency was unfairly comparing borrowers who were not similarly situated, Carpenter said, and “we were being accused of something we didn’t do.” Yet prosecutors refused to consider the more scientific data that refuted the racism charges.
“They just rejected it,” Carpenter said. “The people involved [in negotiations] had a very clear agenda, you know, a social agenda.
“The fundamental premise on which they based their case was not true and they knew that, [but] they didn’t care,” he added. “You could show them all the data on the planet. They did not care. They had an agenda.”
Worse, the CFPB could never identify the alleged 235,000 Ally minority “victims” harmed by loan mark-ups. The auto industry does not report borrower race, so the 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, Carpenter says he wouldn’t be surprised if as much as 20% of the checks the government is now mailing out are actually going to Caucasians.
In a pre-emptive 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.
“If that’s the way you get their metrics right,” he said, “that’s the way you have to play the game.”
Paul Sperry is a former Hoover Institution media fellow and author of “The Great American Bank Robbery.” Sperry@SperryFiles.com