“The fact that someone has full legal authority to act in the way he does gives no answer to the question whether the law gives him power to act arbitrarily…

…or whether the law prescribes unequivocally how he has to act. It may well be that Hitler has obtained his unlimited powers in a strictly constitutional manner and that whatever he does is therefore legal in the juridical sense. But who would suggest for that reason that the Rule of Law still prevails in Germany. To say that in a planned society the Rule of Law cannot hold is, therefore, not to say that the actions of the government will not be legal or that such a society is lawless. It means only that the use of the government’s coercive powers will no longer be limited and determined by pre-established rules. The law can, and to make central direction of economic activity possible must, legalize what to all intents and purposes remains arbitrary action. If the law says that such a board or authority may do as it pleases, anything that board or authority does is legal….but its actions are certainly not subject to the Rule of Law. By giving the government unlimited powers, the most arbitrary rule can be made legal; and in this way democracy may set up the most complete despotism imaginable. If, however, the law is to enable authorities to direct economic life, it must give them powers to make and enforce decisions in circumstances which cannot be foreseen and on principles which cannot be stated in generic form. The consequence is that, as planning extends, the delegation of legislative powers to diverse boards and authorities becomes increasingly common…..Constantly the broadest powers are conferred on new authorities which, without being bound by fixed rules, have almost unlimited discretion in regulating this or that activity of the people. The Rule of Law thus implies limits to the scope of legislation: it restricts it to the kind of general rules known as formal law and excludes legislation either directly aimed at particular people or at enabling anybody to use the coercive power of the state for the purpose of such discrimination. It means, not that everything is regulated by law, but, on the contrary, the coercive power of the state can be used only in cases defined in advance by the law and in such a way that it can be foreseen how it will be used. A particular enactment can thus infringe on the Rule of Law. Anyone ready to deny this would have to contend that whether the Rule of Law prevails today in Germany, Italy, or Russia depends on whether the dictators have obtained their absolute power by constitutional means. Whether, as in some countries, the main applications of the Rule of Law are laid down in a bill of rights or in a constitutional code, or whether the principle is merely firmly established tradition, matters comparatively little. But it will readily be seen that, whatever form it takes, any such recognized limitations of the powers of legislation imply the recognition of the inalienable right of the individual, inviolable rights of man.”, F.A. Hayek, 1974 Nobel Laureate in Economics, The Road to Serfdom, 1944

“If you have read Hayek’s The Road to Serfdom and believe its premise and believe in The Rule of Law (as I do), you believe that agencies like the Consumer Financial Protection Bureau have far too much discretionary authority and therefore violate our Constitution and the Rule of Law and are therefore un-American institutions.”, Mike Perry, former Chairman and CEO, IndyMac Bank

November 24, 2015, Yuka Hayashi, The Wall Street Journal


Consumer Watchdog Pushed Discrimination Case on Vulnerable Firm: Report

Republicans say Consumer Financial Protection Bureau targeted Ally on likelihood of settlement to gain restructuring approval

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‘Ally [Financial Inc.] may have a powerful incentive to settle the entire matter quickly without engaging in protracted litigation,’ the Consumer Financial Protection Bureau’s lawyers wrote, according to a report from congressional Republicans. The document showed Richard Cordray approved the staff’s report by signing his initials. PHOTO: STEVE HELBER/ASSOCIATED PRESS

By Yuka Hayashi

WASHINGTON—When federal regulators launched a crackdown on alleged discrimination in auto lending two years ago, they knew their methodology would be questioned. But they calculated they could secure a market-shaping settlement by going after a company unlikely to fight the charges because it needed to avoid a complaint to clinch government approval for a broader restructuring.

That is the conclusion of a report, based on internal documents and emails written by the staff of the Consumer Financial Protection Bureau, released Tuesday by congressional Republicans who have long criticized the discrimination probe.

“Some of the claims being made in this case present issues…that would pose litigation risks…,” CFPB staff members wrote in one 2013 memo addressed to the bureau’s director, Richard Cordray, which was included in the report.

But such concerns, the officials said in the same 23-page document, would be offset by the likelihood of a settlement by the target company, Ally Financial Inc. “Ally may have a powerful incentive to settle the entire matter quickly without engaging in protracted litigation,” the agency’s lawyers wrote, noting that the company’s failure to secure approval to become a holding company would force it to divest itself of key businesses, primarily its insurance subsidiaries.

The document showed Mr. Cordray approved the staff’s report by signing his initials.

Samuel Gilford, a CFPB spokesman, said the bureau wasn’t able to comment immediately, adding that it hadn’t had the time to review the report or verify the authenticity of the accompanying documents.

“The CFPB’s goal has been, and continues to be, the elimination of illegal discrimination,” he said, adding that the bureau will fairly and consistently enforce the related law to “ensure borrowers harmed by discrimination receive the relief they deserve.”

The $98 million settlement with Ally was the government’s biggest case involving alleged discrimination in the auto-loan market and the first case for the CFPB in the industry. The regulators accused the auto lender, formerly known as GMAC, of offering a pricing system that resulted in 235,000 minority borrowers being charged higher interest rates than white customers by auto dealers.

The agency’s campaign to pursue auto lenders has set off fury among industry officials and many lawmakers. They have two main complaints: The CFPB’s foray into the industry despite its lack of authority over auto dealers; and the methodology used to measure the extent of discrimination based on guesswork, rather than concrete data. Proponents of the action say the CFPB has shed light on questionable industry practices previously unknown to the public and succeeded in reaching settlements worth over $200 million.

Identifying racial bias in auto lending has proved a challenge for the CFPB, as auto-loan applicants, unlike mortgage borrowers, don’t have to disclose their race or ethnicity. So the CFPB used a proxy method where they looked at applicants’ names and locations to make educated guesses about what their races were.

The report was put together by the Republican majority staff of the House Financial Services Committee, which has led the political charge by conservatives trying to defang the CFPB, created by the 2010 Dodd-Frank Act following the financial crisis. The report was released  days after the House passed legislation that would rescind the bureau’s 2013 guidance aimed at protecting minority borrowers from being charged higher rates by auto dealers. The bill received bipartisan support, with 88 Democrats joining 244 Republicans.

An Ally spokeswoman said, “It is a very comprehensive report, and we decline to comment further.”

Part of the 54-page document prepared by the Financial Services Committee examines the December 2013 deal that the CFPB and Justice Department reached with Ally, in which the company agreed to settle the allegations of discrimination without admitting or denying wrongdoing.

Offering a rare look into regulators’ tactics for a major enforcement case, the report cites, among other things, the 23-page memorandum addressed to Mr. Cordray and dated Oct. 7, 2013, from staff members of the bureau’s Office of Enforcement and Office of Fair Lending, including Patrice Ficklin, assistant director of fair lending and equal opportunity.

The staffers identified Ally as “one of the largest auto loan lenders” in the U.S. that was “in the end stages of a major reorganization.” They explained the company hoped to exit from the government control it was put under during the financial crisis and was trying to raise capital through an initial public offering.

To do so, Ally, which had been hit by the subprime crisis, needed to receive approval from the Federal Reserve and Federal Deposit Insurance Corp. to convert to a holding company and maintain key business units.

“Ally may be strongly inclined to reach a timely and robust resolution of this matter if it can potentially result in (Ally’s) successfully converting to a financial holding company,” the CFPB lawyers wrote.

They explained to Mr. Cordray that the Fed had indicated that a finding of a fair-lending violation would “most likely result in the denial of holding company status.” They added the Fed had also suggested that if Ally took “prompt and robust corrective action,” that would be taken into consideration.

The FDIC, the lawyers said, had also indicated a similar intent in awarding a rating needed for Ally to convert to a new status.

Five days before its deadline to achieve financial holding company status, Ally on Dec. 20, 2013, signed a settlement with the CFPB and Justice Department. On Dec. 23, the company said the Fed approved its application to become a financial holding company.

In essence, “settlement of the Bureau’s fair lending investigation was a prerequisite for Ally’s status change,” the House Republicans’ report said.

Ally isn’t the only company that has settled with the CFPB cases over alleged violations of fair-lending rules. In September this year, Hudson City Bancorp. Inc. reached a settlement over allegations that the New Jersey bank withheld mortgages from minority borrowers. Days later, the bank received regulatory approval on its long-awaited merger with M&T Bank Corp., announced more than three years earlier.

Beginning with its settlement with Ally, its first case in the auto lending industry, the CFPB has reached agreements worth more than $200 million with several other auto financing companies. The cases center on the dealer markup, which allows car dealers to add or subtract a few percentage points to the interest rates borrowers pay. Regulators say that dealers have been charging higher markups for minority borrowers than for their nonminority counterparts.

Corrections & Amplifications

The document showed Richard Cordray approved the staff’s report by signing his initials. An earlier version of the online article incorrectly stated the document showed no evidence of Mr. Cordray approving the report.


Posted on December 1, 2015, in Postings. Bookmark the permalink. 1 Comment.

  1. Uh, where I grew up, they called this sort of thing “extortion.”

    Mark Nelson 3256 Sitio Tortuga Carlsbad, CA 92009 760.473.7558 mnelson.doit@gmail.com

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