CFPB challenged over loan discrimination methodology

A coalition representing over 50 of the largest US auto finance sources is calling on the Consumer Financial Protection Bureau (CFPB) to address what it describes as “bias and error” in the method used to determine whether an indirect auto lender’s portfolio shows evidence of unintentional discrimination in the terms offered to specific groups of consumers.

In a letter to the regulator the group, led by the American Financial Services Association (AFSA), says the CFPB should revisit its enforcement approach in the light of an independent study carried out in November 2014 by Charles River Associates (CRA). This cast doubt on the reliability of many of the bureau’s findings, saying the methodology it used to analyse lending patterns overstated the impact on minorities.

By law, auto lenders are prohibited from inquiring into or considering a consumer’s race or ethnicity. In order to estimate the background of consumers for pricing comparison purposes, the CFPB uses a proxy that is based on a statistical analysis of the consumer’s last name and residence.

The CRA study, based on 8.2 million vehicle contracts originated in 2012 and 2013, suggested that the CFPB’s method overestimates minorities by as much as 41%.While the CFPB has conducted its own analysis of its methodology, which concluded that the margin of error was around 21%, it has not explained what, if any action, it has taken to address the discrepancy.

“The Associations request that the bureau conducts a thorough review of the CRA study, provide a public response to its findings and recommendations, and correct any bias in its testing methodology, before pursuing further dealer mark-up discrimination claims through supervisory or enforcement action,” the letter stated.

As well as AFSA, other signatories included the American Bankers Association, Consumer Bankers Association, Financial Services Roundtable, and US Chamber of Commerce. They say they want assurance that the CFPB’s lending standards are “evidence-based, applied using analytically sound and transparent methods and predicated on accepted legal foundations.”

The National Automobile Dealers Association (NADA), the American International Automobile Dealers Association (AIADA), and the National Association of Minority Automobile Dealers (NAMAD) have also pledged their support to the coalition’s campaign.

“Discrimination in the market simply cannot be tolerated,” said NADA president Peter Welch. “However, in light of the rigorous peer-review that has cast significant doubt on the CFPB’s findings, the bureau should change course – or at least hit the pause button – and address these new concerns. We applaud the courage of these organizations for speaking up.”

The CRA study “Fair Lending: Implications for the Indirect Auto Finance Market”, was commissioned by AFSA. It recommended that the CFPB adopt portfolio level analysis of aggregated contracts sourced from dealers with different operating models, cost structures, pricing policies, locations, and competitive landscapes. It also said the model should be adjusted for legitimate business factors such as new, used, trade-in, options, insurance, and warranties.