Politicians challenge Ally’s discrimination payouts

The Consumer Financial Protection Bureau (CFPB) has come under fire from senior US politicians over the methodology used to identify borrowers eligible for $80 million in compensation payments under an auto-lending discrimination settlement with Ally Financial.

Republicans in Congress have been investigating the payouts, which were ordered in 2013 and are compensation for dealers allegedly assigning higher charges to African-Americans, Hispanics and Asians and other minority ethnic applicants for leasing deals on cars financed by Ally.

Some 235,000 Ally customers are receiving repayments for between $100 and $520, but the politicians say there is evidence that money is being sent to consumers who are not from an ethnic minority, and who have not been subject to discrimination.

Official report

The House Financial Services Committee Department of Justice has prepared a report on the issue and its chairman, Republican Jeb Hensarling, has now written to the CFPB calling on the regulator to “immediately suspend distribution” of the Ally settlement proceeds until all claimants have verified their eligibility in writing.

CFPB spokesman Sam Gilford told the Wall Street Journal that bureau officials are still reviewing the report.

“Discrimination in auto lending has resulted in minority borrowers being unfairly charged higher interest rates on their loans,” he said, adding that the CFPB will “continue to fairly and consistently enforce” related law to “ensure borrowers harmed by discrimination receive the relief they deserve.”

Methodology

Auto lenders do not automatically collect information on purchasers’ race or ethnicity, which the CFPB has assessed using a methodology which critics claim is flawed. The methodology has previously been questioned by a number of industry bodies, including the National Automobile Dealers Association, because it seeks to weigh up a number of external factors.

In a further twist, the CFPB issued public statements of the number of consumers who had been discriminated against before it conducted its in depth assessment. Critics argue that this then gave the bureau an incentive to devise a methodology which produced final figures matching the original estimate, rather than an independent verification of any potential discriminatory treatment.

In order to find the number of minority borrowers which it alleged had suffered discrimination from Ally, Hensarling asserted the CFPB essentially made “educated guesses” using an algorithm that assigns probabilities to whether borrowers are minorities based on their last names and where they live.

Two types of borrowers received letters from the CFPB in recent months notifying them that they might be eligible to receive payments from the settlement fund, according to the report.

One group—people who were assigned a probability of 95% or higher of being nonwhite according to the CFPB’s methodology—received notifications indicating they would receive payment unless they opted out. The second group—those assigned a probability of 50% to 95% of being nonwhite—was requested to return a form to opt in to the settlement.

In addition, other borrowers were allowed to self-identify and claim the payments.

Of the 201,212 people in the high probability group, only 0.46% opted out. In the lower probability group, 218,457 people received letters and 47.9% responded to opt in to receive payments, the report said.

Hensarling said: “It defies logic for federal agencies to distribute settlement funds without first verifying the eligibility of prospective recipients, particularly when the bureau’s case is premised upon a flawed statistical analysis.”

The latest report also says that an earlier investigation into the enforcement action taken against Ally also found that the methodology used to judge whether the auto lender’s actions were discriminatory was prone to “significant” error.

A separate House committee, the Financial Services Subcommittee on Oversight and Investigation, is expected to hold a hearing in early February which will review the CFPB’s auto lending supervision, enforcement and rulemaking.