New Study Shines Light on CFPB’s Discrimination Claims | Citizens Against Government Waste

New Study Shines Light on CFPB’s Discrimination Claims

The WasteWatcher

As Citizens Against Government Waste (CAGW) has previously pointed out, the Consumer Financial Protection Bureau (CFPB) is in the midst of a war against the auto financing industry.  In March 2013, the agency issued guidance, stating that auto finance sources would be held accountable for alleged discriminatory loan pricing occurring through a practice known as dealer reserve.  However, a study released on November 19, 2014 concludes that CFPB’s method to determine instances of discrimination is flawed.

The practice of dealer reserve, which is common throughout the auto industry, refers to the small fee paid to a dealer or other indirect loan source for securing a bank loan for a customer.  The controversy surrounding dealer reserve centers on CFPB’s claim that use of the practice is resulting in widespread discrimination.  According to a September 17, 2014 article in the Detroit News,

“Dealers routinely arrange financing for customers.  They are often allowed by lenders to mark up the interest rate charged to consumers, allowing them to keep the difference.  The CFPB wants to make sure dealers aren’t charging minority buyers a higher rate than white buyers.” 

While discriminatory lending is a very serious issue, CFPB has not provided reliable evidence that the practice of dealer reserve is resulting in discrimination.  As the Detroit News article noted,

“There are legitimate, market-based reasons for disparities in interest rates — from monthly budget constraints, to the presence of more competitive offers, to inventory reduction considerations — all of which are nondiscriminatory and all of which can be documented in the transaction.”

The November 19 study, conducted by Charles River Associates, reviewed more than 8.2 million new and used vehicle loan records issues during 2012 and 2013.  The report concluded that “Given the asymmetric nature of information between dealers and financial institutions, financial institutions and their regulators are in a less than ideal position to evaluate the pricing dynamics of transactions at dealers.  Despite those limitations, our analysis finds that these pricing dynamics are largely explained by several objective factors, rather than by race and ethnicity… In addition, the use of race and ethnicity proxies creates significant measurement errors, overestimates the population counts and results in overstated disparities.”

A November 20, 2014 article in F&I and Showroom elaborated on the study’s findings: “…even with an 80% probability that a person belongs to an African-American group, the proxy correctly identified race less than 25% of the time.  And when used to identify disparities in interest paid, the BISG [Bayesian Improved Surname Geocoding] methodology inflated disparities for African-Americans by 87%.”

In a November 28, 2014 filing with the Securities and Exchange Commission, Toyota Motor Credit Corp. revealed that it has been accused of discriminatory pricing of loans and could face an enforcement action from the CFPB and the U.S. Department of Justice.  These allegations are similar to those levied against Ally Financial.  In December 2014, Ally Financial agreed to pay a $98 million fine to settle the claims.

Instead of unilaterally imposing misguided, heavy-handed regulation to combat discrimination where there is specious evidence that it even exists, CFPB should work with impacted parties to come up with solutions to problems.  For example, the Council of Citizens Against Government Waste (CCAGW) has endorsed H.R. 5403, the Reforming CFPB Indirect Auto Financing Guidance Act, introduced by Rep. Marlin Stutzman (R-Ind.).  As stated in CCAGW’s letter in support of H.R. 5403, “the legislation would rescind the CFPB’s 2013 guidance and require public comment prior to the issuance of any future guidance.  Additionally, the legislation would require the agency to conduct a study on the impact to consumers, women-owned, minority-owned, and small businesses.” 

The National Automobile Dealers Association (NADA) has suggested that broad industry adoption of its fair credit program would “strengthen a dealer’s ability to comply with fair credit laws while preserving the competitive benefits of dealer-assisted financing.”  As often happens in the case of federal regulatory overreach, the private sector has come up with a better solution (in this case, for a problem that doesn’t seem to exist).  Regardless of how the auto-finance industry moves forward, it is clear that CFPB must reevaluate its current approach to regulating the sector.

  -- P.J. Austin

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