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Five Trade Groups Urge CFPB to Fix ‘Flaws’ in Fair Lending Enforcement

February 19, 2015

WASHINGTON — Five trade groups representing the nation’s largest auto finance sources issued a letter yesterday to the Consumer Financial Protection Bureau’s Richard Cordray, urging the director to review and respond publicly to a study that questions the bureau’s methodology for measuring disparities in dealer reserve.

The letter, which even lists out three areas the coalition wants the CFPB to address, was signed by the American Bankers Association, the Consumer Bankers Association, the Financial Service Roundtable, the U.S. Chamber of Commerce and the American Financial Services Association, which commissioned the study referenced in the letter.

In March 2013, the CFPB issued guidance urging lenders to change the way they compensate dealers for arranging financing, claiming that discretionary dealer markups create a fair lending risk. The AFSA sought to study the CFPB’s claims, and commissioned Charles River Associates (CRA) to conduct an independent study.

Published this past November, the study looked at more than 8.2 million auto financing contracts and concluded that the disparity alleged by the CFPB between the amount of dealer reserve charged to minorities and non-minorities is not supported by data.

Central to the study was an examination of the Bayesian Improved Surname Geocoding (BISG) proxy methodology used by the CFPB to determine disparate impact to legally protected groups. BISG estimates race and ethnicity based on an applicant’s name and census data. The CRA study calculated BISG probabilities against a test population of mortgage data, where race and ethnicity are known.

“The CRA study concluded that observed variations in dealer reserve at the financial institution portfolio level are mitigated when market complexities are considered and adjustments are made for proxy bias and error,” the coalition’s letter stated, in part. “Furthermore, CRA found the bureau’s application of the BISG proxy methodology creates significant measurement error, which results in overestimations of minorities in the population by as much as 41%.

“In its own white paper on the method it uses to proxy for race — published prior to the CRA study — the CFPB acknowledged the overestimation (which it found to be 21%), but never indicated how, if at all, it has corrected this discrepancy.”

The letter requested that the bureau conduct 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 markup discrimination claims.

In early December, Toyota Motor Credit Corp. and American Honda Finance Corporation revealed in regulatory filings that they could face enforcement actions from the CFPB and the U.S. Department of Justice for their dealer participation policies, which the two agencies alleged have resulted in discriminatory pricing of loans. The two finance sources said they would cooperate with the agencies’ investigations.

In their letter, the trade groups requested that the CFPB address how its portfolio analysis of aggregated contracts sourced from dealers accounts for different operating models, cost structures, pricing policies, location and competitive landscapes, among other things. They also asked the CFPB to address how its methodology considers different business factors such as deals involving new or used vehicles and trade-ins, among other things. Lastly, the coalition asked the bureau to “address and adjust for the bias within the BISG methodology and its overestimation of individuals within protective classes.”

“We share the bureau’s commitment to combating illegal discriminatory treatment in the vehicle finance market,” the letter, read in part. “This common goal is best achieved when fair lending standards are evidenced-based, applied using analytically sound and transparent methods and predicated on accepted legal foundations.

“For these reasons, the industry wishes to engage the CFPB in a constructive dialogue on the CRA study and strongly encourages the bureau to adopt the recommendations above to improve the accuracy of the fair lending analysis.”

The National Automobile Dealers Association (NADA), the American International Automobile Dealers Association (AIADA) and the National Association of Minority Automobile Dealers (NAMAD) issued a joint press release that applauded the efforts of the five financial services organizations.

“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.”

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