CFPB Under Fire For ‘Junk Science’ Auto Loan Methodology
We told you previously congress was taking aim at the CFPB over concerns about their auto guidance and lack of transparency. Our update to that story is more congressional backlash for the Consumer Financial Protection Bureau.
Republicans on the U.S. house committee on Financial Services published a report November 24 offering a critique of the CFPB. This report by the house financial services committee comes on the heels of the passage of H.R. 1737, a bill which seeks to improve transparency at the CFPB and wipe away their previously published auto guidance, which went into effect without any public or congressional input.
In their CFPB report, house members revealed internal documents from the CFPB showing fear of releasing the proxy methodology used by the organization. A CFPB memorandum published by members of the house, CFPB fair lending director Patrice Ficklin wrote, “…publicizing our methodology in the short term opens our methodology up to attack and further questions. News reports are already labeling it as racial profiling and junk science, and these aspersions may increase if we reveal greater specificity.”
The U.S. News and World Report published an article December 2 about the CFPB which read in part, “If all you knew about Mr. Brown was his surname, sex and ZIP code, do you think you could tell if he was black or white? The Consumer Financial Protection Bureau thinks it can – which is just one more reason it should be abolished.” The CFPB used this highly-criticized methodology to declare discrimination in auto lending from institutions such as Ally Bank, from whom they fined $98 million back in 2013. More recently, the CFPB has shown increased interest in auto lending leading some to believe the government group wants to regulate dealer finance directly.
The CFPB is specifically barred for the time being from directly regulating dealers, however, do you think that they’d like to? Why do you think the CFPB has such a keen interest in auto lending? What is your impression of the Consumer Financial Protection Bureau?
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First, it would better said that SOME members of Congress are taking aim at the CFPB instead of trying to paint a narrative that Congress as a whole is taking aim at the CFPB. While I wish the latter were true, it isn’t.
First, CFPB is a byproduct of the years of lax regulation that led to the mortgage crisis and the subsequent meltdown of the global economy, so we shouldn’t be surprised that the pendulum has swung too far back the other way. Also, CFPB has done some really good things. I don’t think many Americans want our military people and the elderly victimized. There have been procedures imposed by CFPB that minimize abusive collection tactics, lax and/or inaccurate credit reporting, credit card reform, and many other helpful initiatives. However, this might be the only good thing I will say about them from here on in this piece.
CFPB is inhabited by ideologues with an agenda. They arrived at their conclusion, then arranged “research” to prove the premise the had already arrived at. Of course, there is an epidemic of that going on in the world these days. CFPB’s methodology for determining who is and isn’t a member of a protected class is a complete joke. It is first based on how a person answers ethnicity questions on a mortgage credit application. First, there is no objective standard and people are asked to self identify. In fact, one is invited to check as many boxes as one likes. You can be pure Irish, and nothing prevents you from claiming you are a member of every protected class ethnic group itemized on the mortgage application. Worse yet, if you refuse to answer, the mortgage officer is required to check a box based on their own perceptions. And this is what CFPB’s methodology is based on. They call it Bayesian Improved Surname Geocoding (BISG) as if hanging a gobbly gook name on it will increase its level of perception of being “scientific.” Its not.
At a recent conference for minority auto dealers Patrice Ficklin, ‎Fair Lending Director at Consumer Financial Protection Bureau for CFPB, was harangued by the members in attendance. It seems they didn’t care to be stigmatized by being assigned to a “protected class” as if they were some how “handicapped.” In addition, they didn’t appreciate having their businesses disrupted by a bunch of ideologues on a witch hunt. The good Ms. Ficklin, a really bright and nice person, wasn’t treated well. But CFPB doesn’t care. They will force their help on members of protected classes whether they want it or not.
In the consent agreement CFPB extorted from ALLY Financial, CFPB received $98 million dollars with $80 million earmarked for consumer restitution. CFPB determined that minority borrowers paid about a third of a percent higher interest rate margin than the rest of the population. Given the “margin of error” in how CFPB determines members of protected classes, a third of a percent isn’t much. After gathering data based on the results of many mortgage applications, CFPB uses surnames and zip codes to “guess” at who might be a member of a “protected class.” This, in a nutshell, is BISG “methodology,” the basis for CFPB’s claim of discrimination where there is none. But it gets better. Now that CFPB has extorted the money from ALLY, they now have to figure out who to send a restitution check to. So in their infinite wisdom, they are sending out questionnaires to ALLY borrowers asking them to self describe their ethnicity. Now that word is out that if you answer your survey in a certain way you’ll have a check come in the mail, one wonders if there might be “margin of error” involved. I expect that the pool of available restitution dollars will be so diluted that so called “harmed parties” won’t get anywhere near their “third of a percent” overcharge returned to them and more than a few folks will receive a windfall.
So much for good intentions.