J.P. Morgan Chase Investigated For Auto Loan Practices

J.P. Morgan Chase, the largest U.S. bank by their amount of assets, revealed in a securities filing they are in discussions with the U.S. Department of Justice due to concerns about their auto lending practices. The discussions with the DOJ are part of a larger federal probe into whether or not there were “potential statistical disparities,” on auto loans granted to certain racial groups.

According to the WSJ, J.P. Morgan Chase has been in talks with the government for weeks over this issue and the end resolution, whether it be a lawsuit, warning, fine or nothing is not yet known. This discussion, as it has been called is the latest in a string of government interest and investigation into automotive lending practices, and it will continue.

In his prepared remarks for a speech at the National Association of Attorney Generals, CFPB Director Richard Cordray pointed to more scrutiny being placed on the automotive lending market. In his speech Cordray said, “… The Bureau has focused significant resources on rooting out discrimination in indirect auto lending.” He went on to mention his organization has collected $136 million in fines to help 425,000 customers whom Cordray says, “we’re discriminated against on the basis of race.” The methodology that the CFPB used to reach their conclusion of discrimination has been the source of controversy.

A study by the American Financial Services Association, which was carried out by Charles River Associates, and released in November of 2014, found “the disparity alleged by the Consumer Financial Protection Bureau (CFPB) between the amount of dealer reserve charged to minorities and non-minorities is not supported by data.” The AFSA reported the CFPB didn’t take certain things into account when they conducted their proxy methodology data analysis. AFSA President & CEO Chris Stinebert Said in a statement, “The interplay between factors such as geography, new versus used, length of loan, down payment, trade-in vehicle, credit score and competitive factors, such as meeting or beating a competing offer, is evidence of a dynamic market.”

The AFSA study examined the Bayesian Improved Surname Geocoding Methodology used by the CFPB to determine disparate impact for certain groups. The AFSA tested the BISG findings against a test population of mortgage data for which race and ethnicity are known. Among the findings were, “When the proxy uses an 80 percent probability that a person belongs to an African American group, the proxy correctly identified their race less than 25 percent of the time.” The study further discovered, ” Applying BISG on a continuous method overestimates the disparities and the amount of alleged harm and provides no ability to identify which contracts are associated with the allegedly harmed consumers.”

With doubt cast on the CFPB methodology, the American Bankers Association, American Financial Services Association, Consumer Bankers Association, Financial Services Roundtable and U.S. Chamber of Commerce sent a letter to CFPB Director Richard Cordray on February 18th. The letter asked the organization to review their methodology, which sometimes overestimated minorities in the population by as much as 41 percent. There hasn’t been a response from the CFPB, but there has been support by NADA for the courage on the part of the organizations, which sent the letter.