Vehicle Finance Trades Urge CFPB to Fix Flawed Methodology in Fair Lending Enforcement

WASHINGTON -- Feb. 18, 2015: A coalition representing many of the nation's largest auto finance sources urged the Consumer Financial Protection Bureau (CFPB) today to address the bias and error found in the method it uses to determine whether unintentional disparate impact exists in an indirect auto lender's portfolio. The Bureau has used – and continues to use – this methodology to support allegations of discrimination, despite its flaws.

Since 2013, the CFPB has urged financial institutions to change how they compensate auto dealers for arranging financing, based on the Bureau's allegation that dealer reserve poses a risk of disparate impact. However, a November 2014 study by Charles River Associates (CRA) found that the CFPB's analysis overstates the impact on minorities, and cast doubt on many of the Bureau's findings.

In light of these findings, the coalition called on the CFPB in a letter to revisit its enforcement approach. "The Associations request 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 mark-up discrimination claims through supervisory or enforcement action."

Signatories of the letter include the American Financial Services Association, American Bankers Association, Consumer Bankers Association, Financial Services Roundtable, and US Chamber of Commerce.

By law, auto lenders are prohibited from inquiring into or considering a consumer's race or ethnicity. In order to estimate the background of consumers for pricing comparison purposes, the CFPB uses a proxy that is based on a statistical analysis of the consumer's last name and residence. The CFPB's own study of its proxy methodology revealed that it is subject to significant error.

The CRA study, based on 8.2 million vehicle contracts originated in 2012 and 2013, showed that the CFPB's method overestimates minorities by as much as 41% – further calling into question the reliability of the CFPB's testing method. The CFPB has not indicated that it has made any corrections for these error rates.

"We share the Bureau's commitment to combating illegal discriminatory treatment in the vehicle finance market," the letter stated. "This common goal is best achieved when fair lending standards are evidence-based, applied using analytically sound and transparent methods and predicated on accepted legal foundations."

Based in Washington, D.C., AFSA is the national trade association for the consumer credit industry, protecting access to credit and consumer choice. Its 350 members include consumer and commercial finance companies, vehicle finance/leasing companies, mortgage lenders, credit card issuers, industrial banks and industry suppliers.