House of Representatives Issues Part II of Report Criticizing CFPB’s Auto Lending Enforcement Efforts
On January 20, 2016, Republican members of the House of Representatives’ Financial Services Committee issued a report titled Unsafe at Any Bureaucracy, Part II: How the Bureau of Consumer Financial Protection Removed Anti-Fraud Safeguards to Achieve Political Goals, which criticizes the Consumer Financial Protection Bureau (CFPB) for its actions following its 2013 enforcement action against auto finance company Ally Financial Inc. and Ally Bank (collectively, Ally).
The Committee’s report focuses on the CFPB’s approach in designing and implementing the settlement process for the allegedly harmed minority consumers. According to the report, the CFPB employed unreasonable processes to identify affect consumers that the CFPB knew were flawed. The report alleges that “political exigency required the Bureau to design a process that would ensure that a sufficient number of alleged victims would be identified as eligible claimants,” because at the outset of the Ally enforcement action Director Cordray publicly announced that at least 235,000 consumers harmed by Ally would be paid $80 million, even though he “did not know the race of a single borrower in any vehicle finance contract purchased by Ally.”
In order to identify at least 235,000 allegedly affected consumers, the CFPB utilized statistics generated by using disparate impact methodology, known as Bayesian Improved Surname Geocoding (BISG), which the Committee blasted in an earlier November 24, 2015 report, discussed below. The CFPB then sent notices to two groups of consumers that it identified as potentially affected. As to the first group of consumers, the CFPB sent them a mailing that simply notified them that they would receive remuneration unless they expressly opted out. The claims administrator sent out 201,212 notices to those consumers and only 0.46% of those consumers opted out. As to the second group of consumers, the CFPB sent them a notice that indicated that they may be eligible for a payment, but to be eligible the consumer must be African American, Black, Hispanic, Latino, of Spanish origin, Asian, Native Hawaiian, or other Pacific Islander. The second group of consumers were required to sign a participation form and send it to the claims administrator. The claims administrator mailed 218,457 notices to the second group of consumers and 47.92% of consumers returned opt-in forms.
The Committee’s report criticized the CFPB’s failure to require any consumer from any group to (i) identify which minority group they associate with; (ii) affirm under oath that they were part of an affected minority group and otherwise entitled to payment. The report further pointed out that by permitting the first group of consumers to passively participate in the settlement without requiring them to expressly opt-in, the number of participating consumers were artificially high. As a result of CFPB’s settlement process, not only was the CFPB able to reach its initial estimates that at least 235,000 consumers would receive at least $80 million, but it also all but guarantees that non-minorities will also receive compensation. In other words, the CFPB’s approach results in White, unharmed, consumers being compensated at the expense of Ally, simply to ensure that enough consumers were compensated to support Director Cordray’s initial remarks about the magnitude of the enforcement action.
November 2015 Report
This report follows the Committee’s November 24, 2015 release of its initial report titled Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending, which blasted the CFPB for knowingly using unsound or weak methodology in challenging auto lending practices based on allegations of discrimination.
Among other things, the initial report calls into question the statistical methods the CFPB used to allege racial discrimination in the auto lending industry. In addition, the report challenges the CFPB’s reliance on the legal theory known as “disparate impact” to take action against auto lending companies for alleged discriminatory lending practices. In a bit of irony, the report also accuses the CFPB of pursuing “its radical enforcement strategy using ‘unfair, abusive, and deceptive,’ tactics,” which is the very standard the CFPB is charged with enforcing against financial industry participants.
Representative Jeb Hensarling, Chairman of the Financial Services Committee, blasted the CFPB in a statement accompanying the release of House report, stating that the CFPB “is irresponsibly branding companies with the stigma of racial discrimination based on nothing more than junk science that even CFPB senior officials acknowledged is gravely flawed. Why? To cudgel those companies into enormous monetary settlements without ever having to go to court. If it sounds like a shake down, that’s because it is.”
You can view the Financial Services Committee’s Unsafe at Any Bureaucracy, Part II: How the Bureau of Consumer Financial Protection Removed Anti-Fraud Safeguards to Achieve Political Goals Report here: http://financialservices.house.gov/uploadedfiles/cfpb_indirect_auto_part_ii.pdf.
You can view the Financial Services Committee’s Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending Report here: http://financialservices.house.gov/uploadedfiles/11-24-15_cfpb_indirect_auto_staff_report.pdf.
You can view Chairman Jeb Hensarling’s press release here: http://financialservices.house.gov/news/documentsingle.aspx?DocumentID=399984.
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Zane Gilmer is a member of the firm’s litigation practice group. His practice focuses on business litigation and compliance and he is a member of the firm’s CFPB taskforce. Zane works out of the firm’s Denver office and he can be reached at firstname.lastname@example.org or 303.376.8416.
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