House Financial Services Committee Offers a Model on Assessing Disparate Impact via Report

Kelly Knepper-Stephens,
Stoneleigh Recovery Associates

On January 20, 2016, the House Financial Services Committee released a report prepared by the Republican staff members entitled “Unsafe at any Bureaucracy, Part II: How the Bureau of Consumer Financial Protection Removed Anti-Fraud Safeguards to Achieve Political Goals.”

The Report examined internal CFPB documents relating to the December 2013 consent order against the auto finance company Ally Financial Inc. and its subsidiary Ally Bank.  The Report stated the CFPB purposefully chose to distribute the $80 million dollars in Ally Bank settlement funds “without verifying that recipients [were] eligible to receive the money.”  The funds were supposed to be divided up among the African-American, Hispanic, and Asian borrowers who received higher interest rates on their auto loans than white borrowers; however, the CFPB’s method of identification and distribution resulted in some white borrowers mistakenly receiving settlement checks.

No matter the methodology chosen, there would always have been a margin of error regarding the identification of minority borrowers in Ally’s portfolio because the Equal Credit Opportunity Act prohibits lenders from asking borrowers to identify their race and ethnicity.  This is why the CFPB did not initially know the race of any of the consumers in the Ally Bank portfolios.

There are many statistical methods to determine the probability of a borrower’s race; for example assumptions can be made based on the probability that a last name is associated with a particular race or ethnicity and/or the probability that a zip code is associated with a particular race or ethnicity based on census data.  The internal CFPB documents, available on the House Financial Services Committee website, offer various methodologies that the CFPB has identified as viable ways to determine any given consumer’s race.

The Report concluded the CFPB’s selected methodology was used to increase the actual number of people refunded in an effort to ensure that their statements concerning the number of harmed minority consumers panned out.  CFPB Director Richard Cordray reported in December 2013 that “at least 235,000” minority consumers paid higher interest rates for their auto loans; however, the Report concluded that  the CFPB made this estimate without knowing the race or ethnicity of any of the consumers in the Ally Bank portfolios.  According to the Report, the CFPB “wildly miscalculated,” overestimating by more than half (somewhere between 92,000 to 199,000 consumers).  The internal CFPB documents evaluated in the Report outlined  the three different options considered to verify the minority status of the borrowers.  The Report indicated that the Department of Justice objected to the CFPB’s chosen methodology as a less accurate way to identify the minority borrowers effected.  The CFPB’s methodology resulted in 235,319 refund checks, almost identical to the CFPB’s original estimates.

Today a disparate impact policy is part of a fully developed compliance management system.  This would include specific guidelines to make sure that all similarly situated consumers are treated equally in situations like settlement negotiations where different results based on individual circumstances are likely.

However, as ARM companies do not know the race of the consumers with which they interact, assessing uniformity in consumer interactions can be tricky.  The CFPB methodologies laid out in the Report and in the CFPB documents demonstrate options that can be implemented to help in a disparate impact evaluation — options the CFPB enforcement and supervision teams will likely use in ongoing and future investigations.  The CFPB is not alone in its concern about the disparate impact on minority consumers.  States Attorneys Generals have openly expressed their objectives to evaluate industry conduct for ARM industry practices that might have a disparate impact on minority communities, as we saw with the Attorney General of Missouri this past summer.

The Republican Committee Members released Part One “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending” in November of last year.  Part one dealt with the CFPB supervision and enforcement actions against auto finance companies, like Ally Financial.