In December, we told you about Part I of a report prepared by the Republican staff of the House Committee on Financial Services. The report attacked the Consumer Financial Protection Bureau’s pursuit of racial discrimination claims under the Equal Credit Opportunity Act against indirect auto creditors for alleged pricing differences in contracts they buy from dealers. Part I detailed the Bureau’s use of the controversial “disparate impact” legal theory, reliance on statistics generated by Bayesian Improved Surname Geocoding to identify minority buyers (the Bureau erroneously calls buyers under retail installment contracts “borrowers”), and powerful political leverage in its enforcement action against Ally Financial, Inc., and Ally Bank. The enforcement action ultimately resulted in a settlement with Ally in conjunction with the Department of Justice. Despite the fact that the Bureau did not know the race of any of the buyers who were parties to the vehicle finance contracts that Ally bought, Director Richard Cordray subsequently announced that the Bureau would return $80 million to at least 235,000 African-American, Hispanic, and Asian consumers who allegedly fell victim to the dealers’ discriminatory practices.
On January 20, the Committee released Part II of its unflattering report, which again portrays the Bureau as an agency focused on its political agenda and motivated by pride. While Part I focused on the Bureau’s activities prior to concluding its ECOA enforcement actions against indirect auto finance companies, Part II, entitled “Unsafe at Any Bureaucracy, Part II: How the Bureau of Consumer Financial Protection Removed Anti-Fraud Safeguards to Achieve Political Goals,” homes in on the Bureau’s methods for remunerating consumers allegedly harmed by the discriminatory practices. As the report’s title suggests, its contents are just as dismal as Part I and provide little satisfaction to those who were hoping to see a silver lining within the Bureau’s flawed and misguided ECOA enforcement efforts. Rather than providing that silver lining, the report instead solidifies a picture of a Bureau so focused on being right that it continued to rely upon unsound assumptions and misguided decision-making in distributing the spoils of the enforcement action against Ally.
The Committee’s report relies on information gleaned from the Bureau’s internal documents, including PowerPoint presentations, memoranda, and other reports. Those documents reveal that theBureau, rather than admitting any flaws in its methodology used to develop the number of consumers allegedly harmed, instead chose to continue to rely upon that methodology because of its desire to generate enough check recipients to match its press claims, knowing that “if fewer claimants received checks …, the validity of the Bureau’s disparate impact methodology would be called into question.”
In order to be eligible for payment under the settlement, the Bureau first determined that: (i) at least one buyer on the contract must be African American, Black, Latino, Hispanic, of Spanish origin, Asian, Native Hawaiian, and/or other Pacific Islander; and (ii) the buyer must have been identified by the Bureau and the DOJ as having paid “more than the non-Hispanic white average markup.” Identifying these buyers in an efficient and meaningful way, however, presented a substantial stumbling block, as “automobile dealers are prohibited from collecting information regarding the race of a prospective vehicle financing customer, and as a result, such data is not provided to finance companies such as Ally, who purchase the resulting Retail Installment Sales Contracts (RISCs) from dealers.” The Bureau, however, did not let that hurdle slow it down and instead “chose to save face by engineering its desired result rather than implementing a claims process reasonably designed to identify alleged victims and discourage fraud.”
The Committee staff’s report first takes issue with how the Bureau identified people who allegedly overpaid for credit. The Bureau’s criterion was whether a minority group on average paid “more than the non-Hispanic white average markup.” The report surmises that the Bureau “fundamentally misunderstands the vehicle finance market,” explaining that “[t]he fact that a particular consumer paid more or less than average says nothing about whether that consumer was treated unfairly. Only by comparing that consumer to other similarly situated consumers – those with a similar creditworthiness, financing a similar amount at the same dealer at around the same time, etc. – can the Bureau draw a meaningful conclusion about whether a particular consumer was ‘overcharged.’” Ultimately, the Bureau’s method for determining which buyers were overcharged merely compares buyers whom the Bureau estimates to be members of a protected class with buyers the Bureau estimates to be non-Hispanic white, rather than comparing similarly situated minority and non-minority buyers and thus more accurately determining buyers who may be entitled to remuneration.
The Committee also harshly criticizes the Bureau’s method of determining whether a potentially eligible consumer satisfies the criterion that one of the buyers on the account is a member of a protected class. The Bureau relied upon BISG proxies in the enforcement action (a method that combines the odds of being a member of a minority group based on surname and geographical location) to generate the number of minority buyers harmed. Despite internal memos admitting that BISG is seriously inaccurate and inferior to other proxy methods, the Bureau continued to rely upon the methodology when identifying buyers eligible for remuneration.
The Committee’s report details the contents of several Bureau PowerPoint presentations evaluating options for remunerating buyers. Ultimately, the Bureau recognized that, regardless of the method chosen, using the BISG probabilities to identify affected buyers would result in some amount of damages going to non-Hispanic white buyers. Accordingly, the Bureau considered various verification methods that would help ensure that claimants were actually eligible buyers.
In unveiling the debate on how to identify eligible minorities, the CFPB documents unintentionally identify the DOJ as the principled player in this saga. The DOJ appears to have pushed hard for a verification process with integrity. The Bureau seems to have pushed back against a verification process even harder. Ultimately, the DOJ won some concessions from the Bureau but relented on several important safeguards.
In considering the potential verification methods, the Bureau rightfully reasoned that suggesting that consumers receive remuneration without verifying identity “risks critique that the CFPB is remunerating Hispanic White borrowers” and that “the DOJ will likely strongly oppose.” Despite this reasoning, the Bureau ultimately suggested using an opt out verification method for some buyers, in which buyers identified as meeting a certain BISG threshold would receive a check unless they affirmatively opted out of the award. Predictably, the DOJ initially strenuously objected to the Bureau’s proposal. In doing so, the DOJ indicated that its main concern was “that non- Hispanic White consumers will receive checks unless we require written verification of eligibility.” In order to attempt to alleviate this concern, the DOJ recommended requiring all eligible consumers to verify their identity under penalty of perjury.
The Bureau acknowledged that adopting the DOJ’s position and not using the opt-out letters would minimize the possibility of remunerating non-Hispanic white consumers. But instead of agreeing to discard the method, the Bureau decided to “push back at senior levels” against the DOJ’s proposal. Ultimately, the DOJ acquiesced to using the opt-out letter, combined with an opt-in letter for other buyers, and an option allowing buyers to selfidentify as eligible on the Bureau’s website. Even more alarming than using the opt-out letters at all, the letters subsequently sent to consumers did not require consumers to verify their identity under penalty of perjury, nor did they even advise consumers that cashing the remuneration checks constituted an affirmation that they were members of a protected minority class.
Unsurprisingly, only 0.46% of those buyers who received an opt-out letter had actually opted out as of the time of the Committee’s report, while 47.92% of those who received opt-in letters returned their opt-in forms. In total, the Bureau mailed 419,669 letters to potential claimants, even though it previously alleged there were only 235,000 victims. Those mailings generated 235,319 claimants allegedly eligible to receive remuneration. In the end, it appears the Bureau went to great lengths to engineer, advocate for, and implement a remuneration method based upon a desire to generate a sufficient number of recipients, rather than to ensure the recipients actually met the criteria for compensation.
At a recent conference, a Bureau representative sternly reminded her fellow panelists and the audience that the Bureau is not a “tempestuous toddler” and is governed instead by reason, logic, and evidence. Reports about the Bureau’s inner workings, like that prepared by the Committee staff, contradict that assertion. It is certainly hard to find the logic in righting alleged credit discrimination against racial minorities by knowingly distributing to non-minority buyers the funds intended to make the victims whole. Though perhaps the Bureau’s representative was right at least with regard to her assertion that the Bureau’s actions are not tempestuous. Tempestuousness implies actions that are uncontrolled and emotional. We certainly see no evidence of that here. Instead, the Bureau appeared to make its decisions regarding the method used to remunerate buyers logically, though with a cold calculation and a wanton disregard as to the foolhardiness of its actions. As the Committee’s report chides, “Sending remuneration checks to white borrowers as a means of remedying alleged discrimination against African-American, Hispanic, and Asian borrowers is an unorthodox approach to fair lending enforcement, to say the least.”
The ECOA is rooted in the vital and laudable goals of preventing discrimination and promoting fairness, impartiality, and equal treatment for all creditworthy consumers. However, with its singleminded focus on placing its agenda above all else, the Bureau continues to harm not only the industries itregulates, but also the consumers it seeks to protect. Moreover, its “win at any cost” objective trivializes the gravity of the wrongs the ECOA seeks to right. To see an agency’s pride interfere so significantly with its decision-making is both disheartening and disillusioning. One hopes that these Committee reports are the harbinger of more scrutiny of the Bureau, and – dare we suggest it? – of the Bureau making an expeditious shift from pride to humility in its focus on furthering the ECOA’s true goals.