House Republicans released a report Tuesday accusing the Consumer Financial Protection Bureau of using “junk science” to show that auto dealers are discriminating against blacks in their lending practices.
The 54-page report, entitled “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending,” condemns the Bureau’s use of a disparate impact equation to find that auto lenders are charging higher interest rates to minority loan applicants, even though the agency in the end made educated guesses about the race of loan applicants.
The House Financial Services report called the CFPB’s subsequent enforcement actions against auto dealers “misguided and deceptive.”
“The CFPB is a dangerously out-of-control agency,” said Chairman Jeb Hensarling, R-Texas. “It is irresponsibly branding companies with the stigma of racial discrimination based on nothing more than junk science that even CFPB senior officials acknowledge 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.”
The report details how the CFPB went after auto dealers and auto loan companies who provide financing to car buyers. All buyers are protected by the Equal Credit Opportunity Act, which makes it illegal for a creditor to discriminate based on race, gender, age and other factors.
According to lawmakers, the CFPB used a questionable formula that found dealer markups were unfair to minorities and violated the law. Because loan applicants do not indicate their race, the CFPB hired an outside contractor to use a statistical proxy to determine race of the loan applicants.
Specifically, the formula combined surname and geography-based information to guess the race and ethnicity of the applicant. According to the report, top CFPB officials continued to use the formula even though they declared it “less accurate” than other methods.
Internal emails show the CFPB initially tried to hide their methodology out of fear it would “provide fodder” to critics.
The report also accused the CFPB of failing to cite evidence that the creditor supplying the auto financing has instituted a policy that is causing racial disparity in lending. Non-discriminatory factors ignored by the CFPB, the report noted, include the applicant’s credit score, the type of car, and the timing and location of the deal.
“The Bureau’s assault on the auto finance market is a textbook example of how regulators that don’t understand business and economics can harm the very consumers they intend to protect,” the report concluded.
House Republicans have been at odds with the CFPB since its inception under the 2010 Wall Street reform legislation.
Obama appointed CFPB Director Richard Cordray during a recess after Republicans continued to block him. Republicans believe the CFPB overreaches in its role of protecting consumers and is harming business and the economy.
The CFPB said its actions against auto dealers and lenders, “will help ensure that discrimination does not increase the cost of auto loans for consumers on the basis of race and national origin.”
The CFPB recently settled with Honda and BB&T over alleged discrimination that might have resulted in higher interest rates for borrowers purchasing cars. Honda paid $24 million in restitution to affected borrowers, and agreed to move to “a new pricing and compensation system.”
