The Consumer Financial Protection Bureau uses statistical methods that can overestimate the number of people harmed by discrimination, according to internal company memos, a practice that can lead to higher damages against companies.
The documents were obtained by American Banker magazine, a trade publication. The memos show bureau officials defending their methods but conceding that others were equally valid, and show these other methods weren’t used because they would lower damage claims.
In an April 2013 memo, Patrice Ficklin, assistant director of the bureau’s office of fair lending, wrote that bureau’s methodology was “valid and reasonable under the circumstances here, and although there may be some risk of overestimating disparities, the alternative presents an equal (and perhaps greater) risk of underestimating disparities and thus consumer harm.”
Elsewhere in the same memo, Ficklin says her office was surprised to be told by the bureau’s office of research that the alternate calculation was equally valid.
“Our initial expectation was that OR’s analysis of the two estimation methods would reveal that one or the other was plainly superior. However, OR has concluded that the two methods are both reasonable, but under different assumptions about the underlying cause of the disparities,” she wrote.
The bureau’s discrimination cases are often based on the legal theory of “disparate impact,” which holds that it is not necessary to show intent to prove discrimination. A regulator need only show that a certain minority group was disproportionately affected.
The memos were in response to claims by attorneys for Ally Financial, the car loan company, which was in settlement talks with the bureau at the time for discriminating against minority borrowers. The bureau was seeking $41 million in damages at the time. Ally said the regulator’s estimation of the number of consumers harmed had not taken in account legitimate factors such as the borrower’s creditworthiness, whether the car was new or used, or the structure of the loan itself in making the calculations. Taking those into account would have reduced the damages to $5.3 million.
The bureau has stuck by its methodology. In the case of Ally, it subsequently doubled the penalty to $80 million, citing the need to address factors such as consumers’ “emotional distress”. The company, which was also seeking federal approval to restructure its business, ultimately settled.
The memos indicate that bureau officials used the restructuring approval as leverage in the settlement talks. “In order to convert to a financial holding company, [Ally Financial] and its bank subsidiary must, among other requirements, be considered well-managed under the [Bank Holding Company Act]. As such Ally may be strongly inclined to reach a timely and robust resolution of this matter if it can potentially result in [Ally Financial] successfully converting to a financial holding company,” according to an October 2013 to CFPB Director Richard Cordray.
“We will decline to comment on the settlement with Ally, beyond noting again that the CFPB and DOJ’s investigation found that minority borrowers were being charged hundreds of dollars more in interest than white borrowers of similar credit profiles. As a result of the action, thousands of borrowers will receive remediation for the harm they suffered,” CFPB spokesman Sam Gilford told American Banker.
When the bureau obtains damages in a case, they are held in escrow until they are distributed to consumers who fit victim profile. The consumers must respond to solicitations from the bureau to get them. If the bureau does overestimate the damages and not enough victims come forward to seek refunds, the money is not returned to the company. Left over funds are deposited in the U.S. Treasury.
