CFPB Director Richard Cordray told a U.S. House panel Tuesday that the Consumer Financial Protection Bureau didn’t account for credit scores when measuring whether minorities were charged higher interest rates than other borrowers on dealership-arranged auto loans through Ally Financial.
“I think we used factors that try to reflect the aspect [of creditworthiness in] the transaction. Ally might disagree. You might disagree,” Cordray told Rep. Mick Mulvaney, R-S.C., during the CFPB’s semiannual report to the U.S. House Financial Services Committee.
Most committee members challenged the CFPB’s methodology to calculate discrimination and pressed Cordray to explain how and if the bureau determines the creditworthiness of potentially harmed consumers.
The hearing comes as the CFPB steps up its probe of auto lenders for discrimination in auto lending.
The CFPB, along with the U.S. Department of Justice, said Ally Financial’s practice of allowing dealerships discretion in setting the dealer reserve -- the share of a customer’s interest rate that dealerships earn for negotiating the finance contract -- resulted in minorities paying higher interest rates than other borrowers.
The CFPB said the variation amounted to discrimination under a legal theory known as disparate impact, which says that a practice can be considered discriminatory if it has a disproportionately adverse effect on minorities, even if no discrimination was intended.
In December 2013, Ally agreed to pay a $98 million settlement, although it denies allowing discrimination and still offers dealer reserve.
‘View of creditworthiness’
There are better approaches to determine creditworthiness than by evaluating credit scores, Cordray said, although he did not provide details of other methods.
When Rep. Sean Duffy, R- Wis., asked whether Cordray had a “view of creditworthiness” that he applied to the Ally case, he didn’t directly answer the question but said that creditworthiness is a “fair consideration when people are making a loan. I believe we try to find ways to take account for that.”
Committee members repeatedly challenged the accuracy of the methodology the CFPB uses to determine disparate impact. The methodology, called Bayesian Improved Surname Geocoding, or BISG -- infers race and ethnicity based on applicants’ addresses, names and census information.
“There are various methodologies that could cause [disparate impact] to be overestimated and various methodologies that could cause it to be underestimated,” Cordray said. “Accurate is in the eye of the beholder, but we are trying to get it right, trying to understand what accurate means.”
When Rep. Jeb Hensarling, R-Texas, the committee’s chairman, asked if the CFPB has compared the BISG method to an analysis where race is known, as is the case under the Home Mortgage Disclosure Act, Cordray said that mortgage lending cannot be compared to auto lending.
Cordray said that the bureau “attempts to control for all of the variables that have nothing to do with” protected information, such as race, when asked if the CFPB factors credit scores into their analyses.
Hensarling pushed further, asking, “Isn’t it true that credit scores could count for some if not all of the disparities you have observed?”
Cordray said that it is unfair to say that credit scores explain the disparities. “However, that’s a relevant point,” he added.
In addition to Ally, the CFPB has settled similar cases with Fifth Third Bancorp and American Honda Finance Corp. Of the three, Ally is the only lender that did not agree to limit dealer reserve.
Fifth Third said Monday it agreed to pay $18 million to settle discriminatory auto lending charges with the CFPB and the Department of Justice. It also agreed to limit dealer reserve to 1.25 percentage points above its wholesale buy rate for loans of 60 months or fewer and to 1 percentage point for loans with terms longer than 60 months.
Fifth Third’s caps were the same as those agreed to by American Honda Finance Corp. in its settlement with the CFPB and Justice Department over discriminatory lending practices, announced in July. American Honda agreed to pay $24 million to potentially affected consumers.
The House Financial Services Committee in July approved, by a 47-10 vote, a bill that would significantly limit the CFPB’s guidance over auto lending. The bill aims to guarantee that the CFPB’s auto lending actions are based on “accurate analysis” and the “best interest of consumers,” Rep. Ed Perlmutter, D-Colo., said at the time. Perlmutter, along with Rep. Frank Guinta, R-N.H., had introduced the bill in April.
The bill has moved to the U.S. House of Representatives for consideration.