The Consumer Financial Protection Bureau could be sending payments from Ally Financial’s $80 million settlement fund to non-Hispanic white borrowers because of a potentially unreliable race identification method, the House Financial Services Committee said today.
The committee based its statement on internal CFPB documents the committee obtained.
The CFPB employed a combined opt-in/opt-out approach in its mailings to potentially affected consumers. Consumers who were more than 50 percent likely to be a minority received a direct mailing that gave them the option of opting out if they are not part of a minority group. If they did not opt out, they were automatically opted in for payment.
Justice opposition
The U.S. Department of Justice was firmly against the opt-out mailings, CFPB documents released by the House committee said. The Justice Department was concerned that non-Hispanic white consumers would receive checks unless written verification of eligibility was required.
The Justice Department proposed using only opt-in and self-identification methods to prove eligibility for payment. The opt-in approach would send direct mailings and require an opt-in for borrowers who are 40 to 80 percent likely to be a minority. The borrowers would have to opt-in before receiving a check. Other borrowers who claim to be affected would have to self-identify.
The Justice Department also considered having all eligible consumers verify their identity under penalty of perjury. Each customer would likely have to confirm that he or she is a minority and provide an Ally account number, vehicle details and loan origination date.
CFPB documents said that if the bureau adopted the Justice Department’s suggested approach, it was possible that only 36,000 to 143,000 consumers would be eligible to receive checks. CFPB Director Richard Cordray has said that 235,000 consumers were harmed by Ally’s discriminatory lending practice.
The Republican staff of the House Financial Services Committee said in a report today that implementing the Justice Department’s proposal would make Cordray’s 235,000 estimate look “wildly inflated” and the bureau’s method to determine race look “deeply flawed.”
Push back
The CFPB could either “push back at senior levels” against the Justice Department’s proposal or accept the proposal, the bureau’s internal documents said.
The CFPB ultimately pushed back and decided to adopt the opt-in/opt-out method. The approach “is likely to result in checks sent to more affected consumers but likely will result in checks being sent to some non-Hispanic white consumers who fail to opt out,” CFPB documents said.
The Justice Department’s suggested opt-in and self-identification proposal “minimizes the possibility that checks will be sent to non-Hispanic white consumers, but is likely to result in fewer payments to eligible consumers,” the bureau’s documents said. “Requiring verification under penalty of perjury will likely reduce uptake rate, but may limit payment to non-Hispanic Whites.”
Halt payments
House Financial Services Committee Chairman Jeb Hensarling, R-Texas, said the CFPB’s approach “invites fraud on a massive scale.” He sent a letter to Attorney General Loretta Lynch Tuesday, asking her to halt distribution of the settlement proceeds until all mailing recipients have verified their eligibility in writing.
“It defies logic for federal agencies to distribute settlement funds without first verifying the eligibility of prospective recipients, particularly when the Bureau’s case is premised upon a flawed statistical analysis,” Hensarling wrote in the letter.
A CFPB spokesman told Automotive News that the bureau is reviewing the House Financial Services Committee’s report.
“The CFPB’s goal has been, and continues to be, the elimination of illegal discrimination,” he said. “We will continue to fairly and consistently enforce the Equal Credit Opportunity Act to ensure borrowers harmed by discrimination receive the relief they deserve.”
CFPB Assistant Director Patrice Ficklin will be asked to testify before the Financial Services Subcommittee on Oversight and Investigation in early February at a hearing on the CFPB’s auto-lending supervision, enforcement and rulemaking, a House Financial Services Committee statement said.
Ally settlement timeline
Ally settled with the CFPB in late 2013 after the bureau accused the finance company of discrimination via dealer reserve. The finance company admitted no wrongdoing and did not change its lending practices by applying a flat fee or a cap on dealer reserve, as the CFPB proposed at the time.
The bureau says that dealer reserve can lead to higher rates against legally protected classes of consumers, which it says is a form of discrimination. Even if discrimination is unintended, the disparate impact is illegal.
African-American, Hispanic, Asian or Pacific Islander consumers who received an auto loan from Ally between April 1, 2011, and Dec. 31, 2013, may be eligible for a payment.
In early 2014, Ally submitted $80 million and a list of potentially affected customers to the CFPB. Roughly a year and a half later, the CFPB began contacting those customers to determine who is eligible for a payout.
