Category Archive: Flawed Research and Rulemaking

  1. How the CFPB Targets Minority Communities

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    Minority communities, beware of the Consumer Financial Protection Bureau (CFPB).

    This week, U.S. Hispanic Chamber of Commerce President and CEO Javier Palomarez published an op-ed column explaining why the CFPB’s recent rulemaking on small-dollar loans ultimately puts minority entrepreneurs at risk. By imposing numerous restrictions on small-dollar lending, the rogue agency will inevitably make it more difficult for small business owners to secure the credit they need. In Palomarez’s words:

    The United States Hispanic Chamber of Commerce (USHCC) has long warned the CFPB of the consequences of restricting access to small-dollar credit. The USHCC represents 4.4 million Hispanic-owned businesses, which create jobs and contribute more than $700 billion to the U.S. economy. USHCC members depend on access to capital to thrive, but in many cases traditional banking institutions don’t operate as extensively within minority communities. In fact, the number of small community banks declined by 14 percent between 2010 and 2014. Small-dollar lenders are therefore often one of the only sources of credit available within many communities.

    Even the agency estimates that its rule would reduce small-dollar lending store fronts by nearly 70 percent. Other research pegs the number closer to 85 percent. This ultimately ends up hurting the employees and customers who depend on small business to survive and thrive.

    Given the fact that nearly half of Americans cannot cover an unexpected expense of $400, the CFPB’s attack on credit is deeply troubling and destructive to the U.S. economy. Memo to the CFPB: Lay off the American people.

  2. Federal Judge Sanctions CFPB

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    Earlier this week, a federal judge in Atlanta sanctioned the Consumer Financial Protection Bureau (CFPB) for its conduct in a recent enforcement action against several debt collection agencies in Georgia and New York. U.S. District Judge Richard Story claimed that the CFPB “willfully violated” his repeated instructions to identify the factual basis for its claims against the agencies.

    The CFPB’s enforcement agency dates back to 2015, when the agency sued a dozen debt collection entities and dept payment processors for allegedly collecting “phantom debts” from consumers. But, according to Story, the CFPB failed to provide enough proof. In his words, CFPB attorneys exhibited “blatant disregard” for judicial instructions. The federal judge proceeded to dismiss four payment processing companies from the CFPB’s case, exempting them from the agency’s continued overreach.

    The decision comes at an inconvenient time for Director Richard Cordray, who is reportedly planning a 2018 run for governor in Ohio. At the same time, he’s directing his agency to ram through last-minute financial regulations hassling employers. The Republican Governors Association has suggested that Cordray is in violation of the Hatch Act, which prohibits government officials from engaging in political activity. As we’ve covered before, Cordray’s political aspirations could translate to illegal activity—another blemish on the CFPB’s tarnished reputation.

    Shoddy enforcement actions and political posturing. What else is new?

  3. CFPB Enforcement Based on “Junk Science”?

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    The Consumer Financial Protection Bureau (CFPB) has made it a priority “to pursue lenders whose practices discriminate against consumers.” In 2013, the CFPB and Department of Justice (DOJ) ordered Ally Bank to pay $98 million in fines for alleged discrimination against minority car owners. The CFPB-DOJ investigation concluded that Ally illegally charged African-American, Hispanic, and Asian and Pacific Islander borrowers higher markups for their auto loans than their white counterparts.

    Or did it?

    According to Corporate Counsel, “The CFPB would likely have had difficulty proving disparate impact on Ally’s customer base because the methodology it used was, by its own admission, flawed.” The CFPB’s assistant director, Patrice Ficklin, admitted “that our proxy [methodology] is less accurate in identifying the race/ethnicity of particular individuals than some proprietary proxy methods that use nonpublic data.” She even suggested that revealing the CFPB’s methodology in full would leave the agency open to calls of “racial profiling and junk science.” Corporate Counsel has more:

    “Despite apparent known alternatives, the CFPB chose to rely upon outdated census data that attempts to determine whether a borrower is a minority by looking at surnames, geographic location or a combination of both.


    According to the CFPB’s report on using publicly available information to proxy for unidentified race and ethnicity, the CFPB’s methodology overestimates the number of people categorized as ethnic, including a 20 percent overestimation of African-Americans.”

    In other words, the CFPB’s allegations of racial discrimination—and $98 million fine—were built on faulty grounds. The agency never fails to disappoint.

  4. CFPB Still Hasn’t Paid “Victims” of Lending Discrimination

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    When the CFPB extracts a financial settlement from companies accused of financial wrongdoing, generally that money is supposed to be paid to the “victims” of that company’s practices. But it’s been more than a year since Ally Financial paid $80 million in damages to the agency for alleged discrimination in lending and not a single victim has been identified or paid.

    Perhaps the CFPB’s foot-dragging has something to do with fact that a recent study found the agency’s method for estimating when auto dealers offer different interest rates to different customers grossly overestimates the number of minority borrowers. As the Wall Street Journal’s editorial board wrote: “The feds then claim discrimination in interest rates if the people they assume are minorities on average pay more than similar borrowers that the feds assume are white. This is not a joke.”

    Ally didn’t actually admit to wrongdoing when it paid its settlement, but the CFPB estimates more than 235,000 minority borrowers were injured by Ally’s practices. How the CFPB came to that number isn’t entirely clear.

    Marsha Coucharne, economist and author of the study exposing the CFPB’s flawed methodology, explained how difficult it is for the CFPB to actually identify victims. As the WSJ summarized: “if two borrowers each have a 50% chance of being black, they would count as one black borrower. In reality, both could be white, black, Asian, or members of any other racial category. But at the CFPB two fractions can add up to one victim.”

    Considering the agency has no idea which borrowers are minorities, it’s unclear how the CFPB will go about distributing Ally’s settlement payment. These challenges and publicly exposed flaws, however, haven’t deterred the agency from pursuing similar actions against other financial institutions.

  5. Study Finds Serious Flaws with CFPB’s Approach to Identifying Lending Discrimination

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    One of the CFPB’s key goals is to punish companies that discriminate against minorities when offering financial services. Recently, the CFPB has targeted auto dealers, claiming that the auto financing rates and options offered to African American customers were more costly than those offered to white customers. Discriminatory lending is clearly against the law, but it’s not clear that the CFPB actually uncovered illegal practices.

    The CFPB can’t actually compare the auto loans offered to minorities with those offered to whites because federal law prohibits auto dealers from collecting racial demographic information on auto loan applications. So to compare loans, the CFPB developed a “proxy methodology” for estimating which borrowers are minorities. Using borrowers’ zip codes and last names in a statistical modeling system, the CFPB estimated which consumers were minorities. Though it may sound like a sound strategy, a new peer-reviewed study found that the CFPB’s methodology for estimating African-American borrowers was off by 41%.

    The study, financed by the American Financial Services Association, found that the CFPB’s method is “conceptually flawed in its application and subject to significant bias and estimation error.” Further, it found that the CFPB’s tendency to overestimate minority populations can “contribute to inflated estimates of alleged consumer harm.”

    The CFPB disagrees with the study’s findings, but hasn’t pointed to any specific flaws or explained its objections. It’s not surprising the agency is reluctant to admit it’s flaws–the CFPB used this faulty methodology to collect a $94 million settlement from Ally Financial, Inc. for alleged auto lending discrimination.