Consumer Finance Insights
January 28, 2016

House Republicans Level Another Blow at CFPB’s Auto-Lending Policies

Scrutiny of the CFPB’s auto-lending supervision and enforcement practices was renewed last week when Republicans on the U.S. House of Representatives Committee on Financial Services issued another scathing report criticizing the agency, this time focusing on its handling of the distribution of the Ally Financial auto-lending settlement funds.  Concurrently with the report’s release, Committee chairman Jeb Hensarling (R., Texas) called for a suspension of the distribution of the $80 million in settlement funds until the eligibility of the recipients has been verified.

The Republican committee members’ latest report, “Unsafe at Any Bureaucracy, Part II: How the Bureau of Consumer Financial Protection Removed Anti-Fraud Safeguards to Achieve Political Goals,” is the second such report concerning the CFPB and the Ally settlement.  The first report, released in November 2015, had taken issue with the CFPB’s methodology for estimating the number of consumers affected by Ally’s allegedly-discriminatory conduct.  That report argued that the CFPB’s estimate that 235,000 minority borrowers had been discriminated against was likely an overestimate.  (For a more detailed discussion of the Committee’s first report, please see our earlier post here.)

The new report challenges the CFPB’s method for identifying and remunerating affected minority borrowers.  The CFPB used a three-tiered identification and remuneration structure: borrowers identified as having a high likelihood of being a minority would receive a settlement check unless they opted out; borrowers with a moderate likelihood of being a minority would have the opportunity to opt in and receive a check; and borrowers who were not identified at all could self-identify as being eligible for compensation.  Potential recipients were not required to verify their race in writing under penalty of perjury; the CFPB explained that it did not require sworn verification because the agency is “not in a position to question self-identification of race.”

The Republican committee members’ report sharply criticizes this methodology, arguing that the “opt out” feature and the lack of a verification requirement create a significant likelihood that white borrowers may be receiving checks for Ally’s alleged discrimination against minority borrowers.  According to the report, CFPB officials realized that fewer than 235,000 minority borrowers had been affected by Ally’s alleged conduct, but rather than revising that estimate, the CFPB doubled down on it, designing a process for identifying and remunerating consumers that would confirm its initial figure.  The resulting remuneration method, the report argues, captures many more borrowers than were actually affected in order to boost the number of recipients to be consistent with the CFPB’s estimate of 235,000 victims.  The report claims that CFPB officials were aware that their remuneration structure was too broad, but that they approved the structure anyway because a more stringent method would have resulted in too few borrowers receiving compensation under the settlement, revealing flaws in the CFPB’s disparate-impact methodology.

According to the report, remuneration checks are scheduled to be sent to 235,319 consumers this month.  Chairman Hensarling has called on U.S. Attorney General Loretta Lynch to suspend the distribution of the checks until all of the recipients have verified their eligibility in writing and under penalty of perjury.  At the time of writing, the Attorney General’s office had not yet responded to Chairman Hensarling’s request.  The House Financial Services Subcommittee on Oversight and Investigations will also be holding a hearing on the CFPB’s auto-lending supervision and enforcement practices in early February, where the subject of this report will almost certainly be raised.  Industry members should continue to monitor this story to see how this latest challenge to the CFPB’s authority plays out.