Democrats and Republicans in Congress can rarely reach agreement on anything these days, but one bipartisan effort that continues to gain steam is their repeated attempts to learn the methodology by which the Consumer Financial Protection Bureau (“CFPB”) and other federal regulators investigate auto lenders for purported fair lending violations. In a letter dated March 7, 2014, Representative Jeb Hensarling, Chairman of the House Committee on Financial Services, took the CFPB to task for consistently refusing to provide any information on its disparate impact testing policies or methodologies, including those used to separate alleged improper racial disparities from legitimate methods of credit scoring.
Representative Hensarling’s letter details the previous four attempts from members of Congress to obtain this information, which date back to May 28, 2013. The letter also indicates that Representative Hensarling demanded a briefing after the CFPB announced it had resolved its fair lending enforcement action against Ally Financial, but that CFPB officials had refused to answer any specific questions about the methodology used to test Ally Financial’s indirect auto lending portfolio.
The Committee’s letter requests detailed information on the manner in which the CFPB performs its fair lending disparate impact analysis, including: (1) how the CFPB performs the proxy analysis by which it determines the race, ethnicity, or gender of the borrowers; (2) the factors held constant to ensure that race, ethnicity, or gender are the sole bases for any purported pricing disparities; and (3) the statistical threshold at which the CFPB considers a fair lending violation to have occurred. If this information is not provided by March 13, 2014, Representative Hensarling threatened in the letter to use his Committee’s compulsory process powers to obtain the information.
This bipartisan effort is important because federal regulators have remained relatively secretive when it comes to this methodology. Complaints and consent orders filed in enforcement actions are vague regarding the manner by which testing was performed on loan portfolios. Indeed, in the complaint filed in the aforementioned Ally Financial enforcement action, the Department of Justice and the CFPB took the position that because the dealer reserve rates at issue allegedly were unconnected to objective risk factors, they were not required to control for such factors, including credit score, when analyzing dealer reserve rate disparities.