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Inside this issue
New Comprehensive Study of Loan Records Refutes CFPB Position on Auto Lending
Industry-Backed Study Finds CFPB Overstating Auto Lending Discrimination
AFSA Study Finds Significant Bias and High Error Rates in CFPB Proxy Methodology
CFPB Reform Legislation to Increase Transparency for Auto Finance Guidance Gaining Momentum
Click here for more auto industry news at NADAFrontPage.com. .
Top Stories
New Comprehensive Study of Loan Records Refutes CFPB Position on Auto Lending

Charles River Associates study of loan records shows that the CFPB methodology to measure for discrimination is inherently flawed and unreliable.

A new comprehensive study of more than 8.2 million loan records by Charles River Associates concludes that the method used by the Consumer Financial Protection Bureau (CFPB) to measure for discrimination in an auto lender’s portfolio is “conceptually flawed in its application and subject to significant bias and estimation error.”

The peer-review study calls into question the reliability of a testing methodology that the CFPB has used to level allegations of unintended discrimination against—and extract settlements from—auto lenders and to pressure auto lenders to change the way they compensate dealers for originating finance contracts.
 
The study, released today, reviewed more than 8.2 million new- and used-vehicle finance contracts issued during 2012 and 2013, and measured differences in dealer reserve paid by minorities and non-minorities using the CFPB methodology. Dealer reserve represents the compensation that dealers receive from lenders for their role in the auto-financing process.
 
The study concluded that the CFPB’s methodology frequently misidentifies the background of consumers and dramatically overestimates differences in dealer reserve paid by different groups of consumers. The methodology also fails to account for numerous factors unrelated to the consumer’s background that affect the amount consumers paid for dealer reserve. The study further explains that the CFPB’s examination of differences in dealer reserve at the portfolio level is meaningless because it completely fails to account for legitimate reasons for pricing differences at the retail level. These collective flaws result in a testing methodology that is inherently unreliable.
 
“This study shows that the CFPB’s attempt to upend the auto lending process is insufficiently informed and the victim of flawed assumptions and inadequate peer review,” said Peter Welch, president of the National Automobile Dealers Association (NADA). “Allegations of potential discrimination are explosive and certainly should not be made without a reliable foundation in data.”
 
Currently, 136 members of Congress from both parties – 86 Republicans and 50 Democrats – have cosponsored legislation in the U.S. House of Representatives to rescind the CFPB’s 2013 guidance that serves as the centerpiece of the bureau’s attempt to change the highly efficient and pro-competitive dealer-assisted financing model. The bill, H.R. 5403, co-sponsored by Reps. Marlin Stutzman (R-Ind.) and Ed Perlmutter (D-Colo.), would also require transparency and public input prior to the issuance of future CFPB guidance in auto lending.
 
The legislation came after dozens of letters—from Congressional Democrats and Republicans to the CFPB—urged the disclosure of the CFPB’s testing methodology, which is lacking in the bureau’s guidance. The CFPB repeatedly failed to fully respond to the questions it was asked, leading to the Stutzman-Perlmutter legislation.
 
Dealers have also offered up an optional program that addresses fair credit risks. Based on a fair credit risk mitigation model developed by the U.S. Department of Justice in 2007 to resolve fair credit investigations of two dealers, NADA in January 2014 released its comprehensive Fair Credit Compliance Policy & Program. When implemented, the NADA program documents those instances when dealers discount interest rates and ensures the discounts are for legitimate business reasons, like meeting a competitive finance offer. Rather than require costly and inaccurate statistical testing, the program controls for risk on the front end of the transaction. Many dealers, including several large dealer groups, have implemented the program. NADA has called on the CFPB to urge finance companies to incorporate the program into their compliance management system.
 
“Had the CFPB followed the process set forth in the legislation before it issued its guidance to indirect auto lenders, it could have avoided the flawed assumptions and lack of clarity that have come to characterize this guidance,” said NADA’s Welch. “The way forward is for the government to promote broad industry adoption of NADA’s fair credit program, which would address fair credit risks where they matter—at the retail level.”
Source: NADA Public Affairs
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Industry-Backed Study Finds CFPB Overstating Auto Lending Discrimination

The method CFPB uses for identifying discrimination in auto lending is flawed, and may result in significant measurement errors that overstate the extent of harm to borrowers, according to a new industry-backed study. The study, commissioned by the American Financial Services Association, looked at more than 8 million indirect auto loans, where the auto dealer arranged the financing on behalf of the lender. Because borrowers don’t report race or ethnicity when they take out an auto loan, regulators have to use “proxies” — such as last names or zip codes — to determine whether a borrower might have been a minority.

The study said CFPB’s proxy methodology has significantly high error rates that can lead to inflated estimates of disparities and consumer harm. And many of the reasons for pricing discrepancies among white and minority borrowers can be explained by objective factors, such as geography or legitimate business factors. When those factors are taken into account, African-American and Latino borrowers paid less than a dollar more on their monthly payments on average, according to the study.... 

“Allegations of potential discrimination are explosive — and certainly should not be made without a reliable foundation in data,” National Auto Dealers Association President Peter Welch said in a statement about the AFSA study.
Source: POLITICO
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AFSA Study Finds Significant Bias and High Error Rates in CFPB Proxy Methodology

A comprehensive study of more than 8.2 million auto financing contracts found that the disparity alleged by the Consumer Financial Protection Bureau (CFPB) between the amount of dealer reserve charged to minorities and non-minorities is not supported by data. The study, Fair Lending: Implications for the Indirect Auto Finance Market, commissioned by the American Financial Services Association (AFSA), examined the proxy methodology used by the CFPB and found significant bias and high error rates.  

"AFSA is committed to ensuring all consumers are treated fairly. AFSA's results are much lower than what the CFPB alleges as problematic in the marketplace, because the association's study factored in complexities of the automotive market that the CFPB did not consider, and errors associated with the CFPB methodology," AFSA President & CEO Chris Stinebert said.  "The interplay between factors such as geography, new versus used, length of loan, down payment, trade-in vehicle, credit score and competitive factors, such as meeting or beating a competing offer, is evidence of a dynamic market."

Central to the study was an examination of the Bayesian Improved Surname Geocoding (BISG) proxy methodology used by the CFPB to determine disparate impact to legally protected groups. BISG estimates race and ethnicity based on an applicant's name and census data.  AFSA's study calculated BISG probabilities against a test population of mortgage data, where race and ethnicity are known. Among the findings:

  • When the proxy uses an 80% probability that a person belongs to an African American group, the proxy correctly identified their race less than 25% of the time. 
  • Applying BISG on a continuous method overestimates the disparities and the amount of alleged harm and provides no ability to identify which contracts are associated with the allegedly harmed consumers. 

"Alleged pricing discrepancies between minorities and non-minorities for auto financing rates are simply not supported by data," Stinebert said. "We have reviewed our study results with the CFPB and look forward to continuing our work with the bureau to address the issues we raised and to ensure consumers have access to affordable credit."

Conducted by consultants at Charles River Associates, the study examined 30 percent of all new and 10 percent of all used retail installment contracts financed during 2012 and 2013. The study is available on the AFSA website.
Source: American Financial Services Association
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CFPB Reform Legislation to Increase Transparency for Auto Finance Guidance Gaining Momentum

NADA-backed legislation to rescind the CFPB’s 2013 guidance to indirect auto lenders is gaining momentum, with 136 co-sponsors in the U.S. House.  H.R. 5403, sponsored by U.S. Reps. Marlin Stutzman (R-Ind.) and Ed Perlmutter (D-Colo.) is now co-sponsored by 50 Democrats and 86 Republicans. The legislation would both rescind the CFPB’s guidance and ensure transparency and an informed process in auto lending regulations moving forward.

NADA urges its members to contact their House member and request his/her co-sponsorship of H.R. 5403. Democrats remain the primary target of NADA’s grassroots efforts. For more information, visit www.nada.org/cfpb, contact us at legislativeaffairs@nada.org or call (202) 547-5500.
Source: NADA

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Quotable

“This study shows that the CFPB’s attempt to upend the auto lending process is insufficiently informed and the victim of flawed assumptions and inadequate peer review.”

    -- NADA President Peter Welch, referring a new comprehensive study of more than 8.2 million loan records by Charles River Associates, NADAFrontPage.com, Nov. 19

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