The chairman of the U.S. House Financial Services Committee is urging Attorney General Loretta Lynch and other federal officials to stop distributing $80 million in settlement proceeds from the Consumer Financial Protection Bureau’s enforcement action against Ally Financial.

A second committee report released on Wednesday says the CFPB is distributing money without verifying that recipients are eligible to receive it. Lawmakers claim the result is some white borrowers are getting settlement checks over alleged racial discrimination against African-Americans, Hispanics and Asians.

House members came to that assertion because that what the CFPB concedes in its own internal analysis obtained by the committee, which released internal bureau documents on Wednesday as part of a staff report.

That same report also reveals the Department of Justice originally objected to the CFPB’s approach but later acquiesced, evidently in the face of “push back at senior levels” from bureau officials, as one document states.

House committee members acknowledge it is unclear whether CFPB director Richard Cordray personally approved this action or whether the decision was made by Patrice Ficklin, the bureau’s Assistant Director for Fair Lending and Equal Opportunity.

“Sending remuneration checks to white borrowers as a means of remedying alleged discrimination against African-American, Hispanic, and Asian borrowers is an unorthodox approach to fair lending enforcement, to say the least,” notes the staff report, which can be downloaded here.

Chairman’s requests

Financial Services Committee chairman Jeb Hensarling, a Republican from Texas, asked the attorney general to immediately suspend distribution of the settlement proceeds “until such time as you have certified that all claimants have verified their eligibility in writing under penalty of perjury.”

Hensarling told Lynch the CFPB’s action “invites fraud on a massive scale.” The Texas lawmaker went on to make several other points in his letter to Lynch that’s available here.

“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 said.

To find minority borrowers, Hensarling asserted the CFPB essentially makes “educated guesses” using an algorithm that assigns probabilities to whether borrowers are minorities based on their last names and where they live.

The Department of Justice originally proposed to the CFPB a distribution method that “[p]rovides strong protection from criticism that we are giving damages to non-Hispanic white borrowers,” according to a bureau PowerPoint presentation. 

In the same presentation, however, bureau officials note that “if we adopt DOJ’s proposed limitation” then potentially only 36,000 to 143,000 consumers would receive checks — far fewer than the 235,000 consumers Cordray had publicly alleged were harmed by Ally.

The report goes on to indicate that adopting the Department of Justice’s plan would therefore expose Cordray’s estimate “as wildly inflated” and the bureau’s disparate impact methodology as “deeply flawed.”

The report adds, “In fact, Director Cordray did not know how many alleged victims there were in the Ally case because the bureau could not identify the race of any consumer whose finance contract had been purchased by Ally.”

Lawmakers went on to mention the report discloses the government mailed 419,669 letters to potential claimants in an attempt to find the 235,000 minority borrowers Cordray claimed were victimized.  Indeed, a bureau official informed the committee the CFPB mailings ultimately generated 235,319 Ally accounts eligible to receive checks. 

“Political exigency required the bureau to design a process that would ensure that a sufficient number of alleged victims would be identified as eligible claimants; after all, if fewer claimants received checks than director Cordray initially announced, the validity of the bureau’s disparate impact methodology would be called into question,” the report said.

“But, as internal documents reveal, bureau officials knew that in order to generate a sufficient number of check recipients, they would have to remove a number of safeguards from the claims process, including confirming the race of claimants alleged to have been discriminated against, thus making it more likely that non-minority consumers would receive remuneration,” it continued.

“Confronted with such a dilemma, the bureau chose to save face by engineering its desired result rather than implementing a claims process reasonably designed to identify alleged victims and discourage fraud,” the report went on to say.

The staff report is the second released by the committee on the CFPB’s enforcement actions against vehicle finance companies.

Members explained the first report, released in November, revealed the bureau pursued — and Cordray approved — its potentially “market-tipping” enforcement action against Ally even though internal bureau documents revealed the statistical method upon which its case rested is “prone to significant error.”  The CFPB was able to secure its settlement with Ally because of “undue leverage”— the company needed Washington regulators’ approval for a broader restructuring of its business, according to the House findings.

Lawmakers added Ficklin will be called 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.